Tuesday, October 30, 2007

Spend the Surplus

Despite the much of our media having spent the last few years playing the part of the tax cuts lobby the New Zealand public has different ideas:

More support public spending than tax cuts

Research New Zealand is surprised at the results of its latest poll, which asked whether the Government should spend its cash surplus on tax cuts or public services.

Director Emanuel Kalafatelis says 48 percent of respondents said they want the Government to spend the surplus on public works, while 37 percent want it spent on tax cuts. He says people living in major urban areas are more likely to support increasing spending on public works than those in smaller towns.

Mr Kalafatelis says twice as many people with tertiary qualifications supported the surplus being used for more public services than those with no qualifications.

The poll was taken following the Government's announcement it has a multi-billion dollar cash surplus in early October.

Me, if the choice is the one presented above, I'm with the majority of New Zealanders: what we need now is more spending on things like health not lower taxes. Of course, if we are to follow sound macro-economic policy, then we should keep the surplus until inflationary pressures ease and fund additional spending from increased taxes (this is my preferred position). But if we have to break from best practice, I'd prefer we invested in health and education, not tax cuts .


Matt Nolan said...

Ultimately it depends on the outcomes associated with either spending or giving tax cuts. If I felt that spending was going to add nothing (if I believed extra health spending would not help anyone) I would prefer it to be given in tax cuts.

However, if I believed that extra health spending would genuinely improve peoples lives, I would be happy to spend the money. (Note: I actually have no opinion :) )

Often the difference between the left and right is simply what they think can be done with the funds. I'm happy either way, as long as I think the person making the choice knows what they are doing :)

In terms of inflationary impact, tax cuts will always be less inflationary than government spending (if they are the same sized fiscal input), for a couple of reasons:

1) They increase the labour supply (furthermore, they can decrease business costs in a sense)
2) Some of the tax cut will be saved.

Terence said...

Hi Matt,

Thanks for your comment. Just quickly, with regards to spending being more inflationary than tax cuts I'm not so sure.

1. The labour force participation rate in New Zealand is pretty high at present, how much can it actually expand? If, for example, you look at unemployment figures about 70% is frictional unemployment. Of the other 30%, I'm not sure that many of them would necessarily respond to the small incentive to work offered by tax cuts. In general, I don't think that people's decisions about work are as materialist as standard economic theory might predict either.

2. Given New Zealander's saving habits at present, presuming the cut isn't steered into Kiwisaver, I'm not sure that much would be saved at all.

Matt Nolan said...


Even if those two shifts were very small, tax cuts would still be less inflationary than spending, even if it is only by a tiny amount. Now I don't know how much less inflationary they will be (i'm trying to do some research on it at the moment). Ultimately, I agree that tax cuts will be inflationary, however factors that might help out are:

1) For the labour supply point we are in a global labour market. Lower taxes may help us retain and attract labour. I agree that the participation rate cannot get much higher, so most of the impact would have to come from this.

2) Kiwi's 'saving' is low as their wealth has grown so quickly (as house prices have been rising). As house price growth should slow down, the marginal propensity to save will rise.

I'm not sure whether I would want more spending or tax cuts. Ultimately I'm happy for the money to just stay out of the economy for now, until inflationary pressures abate.

Anonymous said...


If I thought that spending another 10% on health over last budget would achieve anything,Id consider it.

The last two huge increases havent seemed to do anything productive?!

Education will absorb as much money as you give it - without changing any learning outcomes significantly.

Its like filling up your car with petrol more often,when its running too rich and consuming more petrol than it needs. It definately uses up that petrol with ease ;-)

Now,spending extra on public works like roads(thus filling those new roads with more oil consuming cars)seems pointless and shortsighted.

Now,im not expert but I have an interest in these things and enjoy discussing.


Terence said...


the health spend has achieved something significant - cheaper doctor's visits. I also think it has started to improve things in our hospitals. The sad fact though is that we considerably underspend, so we would have to spend a lot more to get the sort of system that was unquestionably great. Also, remember that with an aging population we have to spend more to stay in one place.

As for roads - I'd prefer it spent on public transport. And education is really a field I know little about.

Terence said...

oh, and Matt, the global labour market - true to a point, but it does also depends on immigration laws and also whether the people who will be attracted are those working in current job market bottlenecks. Also, if it reduced inflationary pressure by stifling nurses' bargaining power I'd be against it.