THE PRESS MONDAY, JULY 28, 1986. Forecasting the Budget

Press, 28 July 1986, Page 24

THE PRESS MONDAY, JULY 28, 1986. Forecasting the Budget

In forecasting what will be in this week’s Budget, no-one can match the Minister of Finance, Mr Douglas. He has given away no secrets improperly in advance; yet last week, he made much plainer what was already in the wind.

In spite of signs that tax revenue is falling below forecasts, Mr Douglas seems determined not to go back on his plans to reduce rates of income tax. To sell the idea of the goods and services tax, the Government made two promises: to reduce income tax rates, and to give financial support to people, especially families, at the lower end of the income scale.

The risk of making such undertakings, and especially putting figures on the rates, a long time in advance, is that the economy will change in the meantime. This risk is increased when the Government is contriving significant and, because of its market approach, barely controllable changes in the economy. Having absolved the lowest-income earners from income tax, indeed having provided for increased welfare payments in the form of a negative income tax, the Minister has no-one left to tax except the middle-income earner and businesses. When large sums are needed by the State, higher taxes on high incomes yield relatively little. Not surprisingly, Mr Douglas has been discounting the idea of increasing tax on middle incomes.

He has but one course open to him, and the question is how far he can go along this course: cutting Government expenditure. A month ago he made it clear he would be going further than he at first intended; that was when he announced that Government debt was running much higher than the Treasury had forecast.

This news stirred the financial world. Here was the Government on the edge of borrowing much more than had been expected. For all the cuts that Mr Douglas spoke of last Friday, tliis was still so, and the borrowing will go on longer than he had led the market to believe.

First, many of the savings or earnings that he outlined will be unique: assets will be

sold; they can be sold only once. Unless tax revenue is higher next year as a result of more business activity or because of inflation, the Government’s 1987 Budget will be even harder to balance than this year’s.

Second, some of the reductions in the Government’s capital needs, and therefore in what is labelled as the Government’s deficit, will be merely shifts in labelling the borrowing. The total amount to be sought from the economy, at an interest cost no dess than that set by Government stock tenders, will be the same unless the so-called relabelled private sector of the State actively reduces its business. This would mean that such institutions as the Rural Bank and Housing Corporation would run down their activity. It does not seem to be the Government’s wish that they should do so, though it clearly expects them to pay the market price for capital, and to charge the market rate when using it. In presenting the Budget this week, all these shifts should be made clearer. To expose properly the state of Government and near-Govemment financing, the Budget will have to set out legitimate comparisons between past and present labels. Attention will be on what Mr Douglas has to say about further reductions in indirect taxation as GST approaches, particularly about taxes on imports. He will not be wanting to encourage a rush on imports in the next two months. Our earnings from exports will not bear this. Furthermore, the delay in reducing tariffs so far is evidence of the Government’s concern over revenue. So is the Government’s resolve to push more State enterprises into charging more, into making profits and paying tax and dividends — even the Reserve Bank.

The basis of this Budget, like the last and many decisions in between, has been to reduce Government spending and the Government’s deficit. As things stand, the true totals for both are unlikely to show any great reduction. The differences will be in who receives, and who pays, and how and when.