Thursday 15 May 2014

Budget Alternatives And Alternative Budgets

Walking The Talk: The NLP's 1991 Alternative Budget. NewLabour's leader Jim Anderton understood the political and ethical rewards accruing from his party's willingness to show the voters not only what they wanted to do - but how they intended to pay for it. Act's new leader, Jamie Whyte, has just picked up the idea. What's stopping Labour from putting some numbers alongside its promises?
IT WAS ONE OF THE THINGS I admired most about the NewLabour Party (and later the Alliance) – it’s Alternative Budget. From its inception, in 1989, until its absorption into the Alliance, the NLP Leader, Jim Anderton, made a point of pre-empting the Government’s official Budget Statement with one of his own.
Along with Anderton, himself, the alternative document was put together by the NLP’s economic consultants, John Lepper and Petrus Simons, with invaluable input from the University of Otago’s Professor James R. Flynn. The irrepressible Flynn was the party’s unofficial conscience when it came to fiscal policy, insisting that it was politically unethical and tactically foolish to offer voters all manner of benefits without, at the same time, demonstrating how the party intended to pay for them.
It was Flynn’s stated intention to make not only his party comrades, but also the wider electorate, understand that democratic socialist outcomes could not be guaranteed in the absence of democratic socialist taxes. He knew that the fastest and most effective way of turning a party of idealists into a party of realists and pragmatists was by showing them how high income taxes would have to rise in order for them to cover the costs of what Bill English describes sneeringly as “nice to haves”.
It was very instructive to observe how the policy maximalists would wince when they saw how high the income taxes of not just the obscenely wealthy but ordinary middle-class professionals and skilled wage workers would have to rise if the Party’s pet projects were to go ahead. The wily old Flynn knew that the prospect of having to levy politically suicidal income tax rates would spur the membership into moderating their demands and searching for alternative methods of revenue-gathering. The result was the NLP/Alliance’s adoption of the Financial Transactions Tax – a measure which, very neatly, solved the problem of how to pay for paradise.
The preparation of an alternative budget is a highly educational (not to say therapeutic) exercise for any political party, but it is especially useful for radical parties like the NLP/Alliance and ACT.
That the ACT Party’s new leader, Jamie Whyte, not only recognises this but has actually gone ahead and released an alternative budget bodes very well for the party’s electoral future. At the very least it has forced ACT’s members into thinking seriously about where they want the country to go and how they propose to take it there.
Getting In On The Act: Jamie Whyte recently released his party's own Alternative Budget.
As neoliberals, not democratic socialists, the task confronting ACT’s members would have been pretty much the opposite of the one facing the NLP/Alliance. Rather than starting with all the things they’d like to have and then calculating how much tax would be needed to pay for them, ACT’s members began by asking themselves how far taxes should be lowered and then worked out how many government services and transfer payments would have to be eliminated to make that figure possible.
The answer, of course, turned out to be: “A helluva lot!”
Whether the scale of expenditure cuts required to produce a top income tax rate of 17 percent made ACT’s members wince I do not know, but, after reading their alternative budget, I’d wager that very few of them were in any doubt about the radicalism of their party.
Why 17 percent?
Well, I have a theory about this seemingly random number. Originally, I suspect, the desired top tax rate was deemed to be 10 percent. But, when ACT’s economic advisors told them that to bring the top rate down to that level would require them taking a very large and a very blunt axe to health, education and welfare spending, they reluctantly decided that, 10 percent being electorally suicidal, a higher figure was required. Hence 17 percent.
Set at this level, Whyte is able to reassure (the Epsom?) voters that taxes can be lowered dramatically without slaughtering the New Zealand electorate’s sacred cows.
It is interesting to note that immediately following the release of its alternative budget the value of ACT’s “stocks” on iPredict rose to 3.8 cents. In other words the political speculators now expect ACT to win nearly 4 percent of the Party Vote.
Why, then, does Labour not produce an Alternative Budget? Wouldn’t such an exercise be of enormous assistance in putting some credible flesh on the bones of Opposition policy? Would it not ensure that when John Key, channelling Tom Cruise, began shouting: “Show me the money!” the Leader of the Opposition was well equipped to do exactly that?
Because, when you think about it, there’s really no excuse for an opposition party not being able to cover its policy bones with detailed flesh of. Opposition politicians would, after all, like us to believe that they have what it takes to form an alternative government. So, surely, within its ranks there ought to be sufficient wit and experience to pull together an alternative budget?
Oh yes, I know, the political “strategists” will have none of it. “Why show the Government your hand?” They will ask. “Why risk Treasury ripping all your numbers to shreds? The resources just aren’t there for the Opposition to even contemplate producing a document to challenge the government’s budget statement.”
But no one’s asking for that sort of detail. All Labour’s supporters want to hear is the two Davids – Cunliffe and Parker – making confident replies to Government and news media questions about numbers. The policies of the alternative government have got to add up. If working people are going to be better-off – or worse-off – as a result of Labour’s policies, then surely they have a right to know by how much? If Phil Twyford wants to be believed when he says the next Labour Government will build 10,000 affordable homes every year, then he must be able to quantify “affordable” in a way that makes sense to a young couple bringing in $70,000 per year.
The so-called “cheese-on-toast” budget that National will deliver on 15 May is unlikely to be spectacular – but it doesn’t have to be. The Government will simply point to their handling of the Global Financial Crisis; to steadily expanding economic activity; to rising business confidence and falling unemployment and say: “See? It’s steady as she goes. The economy’s in safe hands.” The advantages of incumbency are numerous and usually decisive.
Unless they are systematically undermined by an Opposition with a clear and compelling story to tell. Using broad brush strokes to outline their alternative narrative, but also supplying sufficient detail for ordinary people to be able to imagine themselves into the story.
If there really is an alternative – for God’s sake, let’s hear it!
This essay was originally posted on The Daily Blog of Wednesday, 14 May 2014.


Guerilla Surgeon said...

"If there really is an alternative – for God’s sake, let’s hear it!"

Hear hear!

Brendan McNeill said...

Is socialism dead in New Zealand? The Herald published a graph recently of responses from 36 Nations where people were asked the question:

"Do you think it should or should not be the government's responsibility to reduce income differences between the rich and the poor?"

In other words, just how much do you believe in wealth transfer through the taxation system.

New Zealanders wisely showed the least support for the idea amongst respondents from all 36 nations.

I suspect this is why Labour polled 29% in the recent opinion polls despite an appalling couple of weeks for National.

We are no longer a nation of cloth capped socialists fighting historical class wars. Surely we can all be thankful for that?

It's all very encouraging really.

Guerilla Surgeon said...

Much though I hesitate to a good with Brendan, he is perfectly correct. Douglas and his minions have done the best job of social engineering I have ever seen. Aided of course by a press that doesn't say a great deal about the other side of the coin, and tends to vilify the poor and unemployed. But he does have a point. Its all very discouraging really, but of course he'll be pleased at that :-).

Michael Herman said...

Oh, Brendan. Sigh.

Anonymous said...

ACT's alternative budget gets handicapped by their belief in the Laffer Curve: these people think you can cut taxes and increase revenue simultaneously.

Loz said...

"Speak up for those who cannot speak for themselves, for the rights of all who are destitute. Speak up and judge fairly; defend the rights of the poor and needy."
-Proverbs 31:8-9

"A rich man may be wise in his own eyes, but a poor man who has discernment sees through him."
-Proverbs 28:11

Always glad to have the Christian perspective - thanks Brendan :)

Guerilla Surgeon said...

I love the bit about the class wars. It is used a lot in the U.S. too, but only funnily enough, when the lower class fight back. All that stuff at the one percent do to the rest of us isn't really class war at all. Just entitlement.
But the Christian perspective? You can cherry pick the Bible to justify almost anything. And the religious Right naturally do.

Scouser said...

I would guess that the 17% came from research around optimal growth rates as affected by total taxes (including sales and local) as a %age of GDP. I did a stint of reading everything economic I could find and from memory the best researched example was from the OECD. Based on ACT’s mindset it’s unlikely to just be plucked from thin air.

As with all such economic 'rules' it should be treated with caution but indications are that below a certain amount growth slowed and above a certain amount growth also slowed. Basically governments do things the market doesn’t and these support growth but they can also become a drag by consuming a greater proportion of the output – in an economic sense that is. There is a sweet spot that probably moves in some complex manner.

Obviously, this is ignoring the social aspects and, as such, can only be an input and not the overall driver of taxation decisions.

@anonymous this is based on similar principles to the Laffer curve and there is reasonable credibility of the curve as a rule of thumb but it's economics - more of a trade/art than a science.

The figure was somewhere in the 20s from memory.

It does lead to a welfare net of huge denier where only those in dire straits are caught and this would be rejected by the vast majority of voters including National but it's obvious ACT’s aim is to drag NZ to the right somewhat.

The 40%+ ratio we have in NZ is well into the growth slowing range but does have us with a welfare state closer to the western European countries than the US (though the US appears to be moving closer to Europe as well in recent years).

It would be good (but unlikely) to have a rationale conversation along the lines of what balance of growth to social support NZ explicitly wants rather than the perpetual name calling that constitutes politics.

Brendan McNeill said...

Hi Loz

I'm always glad to have you share the Scriptures with me. I agree with the passages you have quoted from Proverbs.

Can you please provide me with chapter and verse that says it is the duty of the State to redistribute wealth from the rich to the poor?

We have individual responsibilties to the poor, and voluntary collective responsibility via the Church, but the State?

Socialism enforces the involentary collective redistribution of wealth by the power of the State. This is entirely unsupported by Scripture.

Guerilla Surgeon said...

The problem with having a rational conversation about economics is that classical macroeconomics is bullshit. The maths is incorrect, and psychologists have known for years that people don't behave in the way that classical economics assumes that they do. So until we get more people taking psychology into account, and better equations, we are not going to get much more than name-calling. It's getting better, but it's really, really slow.

Loz said...

Sure Brendan!

Therefore one must be in subjection, not only to avoid God's wrath but also for the sake of conscience. For because of this you also pay taxes, for the authorities are ministers of God , attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed. (Romans 13:5-7)

As chapter and verse does state that paying tax is right and just because our authorities are the ministers of God , should we not expect of authorities to be following the examples of Christ in providing alms to the poor, Relief to the sick and hope to those in need?

As stated in the first Epistle of John: “If anyone has material possessions and sees his brother in need but has no pity on him, how can the love of God be in him? Dear children, let us not love with words or tongue but with action and in truth” (John 3:17–18)

Guerilla Surgeon said...

Acts 4:32-35

2 Corinthians 8:13-15

Matthew 19:21

Luke 3:11

Galatians 6:2

1 John 3:17

James 5:1-6

See Brendan, I can cherry pick the Bible just as much as you can. :-)

Anonymous said...

@anonymous this is based on similar principles to the Laffer curve and there is reasonable credibility of the curve as a rule of thumb but it's economics - more of a trade/art than a science.

The Laffer curve is based on the reasoning that at 0% tax rates you get no revenue, and the assumption that at 100% tax rates you get no revenue (actually you would, you'd just be dealing with a very different economic structure). Thus, goes the reasoning, you can maximise revenue somewhere between zero and 100% tax. Which isn't exactly groundbreaking reasoning, except that the Right always thinks we're on the downward sloping bit of the curve. That there might be several revenue peaks, and that the entire graph might change day to day, has never occurred to them. That the revenue maximisation right might be, say, 70% rather than 20% has not entered their worst nightmares. In practice it's just an excuse to justify tax cuts for the rich.

Brendan McNeill said...

Hi Loz and GS.

Rather than trade shots, what I'd like to do is treat you both with respect, and examine your proposition carefully from Scripture.

I apprecate that there are many (possibly the majority) of Christians who believe that it is the role of the State to engage in wealth transfer. Savage certianly saw it this way.

You probably know I run my own blog, so over the next few days I will attempt to articulate what I believe is the Biblical responsibility for a follower of Jesus towards the poor, and the role of the State, keeping in mind the passages of Scripture you have referred to and possibly others as well.

Once you have 'heard' me more fully, you can then refute me more fully without distracting from the core focus of Chris's blog.

You can find me here:

Michael Herman said...

@ Brendan: “Of all the preposterous assumptions of humanity over humanity, nothing exceeds most of the criticisms made on the habits of the poor by the well-housed, well- warmed, and well-fed.” - Herman Melville

Scouser said...

@Anonymous on the Laffer curve.

If I understand your latest post correctly your now resiling from your initial post, which appeared to completely disagree with the actual existence of such behaviour where tax income decreases under high tax rates.

You're instead disagreeing with the points on the curve and where the appropriate tax levels are for the most efficient tax take?

That comes across as illogical at best - the cynic in me thinks it's somewhat dishonest.

Common sense says such behaviour is exceedingly likely.

Anonymous said...

If I understand your latest post correctly your now resiling from your initial post, which appeared to completely disagree with the actual existence of such behaviour where tax income decreases under high tax rates.


Initial post = pointing out that ACT-types use Laffer Curve to claim that you can cut taxes and increase revenue.

Second post = pointing out that the Laffer Curve is derived from a truism (zero revenue at zero percent tax), and despite the fact that we have no idea what the graph of tax-rate vs revenue looks like on a day to day basis, the Right invariably thinks we are always taxing in excess of the tax maximisation peak (if there is one).

How is that contradictory?

You're instead disagreeing with the points on the curve and where the appropriate tax levels are for the most efficient tax take?


The point is that one can plot tax rate against revenue. Such a graph is possible, but we have no idea what it looks like (if you actually had a thousand identical economies, you could perform experiments to find out).

The other point is that the Right thinks it knows what the graph looks like, specifically an inverted parabola-shape, with maximisation occurring around 20%. Which is faith-based nonsense.

That comes across as illogical at best - the cynic in me thinks it's somewhat dishonest.

Try harder.

Nic the NZer said...

This post is extremely disappointing Chris. But to show why first you need to learn a bit of simple macro-economics. We start with two ways of calculating of GDP.


C = private domestic sector spending on consumption.
I = private domestic sector spending on investment.
G = Government spending on consumption (note does not include transfer payments such as benefits or pensions)
X = Exports
M = Imports
S = Private domestic sector savings
T = Payments of taxes.

The first measure looks at all the things which the NZ economy makes and sells, so people earn income for, to calculate GDP. The second measure looks at all the ways that people in NZ can use their income.

In any given time period the GDP calculated will match from both these methods. Now we can calculate from this a further identity.

C+S+T = C+I+G+(X-M)
(S-I) = (G-T) + (X-M)

This last formula is called the sectoral balances equation. The three differences in brackets denote segments of the economy. (S-I) is the private domestic sector. (G-T) is the public sector and (X-M) is the external sector.

The brief way to describe this is if we want to see GDP to increase in relation to the current balance then period on period then either the external sector deficit needs to increase (the country exports more), the private sector needs to invest more and save less (this typically involves this sector going further into debt), or the public sector needs to spend more or tax less (e.g running a bigger deficit).

So what then is the interest in GDP about? Well essentially we are interested in GDP because its the primary determinant of employment (and incomes). As GDP rises unemployment tends to shrink, and as GDP shrinks unemployment tends to rise (we might call this a recession).

You might wonder why I insist so strongly that its the public sectors responsibility to encourage full employment. The first reason is that its the only one of the three sectors which doesn't have a budget constraint. This is due to the New Zealand government issuing its own currency, one reason to do this is it can then issue (spend) as much as it wants. The other reason is its pretty much the only sector that the government can influence. While the private domestic sector might elect to leverage up into a housing bubble and this might reduce the government spending necessary to sustain less unemployment (e.g the Cullen era), this is not sustainable indefinitely. Alternatively the external sector might be in surplus, but again there is little to be done to facilitate that and internationally some countries must be in deficit for others to be in surplus.

So Chris your process for developing alternative budgets takes as a starting point the neo-liberal economic pillar of balanced budgets and accepting what ever level of unemployment happens to result from that policy. There are real alternatives, but not if you rule them out by definition. The current best alternative to Nationals surplus policy is running whatever deficit is necessary to sustain full employment for New Zealanders. That will not result from taxing all your government spending initiatives straight back out of the economy.