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Michael Cullen has been adamant about the principles that will guide tax cut policy under the Labour government. But his criteria are not nearly as binding as they might initially sound - a point that was forcefully rammed home by the prime minister’s assurance that the criteria would indeed be satisfied and tax cuts will be forthcoming.

John Minto’s decision to reject an award nomination from the South African government is hardly surprising. He is a doctrinaire socialist and is fundamentally at odds with the market-friendly policies pursued by the ruling African National Congress. Minto has sought to portray South Africa as an example of the failure of market-based policies to address poverty. To support his stance he has made some extraordinary claims about economic and social conditions in South Africa, some of which are quite simply wrong.

A quote in a recent article in The Economist magazine caught my eye: “politics has a habit of undermining economics”.  It was just a throw-away line in an article about the Bali conference on climate change.  As an economist my initial reaction was “so true”.  But it leads you to ask why is this statement so true?  Economics is, at heart, about maximising the welfare of a society.  One would, naively, expect that attempting to achieve that goal would be a vote winner for politicians.  In countries without democracy, or seriously flawed versions of democracy, one might have some understanding about why policies might not be designed to benefit the majority.  But why do political decisions in democracies, like our own, so often fly in the face of orthodox economics? 

As you stand at the petrol pump watching the dollars clicking over on the counter, think about what it’s really costing you to drive around in your car. It’s not the petrol. The big latent cost is depreciation – what you paid for your pride and joy will in many cases turn into a lot less when you come to sell it or trade it in. In very broad terms, fuel purchases account for around 10% of the total annual cost of owning and running a near-new car.

We are Australia’s poor cousins, that we all know. Even Tasmanians, the poorest Australians, earn on average more than 10% per week than we do. While we know we are poorer we like to think that sometimes we have other worthy attributes. We are less inclined to invade foreign countries alongside our traditional allies. We think we are greener – our per capita carbon dioxide emissions are less than half that of Australia’s. We also like to think that we have a more equal society. Greater equality is a popular perception but is incorrect if income distribution is our measure of equality.

The Reserve Bank took the unusual step last week of preempting the government’s fiscal policy plans and simply assumed income tax cuts worth $1.5bn – and on that basis, the Bank has committed to holding interest rates up for longer in response. It is an early warning that the government and the Reserve Bank will spend 2008 playing tug-o-war with the economy.

Researchers at Massey University suggested that the government should subsidise fruit and vegetables, in order to increase household’s consumption of these ‘healthy’ foods.  However, if we are willing to accept this I would like to take it one step further and suggest that we also place a tax on unhealthy foods (foods with a sufficiently low SSCg3d score for example), a concept economists tactfully term a ‘fat tax’.

Despite the many calls for urgent action, climate change is an issue of considerable uncertainty that should be approached with great caution. It is not clear how significant the threat imposed by climate change will be, so we should look carefully before leaping.

While tax cuts are a topical issue, in this article we take a step back and instead look at what a better tax-benefit benefit system could look like. Just as with the current system, the size of government could be as big or as small as society desires, but the debate around tax cuts would be much clearer than some of the vacuous comments we hear from politicians and the dubious findings of badly constructed opinion polls.

Are we living through the biggest boom in commodity prices most of us will ever witness? Quite possibly. The current cycle began sometime between 2000 and 2002, and while there have been some dips along the way, New Zealand’s commodity prices expressed in $US have more or less doubled since 2002 (ANZ’s commodity price index).