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24 May 2011 Budget 2011: A wasted opportunity

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In terms of theatre, last Thursday’s election year budget was certainly a polished performance - a nice public relations exercise aimed at pacifying the concerns of voters, while giving little to opposition parties to really get their teeth into. But in terms of a government’s responsibility to improve the country’s economic outlook by boosting jobs, growth and living standards, it delivered little.

Don’t get me wrong – there were some good things in the budget. But even the Minister of Finance had to admit that it was never going to give the economy the kick start it so desperately needs. In fact during the pre-budget ‘lockup’ he made a public call for help: “I welcome any of the transformational ideas that are out there that we are not picking up. Just let us know and we’ll implement them because we have a good track record of implementing challenging and complex policy”.

The New Zealand Centre for Political Research is responding to that call by asking people who believe they have some good ideas that would help to transform the economy to let us know and we will publish their suggestions and pass them on to Mr English.

So what did the budget actually deliver?

First of all, the doom and gloom being heavily promoted by the government over the last few weeks did not result in a “black budget” - far from it. The spending cuts on Working for Families and KiwiSaver were softer than some expected, with many of the changes designed to be implemented incrementally over time. Almost anything that could be termed as controversial was either ignored or delayed until after the election so the government can claim it has a mandate.

The return of the government’s books to a surplus by 2015, a year ahead of forecast - without the need to slash and burn - was a welcome surprise that seemed to satisfy the credit rating agencies. But it is fair to say that a great deal depends on whether Treasury’s optimistic forecast of a 4 percent growth rate to March 2013 materialises. If it does,  170,000 new jobs are predicted to be created, resulting in a 27 percent increase in the income tax take over the next four years, a 40 percent rise in company tax (the IRD forecasts a 21 percent rise), and a 40 percent increase in GST. In other words, as long as the rosy growth forecast are right, the surplus in 2015 will have been produced without the need for a serious reduction in government spending. Yet just imagine how well our economy could do if we had a government committed to not only getting spending under control, but also to encouraging wealth creation.

When you examine the budget documents you find that in spite of their rhetoric, National will spend more money in the coming financial year than they did in the last. Core Crown expenditure is forecast to rise by an additional $233 million to a total of $73.027 billion - 36.4 percent of all our economy produces (GDP). To put this into perspective, in 2005 core Crown expenditure was almost $30 billion less than it is now at $44.895 billion, or 29 percent of GDP. In 2009, the Government’s 2025 Taskforce pointed out that if government spending was reduced to 2005 levels, New Zealand could become a high growth economy with a top tax rate of no more than 20 percent. This is in line with empirical evidence that shows the optimal size of government is around 25 percent of GDP, with high performing economies like those of Singapore and Hong Kong having ratios below 20 percent.

I asked Roger Kerr, one of the country’s leading economic policy analysts and the Executive Director of the Business Roundtable, who is this week’s NZCPR Guest Commentator, to share with us his observations on the budget. He points out that New Zealand’s poor economic performance, which has caused us to slip down the OECD living standards rankings and fall further and further behind Australia, essentially comes down to two main factors: the first is the imbalance in the economy caused by an excessive expansion of the government sector and dismal growth in the export sector; the second is a persistent decline in the country’s productivity rate.

As an exporting nation, the performance of the export sector is crucial to our economic wellbeing. Yet real export growth has slumped from an average of 5.4 percent a year prior to 2004, to 1.4 percent since then. In spite of a world-wide commodity boom, the budget’s forecast for export growth is a disappointing 2.5 percent a year until 2015.

Productivity is central to a nation’s wellbeing. In general, prosperous economies are highly productive, whereas countries with low productivity are poor. Prior to 2006, New Zealand’s productivity growth averaged 2.5 to 3 percent a year, but has fallen to 0.9 percent since then. It is expected to remain under 1 percent until 2015. 

What all of this means is that in spite of the positive gloss from National, and strong growth forecasts from Treasury, the budget will not do enough to really lift our economic outlook as many of the important reforms signalled by National appear to have been sidelined. As Roger Kerr observes:

“Strangely, no announcements were made in the budget on the recommendations of the Welfare Working Group that reported in February.  Earlier this year the government was saying that the WWG report and that of the Savings Working Group would be a major focus of the budget.  Why has this not happened – election year politics, sluggish decision-making processes, or resistance to change on the part of the welfare bureaucracy? 

“No indication was given of a timetable for the government’s stated goal of getting all income tax rates down to 30% or below… 

“Perhaps most ominously, no mention was made in the budget of the government’s top priority goal of closing the income gap with Australia by 2025. The 2025 goal is a vision articulated by prime minister John Key. Has the government thrown in the towel, just as Helen Clark’s government gave up on its goal of lifting New Zealand incomes to the top half of the OECD income ladder?  If so, the consequences will be serious.  Australian per capita incomes are now 38% above those in New Zealand and the budget forecasts suggest the gap will continue to widen in the next parliamentary term.  The consequence can only be continued migration of businesses and people across the Tasman.” To read the full article Budget 2011 doesn’t solve serious problems, clicking here >>>

Reading a government’s budget is always a shock. Billions of dollars of precious taxpayers’ money is thrown at problems with little accountability. Even the Secretary to the Treasury, John Whitehead, warned the new government back in 2009 that the state sector was crowding out private enterprise and imposing unnecessary costs on people and businesses. According to his estimates over 60 percent of the annual budget could be better spent.

So where does the money go?

Around $1 billion of taxpayers’ funds goes into the big black hole of climate change - much of it into subsidies and administration. Since the ETS forced up the price of fuel and power last year, there have been enormous increases in the cost of living, hurting families and small businesses alike, as well as costing jobs and growth - whilst having no impact at all on the climate. Once agriculture is introduced into the scheme - as National is planning to do in 2015 and Labour in 2013 - the price of meat, milk, cheese, butter, yoghurt and all other dairy products will go through the roof.

In the appropriation, $11 million is earmarked for policy advice including “negotiation for a successor to the Kyoto Protocol”. The Kyoto Protocol runs out next year, and unless a successor is agreed, the government’s Emissions Trading Scheme (ETS) will become redundant and recognised as a scandalous waste of taxpayers’ money. The problem is however, that the collapse of the ETS would be extremely embarrassing for the government and those environmentalists who support a price on carbon – not to mention the massive bureaucracy that has built up around this scheme. They will all be fighting to retain our scheme even if the rest of the world shuts theirs down. That is a battle they must not be allowed to win!

In terms of other items in the budget, race-based funding through Vote Pacific Island Affairs will receive almost $9 million and Vote Maori Affairs $210 million. Of that $43 million will be channelled into Whanau Ora, $75 million will be used to promote the Maori language, and around $50 million will fund activities in Maori communities.

Buried in Vote Justice is an appropriation of $1.6 million to fund iwi who are making claims for the foreshore and seabed under the new Marine and Coastal Area Act, up from $425,000 in the current financial year. Also found there is an extremely generous $8.4 million earmarked for Ngati Porou - up from $3.6 million last year - for their foreshore and seabed agreement under the 2004 Foreshore and Seabed Act, even though the High Court hearing that was an integral part of the claims process has never been held.

The 2011 Budget provides appropriations to fund 72 separate government entities. The biggest Vote is Social Development, which receives almost $22 billion, and the smallest is Vote Racing, which receives just over $1 million. You can examine the budget documents for yourself here >>>.

As you contemplate the scale of spending that this budget represents - well over a third of our New Zealand economy - I will leave the final word to the legendary economist Milton Friedman: "I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, ‘How do you hold down government spending?’ The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes."

Politics is the battle of ideas. Ideas influence people and the NZCPR plays a pivotal role in informing the public, challenging the administration, and advocating policies that promote freedom and prosperity. The NZCPR could not exist without the backing of our newsletter readers. To support our work and receive our free gift, the Milton Friedman special resource featuring his iconic book “Free to Choose", please click here >>>.  

This week’s poll asks: Do you believe the Budget went far enough to cut government spending? Click here for poll >>>

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