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Norman Gemmell

Budget 2013 – Good policy or good luck?

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They say some politicians are just plain lucky. They seem to do the same things as other politicians who are perceived as failing, yet they somehow manage to charm voters or the media, or circumstances conspire to assist rather than defeat them.

For four years Mr English must have wondered if he is one of the unlucky ones. Clearly a smart politician with a brain that can command a complex economic portfolio, he had the misfortune to first come into office in 2008 as the economy was heading south. His pre-election plans to cut taxes, and fairly easily (or so his advisers probably thought) cut back on the public spending excesses of the previous few years, would yield the growth dividend the new government was promising.

Unfortunately for him, the global financial crisis, then the US ‘fiscal cliff’ and protracted Eurozone debt disasters, intervened. The world economy has barely dragged itself along over recent years rather than enjoy the bounce-back that most economists expected. Add to all of this the on-going fiscal consequences of the Christchurch earthquakes, and the Finance Minister has clearly had a lot of bad luck to cope with! Mr English’s previous Budgets have seemed like the economic equivalent of trying to run into the teeth of one of those persistent Wellington headwinds, when he had instead expected to take advantage of a bit of economic calm. As a result, until now we have mostly heard him talk of ‘fiscal responsibility’, preventing ballooning debt trajectories, and keeping international financial ratings agencies on-side.

Is Budget 2013 different? At first sight it all sounds very familiar: maintaining fiscal prudence by “responsibly managing the government finances”, whilst trying to wring every last ounce of efficiency from restricted public spending. The economic headwinds may be abating with forecasts starting to look more optimistic, but this is a government still imposing strict limits on its expenditure growth. Getting the government’s books back into surplus may sound like the proverbial ‘stuck record’, but there can be no doubt that anything else would be a risky strategy in this ‘new world’ where financial markets no longer believe that lending to indebted national governments is a riskless business.

So what’s new in this Budget? First, that air of greater optimism is affecting plans for future public spending. The annual operating allowance is being increased a little, no doubt partly reflecting the difficulties of a Finance Minister keeping a lid on his Cabinet colleagues’ spending plans that were always likely to be unsustainable when tax revenues started to pick up.

Secondly, the Budget badges some new initiatives under three headings: ‘improving public services’; ‘improving business competitiveness’; and ‘the Christchurch rebuild’. I’ll focus on the first two.

On public services the Budget speech was short on detail, but supporting documents promote the government’s recent ‘ten targets’ for better public services. These are specific things like: “reduce the number of people who have been on a working age benefit for more than 12 months”, and “increase the proportion of 18 year olds with NCEA level 2 or equivalent qualifications”.

Almost no-one could disagree such objectives are laudable and would benefit both the economy and the people involved if achieved. Being precise in a way that enables public servants’ (and politicians’) performance to be assessed against quantifiable standards also sounds like a good idea.

However, as the UK government discovered some years ago, setting specific public sector agreement (PSA) targets provides clear opportunities for gaming the system. When the ‘output’ of a public service is inherently multi-faceted (what constitutes a better public service, or less welfare dependency?), it is tempting to pick the ones that are most easily measured. But setting a target for this can merely result in it becoming the exclusive focus, at the expense of the hard-to-measure, but still important, aspects that don’t feature in the target.

Universities have long known this problem. ‘Good teaching’ is hard to define but is clearly multi-faceted and cannot be captured by simple metrics like whether the teacher was punctual, set a number of assignments, or invited feedback. Important as these measureable indicators may be to good teaching, it would not be difficult to rank very highly on them and still be a hopeless teacher in hard-to-measure things like providing reliable knowledge, being challenging, supportive, motivational and so on.

So, be prepared for signs of improvements in New Zealand’s public service targets in the year ahead. But whether these turn out to be of real or illusory value is likely to depend on how multi-faceted the targets are. And let’s hope the outcomes are carefully scrutinised for signs of ‘gaming’.

Under the heading of improving business competitiveness, the Minister devoted a lot of time to three housing issues that might seem tangential to this objective but are clearly sources of concern – social housing, housing affordability, and new housing-based measures added to the Reserve Bank’s interest-setting toolkit.

Following Margaret Thatcher’s recent death, many retrospectives focused on her famous Council house sales policy – selling state-owned social housing cheaply to their, mostly low-income, tenants. With our government’s state-owned enterprise shares sales policy turning out to be more difficult to handle than it expected, they are clearly not ready for this level of radical policy in housing. Instead the Budget seeks to improve social housing provision through more flexible rules and a greater role for the private sector, both of which have echoes of Thatcher’s approach. It will be interesting to see how far this pared-down version can genuinely improve the quality and cost-effectiveness of social housing provision.

But it is on housing affordability, and the new agreement with the Reserve Bank, where the biggest new initiatives are to be found. Numerous studies in recent years have encouraged the government to do more on the housing supply-side and this Budget offers more specifics on how they intend to speed up, facilitate and extend the supply of new houses.

But for me, alarm bells ring with both their new demand-side initiatives – a pilot scheme of low/no interest loans to low-income borrowers, and increased rent subsidies. These always sound good as a help for the poorest buyers but are a strange way to discourage house price inflation. Namely, putting more money in the pockets of those trying to rent or buy property. If these schemes are given a wider roll-out, expect to see landlords reap much of the benefit as weekly rents rise in response, and lower-end house prices rise as the newly enabled recipients of the no-interest loans enter the market as house purchasers with greater buying power.

Lastly, the new ‘rules of engagement’ more explicitly expect the Reserve Bank to set interest rates while taking account of the ‘heat’ of the housing market. Some of those are designed simply to reduce the risks from any future financial crises and represent a ‘new financial prudence’ in light of recent history. Probably a good thing.

But there is also a whiff here of ‘interventionist tinkering’ to smooth the cycle of a sort that has shades of old-style Keynesian demand management. In that case it was about micro-managing taxes and expenditures to try to discern and combat market fluctuations. Here it is about expecting the RBNZ to monitor a wider set of conditions (like housing loan-to-value ratios) and use or adjust them as a way of smoothing market volatility. Whether the resulting time path of inflation and exchange rates turns out to be ‘better’ in some sense is going to be very hard to judge. But the risk of intervention making things worse must also now be greater than it was before. Perhaps it’s the Reserve Bank governor who will need to be lucky!