Budget Day gave New Zealanders a chance to see how well the National government has been doing in keeping the country’s finances in order. Before examining the budget, we should remind ourselves that in 2009, not long after National was first elected, then Secretary of the Treasury John Whitehead revealed that up to 60 percent of all government spending was considered to be of ‘poor’ quality – “including spending on policies introduced 15 years ago, that may no longer be as effective or fit Government objectives”.
By cracking down on this massive level of government waste and reducing spending, an opportunity existed to transform New Zealand into a powerhouse economy like Hong Kong, where government spending is capped at 20 percent of GDP, and Singapore, where the government spends around 19 percent of GDP. Less government spending, of course, means lower taxes – in Hong Kong the top income tax rate is 15 percent and company tax 16.5 percent, while in Singapore the top tax rate is 20 percent and the corporate rate 17 percent. These low tax rates are key drivers of economic growth.
Now the Budget – I asked this week’s NZCPR Guest Commentator, the former Governor of the Reserve Bank and leader of the National Party, Dr Don Brash, for his reaction:
“Judged in conventional terms, the National-led Government’s sixth Budget looks pretty good. As promised, the Minister of Finance can point to a small surplus in the Underlying Operating Balance (before gain and losses) in the financial year starting on 1 July and increasing surpluses in future financial years. Given the huge deficits which were projected when National first came to office in 2008, and the huge fiscal cost of the Christchurch earthquakes, that’s a good achievement, and it’s been done largely by keeping a pretty tight hold on government spending as the economy has recovered. As a result, core Crown expenditure, which was around 35 percent of GDP as recently as 2010/11, is projected to be 31 percent this year and below 30 percent by 2016/17.
“Even with the Operating Balance in surplus, of course, the government will still be borrowing quite heavily to fund its investment programme, so its net debt continues to increase in dollar terms to some $66 billion in 2016/17, at which point it is equivalent to some 26 percent of GDP – a good number compared with those in most other developed countries at the moment, but it needs to be, given our susceptibility to natural disasters in New Zealand and the very high level of our net international indebtedness as a country (some 65 percent of GDP).”
Dr Brash believes that on balance, the Budget will have improved National’s chances of winning the next election, but he does have reservations – you can read his full guest article HERE.
Credit rating agency, Standard & Poor’s gave the budget the thumbs up, reaffirming their AA+ rating on New Zealand government debt.
The Minister of Finance Bill English is clearly both determined and ambitious about National’s long term debt and spending reduction plans. He would like to see government debt reduced down to 10 to 20 percent of GDP by 2020 – at which time contributions to the New Zealand Superannuation fund would be resumed – and government spending lowered to 25 percent of GDP in six or seven years time. Spending at such a level would be an historic achievement.
Mr English is very mindful of how government spending affects mortgage interest rates and he does not want a repeat of the situation that existed under Helen Clark’s Labour administration, where excessive spending helped to push interest rates over 10 percent.
The advice from Treasury is that government spending of around NZ$1.5 billion a year is the upper limit before interest rates – and the exchange rate – are materially affected.
In his budget speech to Parliament, Bill English outlined the importance of prudent financial management: “Governments need to create an environment of stability and good incentives for business to grow the economy. Businesses need confidence the rules will not shift and the Government is not one of the risks they have to manage.”
National has certainly delivered on this objective during their six years in office. Much to the frustration of many New Zealanders wanting to see a greater emphasis on economic reform, National navigated through the domestic recession, the Global Financial Crisis and the Christchurch earthquakes with a slow and steady hand, taking on extra debt to in order to stick to their promise of protecting vulnerable families during difficult times.
The political importance of this economic discipline should not be underestimated, and nor should the importance of keeping election promises. Once a government reneges on major promises, it loses the trust of voters, and the backlash is felt at the ballot box.
That’s one of the main reasons why opponents of John Key’s government use opportunities like the budget debate to harangue the Prime Minister about his 2008 promise to not lift the pension age. They know that if they can goad him into agreeing that super is unaffordable, public trust would be destroyed, and a fatal blow would be dealt to his administration. In other words, for them, politics is the name of the game, not the age of retirement at all.
Public policy spending decisions are, of course, a matter of political choice for any government. John Key’s promise to leave the retirement age at 65, protects the long-standing compact that exists between government and the people: if you work hard for 40 years and pay your taxes, the government will look after you with a pension when you reach the age of 65. While people are certainly living longer these days than they used to, that doesn’t change the fact that for many workers, physical capacity starts to decline in their sixties. Leaving them with some quality time to achieve some of their other life goals has always been considered fair and reasonable.
Given this is shaping up to become a major political football in this year’s election campaign, let’s remind ourselves of the numbers. According to Treasury, around 640,000 New Zealanders will receive a pension by the end of this financial year at a cost of $10.9 billion, or 4.8 percent of GDP. By 2060, the number of pensioners is expected to reach 1.5 million, and the cost of super is expected to rise to 6.6 percent of GDP. This figure is at the lower end of the international scale of public expenditure on pensions.
While there is clearly much more to this issue – and we will save it for another day – it is important to recognise the political motives that are at play in this debate.
Political motives also underpin the whole question of child poverty – another issue raised in the budget debate. The fact is that when political advocates define child poverty as being based on “60 percent of median disposable household income, after adjustments for housing costs”, child poverty can never be reduced. No matter how high wages rise, there will always be the same number of families receiving less than 60 percent of median disposable household income, after adjusting for housing costs. That’s why the politicisation of the poverty debate by the office of the Children’s Commissioner is so regrettable – New Zealanders should expect better from the country’s leading publicly funded child advocate.
Opposition parties also used the budget debate to harp on about the so-called widening gap between rich and poor. It’s as if they want to condemn New Zealanders who are doing well, when, in fact, the country is indebted to them. As the Prime Minister explained in his budget speech, “the top 2 percent of taxpayers in New Zealand pay 22 percent of all personal tax in this country. The top 12 percent of households in this country pay 76 percent of all net income tax before you even account for New Zealand superannuation.”
He went on to say, “Well, here is a question for Labour: if that 12 percent of households paying 76 percent of tax is not enough, how much is enough? How much is enough?”
It’s a valid question – just how much more do Labour and the Greens want to squeeze Kiwis who are trying to build a good life for themselves and their families? And how can they possibly imagine that imposing a raft of new punitive taxes is a fair or good way of encouraging New Zealanders to work harder and become more productive?
We should keep in mind that as far as tax is concerned, lower and flatter taxes are a better and fairer way of encouraging hard work and enterprise – as Hong Kong, Singapore, and many other successful countries show only too clearly. A low flat tax is actually the answer for New Zealand too – we just need political leaders to recognise it!
So what did the budget show?
Firstly, that the economy grew 3.1 percent in 2013, the fifth-highest rate in the OECD. Real GDP growth is expected to peak at 4 percent next year driven by low interest rates, elevated terms of trade, a catch-up in housing supply, the Christchurch rebuild, strong consumer and business confidence, new investment, and higher productivity.
Stronger growth is delivering more jobs – compared to December 2013, forecasts show an additional 170,000 people are expected to be in work by mid-2018, when the unemployment rate is expected to fall to 4.4 per cent.
Wages are rising faster than inflation, with the average full-time wage forecast to rise to almost $62,300 by 2018 – an increase of $7,600 over the rate in December 2013.
The big surprise in the budget was the introduction of $500 million in family-friendly programmes, namely free doctors’ visits and prescriptions for children under 13, an extension of paid parental leave, and a boost in parental tax credits. In addition, there was a wide range of new spending for early childhood centres, social housing, cancer treatment, home-based care, new apprenticeships, welfare reform, research and development, motorway building – along with initiatives to lower the cost of building a new home, and reduce ACC levies… full details can be seen in the budget documents HERE.
Those documents also show just how much National’s slow reduction in government spending has cost the country. Last year, borrowings of $110 million a week were needed to meet spending commitments – including the $1 million an hour necessary to maintain social safety net entitlements. This year, borrowings will fall to $75 million a week, but as Finance Minister Bill English explained, “Paying the interest on our debt this year will cost $3.6 billion – more than we will spend on the police and early childhood education combined”.
That’s why, looking forward, the long term economic health of New Zealand can only be assured if there are further reductions in government spending to balance the budget – rather than the reckless tax-and-spend approach that proved to be so disastrous under Labour.
And, finally, to put all of this into perspective, here is what Cicero said – in 55BC: The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance.
THIS WEEK’S POLL ASKS:
Do you believe that the budget was positive or negative for New Zealand?
Click HERE to vote
Click HERE to see all NZCPR poll results
1. John Whitehead, Public Sector Performance
2. John Key, Budget Debate
Your Views on the Budget – extracts…
* I was very surprised and disappointed with the comments that the economy has now been fixed and how well the government has managed it! Even the press has gone along with it, as there has been little mention of how New Zealand’s debt has increased from $1 billion to $60 billion in this government’s terms. The cost of interest is now higher than the whole of prisons & law! The forecast surplus will not happen until a further three years by time we could well be at $70 billion! This has happened with an ever increasing gap between incomes of the populace. Don
* Politicians need to curb their appetite for spending money we do not have. Social Welfare is an obvious area in dire need of major overhaul… Increasing our population over the past 40 years has placed a considerable strain on this environment and its natural inhabitants with a further problem being seen by tourism. The ‘government’ also needs to take a stand on the fishing industry and limit the catches these people enjoy at the expense of the majority. Just three of the more obvious things that spring to mind. Charles
* Ok as it goes – no great deal but it appears that we may be on the up economically. Far better than Labour and more so than the Greens. Brian
* There is no provision to help young first home buyers to buy their own homes, a New Zealand right in a democracy. Ted
* A great budget as New Zealand needs a slow continuous growth and not big peaks and valleys. The people of New Zealand will share in the surpluses, as and when they happen, by the promise of reduced taxes and additional social benefits. Leon
* Communism by stealth goes on. If we are not careful we will end up with a Nationalised health service which has led to enormous problems in the UK – only the medical profession can stop it. There is so much middle class welfare – a huge waste. How much in the dollar does it cost to collect a dollar of tax and then there is the cost of distribution. Paying people to have kids is ridiculous. One of the examples of families affected by the budget had seven kids – how much does that family get in support. Would they not be better off just keeping their tax money? Paul
* I think the budget is good in its short term perspectives, but weak in its only vaguely hinted longer term economic policies and vision. The popular freely consumable tax reductions of 2009 only got us deeper into debt… But would not resumed contributions to the NZSF amended into a permanent institution of Personal Accounts be a 100% NZ wealth creation winner, eliminating justification for means testing NZ Super, raising its entitlement age altogether, and building up our savings rates? Jens
* This is a very pragmatic Budget. It is designed to win the election and not improve the economy and has been forced on National by the whims of MMP. It does absolutely nothing to address the fundamentals that are wrong in our society. It is a dependency budget. Nothing has been done to the Interest Free Student Loans, The Working for Families Dependency trap, and other take from you schemes only to give it back as a benefit… Until we get the Government’s share of GDP to below 20% we will not be a successful society. Robin
* Whilst we still urgently need to dramatically reduce the civil service and obvious wastage and start in earnest on repayment of debt, nevertheless within the parameters of political reality, I think the budget was exceedingly responsible and politically brilliant. Could I take the opportunity to make the point that possibly the most urgent need at the moment is to strictly control the presently unbridled power that local authorities have to spend without any restraint, to borrow also without apparent restraint and to tax (rate) to whatever level they choose… Peter
* I believe that the free doctors visits for children is a good idea, it will certainly help the low income families. It doesn’t matter what is in the budget someone will miss out, the government can’t please everybody and demonstrating against it is a waste of time. I can’t understand the big deal about owning your own home; surely other things should take priority, health and education for example. Tony
* The budget is right for this time, not everyone can be helped. IF the surplus will indeed continue to grow, more can be done. In the past we got into debt because we borrowed to fulfil unreasonable promises. Morally the government is seriously lacking 1) by agreeing to the “marriage” clauses, which were not necessary because they already altered 150 items of the law to give civil union to same sex couples. 2) By getting race oriented decisions. William
* I think this is a very creditable budget! It conserves what has been gained – but it gives SO many people another lease of life! Good one Bill!! Alison
* Where was the help for the pensioners? All good for families to encourage breeding but what about those at the other end of the scale, just surviving!! Rob
* A great budget to win elections and a superb performance by John Key as a follow up to David Cunliffe. And poor Russell Norman having to follow John Key – match over! Regretfully it was not a good budget for Auckland as the government continues to pour big money into motorways to the almost complete exclusion of public transport… It hasn’t worked because traffic congestion in Auckland is as bad as ever. The City Rail Link should have been at the forefront of budgeted transport expenditure. Warren
* I see Race based privileges are alive and soaring in NZ. Another $30m on top of the $1.4b they get annually, that 85% of the rest of the population don’t get BUT Maori also get what 85% get as well. Seems a bit one sided. Ron
*Our budget, by world standards, is passable considering the fact that we, like every other country, have a massive current account deficit which we can never pay off. The medical handout by the government, especially for the young, is a serious retrograde step… After the war, we had, as a family, the good sense as refugees to come to NZ in 1950 and despite everything going pear-shaped worldwide and being ensnared, NZ is still the best land by a country mile. So, enjoy it while you can, the days are numbered if we sit back and do nothing. Emanuel
* Why does it fall upon productive over taxed citizens with no family connections to make up for the delinquency of the irresponsible and their direct family. The budget cannot be considered sound while we are paying out huge capital losses on dubious Treaty claims and even more dubious costs on whimsical ethnic education programs. Our defense forces are at bare bones. Now our Police Force is being stripped… The number of kilometres of formed road across the nation, is barely any greater than it was in 1960, yet the cost of roading is twenty times more… Vern