It would be churlish to be entirely negative about Bill English’s seventh Budget. There is merit in increasing the basic benefit level – the first increase in real terms since 1972 – and on the other hand increasing the expectation that those on a benefit will get into at least part-time employment. The Minister was able to point to a steady decline in the ratio of core Crown spending to GDP towards a sub-30% level by 2016/17, the level last seen in 2004/05 when Michael Cullen was Minister of Finance. And there was nothing totally nuts, such as any move to exempt fruit and vegetables from GST. For all those things we should be grateful.
But sadly for our future, there was nothing substantial in the Budget aimed at solving the major long-term challenges facing the country, and perhaps that was inevitable given that this is a third-term Budget, not a first-term Budget. The cynic might say that the kind of first-term Budget that Don Brash would like to have seen would have guaranteed that National was a one-term government. Not surprisingly, I don’t agree with that: given the strong mandate that John Key got in the 2008 election, the fact that he could legitimately point both to the fiscal mess which the Clark/Cullen Government had left behind by the enormous spending programmes associated with the 2005 election, and to the obvious impact of the Global Financial Crisis, I believe he could have sold a policy package which would more effectively have dealt with the longer-term economic problems which still face us.
What are the big longer-term economic challenges facing us?
First and most obviously, we continue to experience very low growth in productivity, or output per person employed, and as a consequence very slow growth in real wages. This is not a new phenomenon, and certainly not one for which this Government can wear all the blame. Our living standards have been rising, but at a rate which for decades has been markedly slower than the rate at which living standards have been rising in other countries. And to fix that we need more investment. The Budget might have addressed that by reducing the corporate tax rate. At 28%, our corporate tax rate is at the high end of corporate tax rates around the world: in Europe, the average corporate tax rate is 21%, in Chile it is 18.5%, in Singapore 17%, and in Ireland 12.5%. ACT Leader David Seymour has suggested that with minimal adjustment to other programmes, the New Zealand corporate tax rate could be cut by 1% per annum over the next eight years, to reach 20%. The Taxpayers’ Union has calculated that, by scrapping corporate welfare, the corporate tax rate could be cut to 22.5% immediately. But the Budget contained no hint of any reduction in that rate, either now or in the future.
Nor did it contain any hint of another way of increasing investment, making our policy towards foreign investment more welcoming. At the moment, the OECD ranks us as one of the countries most hostile to foreign investment. OK, perhaps for political reasons we need some restraint on foreigners buying “sensitive land”, but why does it take months for a foreign company to get approval to establish a new factory to export infant formula? Indeed, why does such a company need to get government approval at all?
And as has been well canvassed, the Budget said nothing which might give confidence that the Government will make the Resource Management Act more conducive to investment, whether in housing or in anything else.
A second long-term challenge is fiscal sustainability. Yes, the Budget is projected to be in surplus in 2015/16, but that surplus is wafer thin, less than 0.1% of GDP, and that on the assumption that economic growth is a relatively robust 3+% in 2015/16 and inflation rises to 1.4% (higher inflation helps the government’s tax receipts as taxpayers move into higher tax brackets). If the Budget should prudently be balanced over the course of the economic cycle, as most economists believe, we should surely have been in surplus before now, given that economic growth has been above our long-term average growth rate over the last several years. With many export prices sharply off their recent peaks, we are quite likely to be entering a period of slower growth before long when getting meaningful surplus in the government’s accounts will be much more difficult. Give the Government credit for scrapping one of the sillier bribes introduced by the Clark/Cullen Government in their final days – the $1,000 “kick-start” for joining KiwiSaver – but there was no suggestion that any of the other bribes dating back to that period would be scaled back.
And as for the longer term, there was no sign in the Budget of any plans to deal with the fiscal implications of our ageing population. In their 2013 long-term projections, Treasury estimated that on current policies the cost of New Zealand Super and healthcare would rise from about 11% of GDP currently to almost 19% in 2060 – at the time today’s 20-year-olds reach the current retirement age of 65. That increase of almost 8% of GDP is equivalent to all the money government currently spends on education (primary, secondary and tertiary) and law and order, so finding ways of covering that increase would be a herculean task. Yet National remains resolutely opposed to any discussion about altering the parameters of NZ Super, and won’t even consider ACT’s proposal to hold a referendum on the issue.
Finally, the Budget made no attempt to tackle the long-term structural problem which has seen New Zealand run a balance of payments deficit every year for more than 40 years, spending more overseas than we earn overseas. Indeed, the Budget documents project an increase in the deficit from 2.6% of GDP in 2013/14 to 5.6% in 2015/16 (the year we’re now in). As a consequence, our net indebtedness to the rest of the world is one of the highest of all developed countries.
In the absence of another boom in the prices at which we can sell our exports, reducing the balance of payments deficit involves getting the inflation-adjusted exchange rate down to a level that strongly encourages the production of exports and import substitutes. Nobody pretends that’s easy – actually, that’s not correct: there are people who think that doing that is easy, and simply involves a minor change to the Reserve Bank Act. I can assure them that that is wrong. The simplest way of getting the exchange rate down would be to run a markedly tighter fiscal policy. That would effectively enable the Reserve Bank to cut the Official Cash Rate without risk to the inflation outlook. Actually, a tighter fiscal policy would oblige the Reserve Bank to cut the OCR to avoid the tighter fiscal policy leading to deflation. With the OCR at, say, 1% rather than 3.5% there can be little doubt that the exchange rate would be lower and the balance of payments deficit would begin to shrink. I have seen absolutely no media commentary that the Budget projects the balance of payments deficit to climb back to more than 5% of GDP this year.
Having said all that, the Budget was almost certainly a political master-stroke for the Government. Most people want higher real incomes, but don’t connect those with the corporate tax rate, or the Overseas Investment Office, or the age of eligibility for NZ Super, or the balance of payments deficit.
The ANZ Bank suggested the Budget maintained the broad policy framework “but with some more ‘tilting’ towards the political centre (and arguably over it).”
David Farrar, the man whose firm does most of the polling for the National Party, summed up his view of the Budget by saying that it delivered “the very thing the Left have been demanding – an increase in benefit rates. It will be a fascinating test of which child poverty lobby groups are actually principled, and which are just anti-National shrills, because the child poverty groups should all be praising the Budget for doing what no Labour Government has done in 43 years – give more money to those on benefits. But it is not a Budget I support. Where are the tax cuts for hard working Kiwis? Instead of a surplus and likely tax cuts, we get a further deficit and lots of extra spending… This is a Budget that should be praised on The Standard and The Daily Blog. John Key and Bill English have delivered more to families on benefits than Norman Kirk, Bob Tizard, David Lange, Helen Clark and Michael Cullen ever have.”