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Frank Newman

Budget 2019 – Rhetoric or Well-being?

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Labour promised something special, but Budget 2019 delivered something quite ordinary. Those who believe governments should foster a vibrant economy will find nothing of real substance to applaud, while those who have been promised a transformational change in social policy will be left feeling they have been short-changed.

Here are some key observations.

Government spending is expected to increase $25 billion over the next four years. This year’s surplus of $3 billion is expected to fall to $1.3 billion next year.

Crown debt is expected to be $5 billion more than had been forecast in December. However debt as a percentage of GDP is expected to remain at or below 20% of GDP. Essentially the government is borrowing against a growth averaging 2.5% p.a. to fund its increased social spending.

Treasury has based the expected growth forecast on continued immigration-led population growth, increased government spending, easing monetary policy, and growth in the economies of our trading partners. Concerns about Treasury’s forecasts have been raised by a chorus of economists.

Cameron Bagrie of Bagrie Economics says “There is going to be tension over the coming years balancing fiscal discipline with spending demands…The spending demands are heading one way and the Treasury’s growth forecasts still look on the high side.” He predicts the government will have budget deficits within two to three years at the current rate of spending.

Westpac economists said Treasury forecasts appear to have not factored in the current weakness of the economy, while ASB economists were “considerably less optimistic than the Treasury on the growth and tax revenue outlook”. They were “surprised that the Treasury has not made larger downward revisions to its growth forecasts since the Half-Year Update…we suspect that the Government may be at risk of missing its net debt target”.

In a pre-Budget speech, The Minister of Finance announced that from 2022 the Government would relax its debt target from 20% to a range of around 15-25% of GDP. That latitude will be required if the economists’ cautionary comments come true.

Like the economists, I too see softness ahead. There is no denying small to medium sized business owners are becoming increasingly pessimistic about the direction of this government and its policies that harm business. Although the economy is expected to grow by 2.5%, Treasury forecasts wage growth of 3.5% (some of this will be due to the minimum wage increases). The effect is businesses profits will be squeezed. There is also negative fallout from the decline in house prices in Auckland, and a rampant increase in building costs. Building even an average sized home on a fifth of an acre section is being priced out of the reach of most people. Reduced demand will inevitably have a flow-on effect to the trades. It will not be too long before tradies will have to start looking for work rather than turning it away. This will be significant given construction has been such a major part of our economy for so long.

Big ticket items in this year’s Budget include $1.9 billion for mental health and addiction support, and $1 billion for KiwiRail. The Finance Minister’s KiwiRail funding narrative was about “infrastructure building” but the figures show most of the funding is operational to restore decaying rail assets. In other words, it is deferred repairs and maintenance to locomotives and tracks. 

Of the new money for mental health, $455m will go to boosting front-line staff to assist those with low to mid level mental health problems. While supporting a need is commendable, there appears to be no commentary about addressing the underlying causes of mental illness.

Education got some attention, although at the margins. From 2020, decile 1-7 schools will get a $150 per student payment from the Government in lieu of ‘voluntary’ donations, at a cost of $266m over four years. NCEA fees are to be scrapped.

In the welfare area, benefits are to be indexed to the average wage instead of inflation. The difference is expected to add between $10 and $17 a week to benefits by 2023. The cost is $320m over four years. Welfare advocates criticised that initiative for not increasing base welfare payments.

On the business front, the so-called building a productive nation well-being received $300m in the form of new venture capital funding – $240m from the government and $60m from the NZ Venture Investment Fund. The NZVIF was established by the New Zealand Government in 2002 “to build a vibrant early stage investment market in New Zealand”. It currently has $245m under management. Funds are invested through privately managed venture capital funds – in effect, it funds the funds.

The Mana in Mahi (strength in work) apprenticeship scheme has received a $50m funding boost to place a further 1,850 individuals into the scheme. The scheme was launched in August 2018 to give employers funding to support, hire, and train 18-24 year olds. To date it has placed 150 individuals.

Neither initiative is transformational. They are unlikely to have a significant impact on the macro economy, or improve the well-being of the hundreds of thousands of business owners. It seems these grafters, who do not have their hand out for race-based funding, and don’t ask the government to pay their rent and living costs, are the lost people of New Zealand politics.

Absent from the Budget was KiwiBuild. It received no new funding and did not get a mention at all in the Finance Minister’s speech. One presumes he took the view that some things are best left unsaid – even flagship policies like providing affordable housing. A policy “reset” has yet to be announced. The unknown is whether the failure of KiwiBuild has led the government any closer to recognising the real problems that are being caused by high land and building costs. I suspect not.

Leaving aside the sugar coating, the Well-being Budget delivered what we would expect from a socialist government – more spending on social services, while largely ignoring the role of the private sector in wealth creation.

Although the Budget was couched in terms of directing spending to achieve certain well-beings, the Labour government seems to have missed the point that all governments spend with the intention of having a positive effect on the well-being of their community. A more appropriate debate is the fundamental question about the approach a government should take to improve community well-being. And there is a major difference in approach between a left leaning government which believes bigger government is best, and those said to be on the right who believe in free markets.

Our current socialist coalition appears to have the view that free markets do not deliver a “fair” distribution of rewards – according to their perception of fairness; and at a practical level they have etched out a political constituency that would rather take from others than earn for themselves.

I have no doubt history will, eventually, show the government’s well-being approach to be a spectacular failure, but then I am of a view that socialism as a political system is a spectacular failure. I also have no doubt the coalition government will claim success in creating a fairer society by closing income disparity – which inevitably it will by taking from those above the average and giving to those below the average. The question really is whether that is the right measure, and over what time frame? Surely the long-term objective of a welfare system should be to transition people from welfare to work? That can be measured by counting the number of people that have been shifted from welfare to work, in any one year.

At the end of the day, governments shifting a few dollars a week from the well-to-do to the not-so-well-to-do will not fundamentally change the well-being of those at the poor end of the normal curve.

What would change their well-being is full engagement in the workplace, households spending less than they earn, and home ownership. That can only be achieved by having a legislative framework that promotes an opportunity economy where those who want to work can, and those who want to prosper are able to.

This budget takes us on an opposite path.