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% of GDP as recently as 2010/11, is projected to be 31% this year and below 30% 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% 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% of GDP).
The Budget is also politically astute – it gives little beyond the benefits of fiscal prudence to traditional National voters (nothing beyond the merest hint of possible future tax reductions) but plays into Labour territory with a package of measures to ease the pressures on low income families, particularly the extension to 12 of the age at which children get free doctors’ visits and free prescriptions.
So on balance, the Budget almost certainly improves National’s chances of forming another government after the election in September.
And compared with what a Labour/Greens combination is offering – perhaps with a dash of Mana, Internet, and New Zealand First thrown in – management of the economy by a National-led Government is vastly to be preferred. I have acknowledged publically before that Labour’s suggestion of adding a quasi-fiscal instrument to the toolkit for controlling inflation is not, in itself, a bad idea. Labour is right that when interest rates alone are used to influence the inflation rate, there is a risk that controlling inflation may put disproportionate pressure on the export sector (and those who produce import substitutes) through putting upward pressure on the exchange rate. Finding some way of using fiscal policy to take the steam out of demand would be a useful way of reducing that risk. Unfortunately, the particular instrument which Labour has proposed is unlikely to be terribly effective short of quite draconian changes in the mandatory contributions to KiwiSaver (partly because so many people will never be caught by KiwiSaver – superannuitants, beneficiaries, self-employed, etc.), and involves a legal obligation for all employees to contribute to KiwiSaver, and that has its own negative consequences for many people.
Labour also wants to push up the minimum wage even more sharply than National has done already even while arguing in favour of a lower exchange rate – apparently hoping that the public will not notice that a reduced exchange rate only works if it is successful in reducing real wages. And that’s only one of the contradictions in Labour’s policy platform.
But judged not simply in political terms, or by comparison with what the other lot is offering, is it a “good Budget”?
Not in my view. To begin with, there is no sign of any material increase in our sustainable growth rate. Numbers released by the Minister himself project real GDP to grow at the rate of 4.0% in the year to March 2015 (the year we’re already in), but then drift back to 3.0% in the following year and a very modest 2.1% in each of the two following years. Not a chance of catching Australia by 2025 at that rate, or by 2045 for that matter, despite the Government’s signing up to close the gap by 2025 when it first came to office in 2008.
Nor is there any sign of a fundamental improvement in the balance of payments current account, or evidence that the Government knows how to achieve its target of getting exports of goods and services up to 40% of GDP. In the year to March 2014, the current account deficit was 3.1% of GDP, the lowest figure for many years. But it is projected to increase steadily from that low point to reach 6.3% of GDP by the 2017/18 year. In other words, our dependence on the savings of foreigners will continue to grow from its already high level.
And there is no sign either of any willingness to explain to the public the longer-term implications of our current policy track, driven in large part by the costs associated with the steady ageing of the population. John Key remains adamantly committed to not increasing the age of eligibility for New Zealand Superannuation, even though most similar countries have already flagged the need to start raising the age at which people become eligible for their taxpayer-funded pension, with Australia talking about raising the age to 70. And nobody has yet talked about the fiscal challenges of providing healthcare, and frequently residential care, for the growing numbers of people who will live well beyond 65, indeed well beyond 85.
Yes, by conventional standards, a good budget. Compared with the kind of budget a Labour/Greens Government would bring down, an excellent budget. But not one designed to deal with the fundamental structural problems we still face, as Jamie Whyte’s alternative budget tried to do.