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Roger Kerr

Budget a Good Rolling Maul But Not a Game-Changer

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The annual budget is the main statement of the government’s overall economic and social programme.

So in the first instance it needs to be evaluated in terms of the government’s own goals. The next key issues are its spending – both the quantity and quality – its revenue position, and the difference between them – whether it is running surpluses or deficits.

The previous government’s top priority goal was to get New Zealand back into the top half of the OECD income range.

In fact the country lost ground. As data in the budget confirm, its interventionist policies, including a 50% rise in government spending in the last five years, led to a slump in productivity growth, a halving of New Zealand’s potential growth rate according to the IMF, stagnation in exports, and a huge current account deficit which has left the country with a precarious level of external debt.

Yet opposition politicians are advocating more spending and proposing dangerous tinkering with monetary and tax policies.

National has set a more ambitious target of catching up to Australian income levels by 2025.

While the economic outlook is improving, there is no sign of the income gap closing. This is the government’s own assessment. By 2014, which would be the end of its second term if re-elected, the official estimate of the trend growth rate is no more than 3%.

Australia is growing faster, and the IMF puts the per capita GDP gap (adjusted to reflect differences in purchasing power between countries) at 47% in 2014. Last December’s Budget Policy Statement noted that on current forecasts New Zealand’s per capita income growth would need to be an additional 1.8 percentage points higher every year to match Australia by 2025.

Worryingly, the current account deficit is forecast to blow out to over 7% of GDP again by 2013, so the economic recovery looks unbalanced.

Government spending remains a big Achilles heel. With core Crown spending at 34.7% of GDP for the coming year (nearly a $6 billion or 9% increase) and local government spending coming on top, it is far too high for fast growth.

Together with rises in electricity and fuel prices arising from the ETS, higher ACC levies and the GST increase, it will put added pressure on monetary policy and the export sector.

Despite efforts to put a lid on spending, the forecast ratio of spending to GDP is higher each year to 2014 than under the Labour government, except for its last year.

It is unlikely that spending constraints will hold for long without major changes to underlying programmes and agencies. It is also a bad omen that the government has already abandoned the idea of fiscal rules that would have more bite.

Some of the most egregious and politically motivated spending initiatives remain unscathed. The tax privileges enjoyed by the racing industry thanks to New Zealand First, the Families Commission which only survives because of United Future, and the Charities Commission which all relevant government departments said was unnecessary, are still in place.

When even such low-hanging fruit are untouched, the government’s spending razor is obviously pretty blunt.

And all this comes before the increases in health and superannuation costs which are in prospect with an ageing population, on which the budget is silent.

The government made unfortunate commitments before the last election not to touch interest-free student loans, raise the qualifying age for New Zealand Superannuation and sell down its interests in state-owned enterprises.

Governments should not break election policies lightly. Nor, however, should they keep making them when they defy logic and common sense. Former Australian prime minister John Howard had the courage to admit he was wrong to commit not to introduce a GST. He sought and won a mandate to do so at a subsequent election. John Key should do likewise on the superannuation eligibility age, which is being raised beyond 65 by governments around the world, most recently by the new Conservative government in Britain .

On tax, the government has made some generally sound and overdue moves, with the exception of the depreciation rules for commercial property which look arbitrary. They reduce business certainty and confidence to invest because they apply retrospectively to investment made on the reasonable expectation that depreciation deductions would be permitted. New rules along these lines are generally applied only to new investment.

Taxing consumption more and income less should encourage investment and growth, although the Treasury’s estimate of the growth impact of the package looks optimistic. The Treasury also notes that the impact on investment of the switch to GST is muted by the additional tax imposed on the business sector.

However, the changes should be kept in perspective. We had a top income tax rate at the new level of 33% from October 1988 until the Labour government unnecessarily raised it in April 2000. We even had a 28% company tax rate – the level to apply from next year – under Roger Douglas. With today’s higher overall tax burden (because of higher government spending) it is doubtful that fiscal policy is now more conducive to growth that it was 10 or 20 years ago.

Science and infrastructure spending plans could be positive for growth, provided they stand up to proper economic analysis. To date the government has not presented any analysis justifying its investment in broadband and KiwiRail.

Government borrowing at $7 billion in the coming year remains at high levels, and debt servicing costs are set to rise to $4.5 billion in 2014 – more than is spent on each of the budget items ‘core government services’ and ‘law and order’. Further borrowing would be necessary if the forecast of additional revenue from tax policies that contribute to the funding of the tax cuts prove to be optimistic.

The fiscal crises in Europe and the stagnant growth outlook for European economies are a sober warning of the perils of high levels of government spending and borrowing.

From a growth perspective, there were numerous other gaps in the budget. The government seems to be making little progress on regulatory reform; no timetable was indicated for achieving its goal of maximum income tax rates of 30%; no progress was reported on opening ACC up to competition; and the ETS remains in place despite Australia ’s decision to defer a similar scheme.

There is no need for a further round of consultation on a Regulatory Responsibility Bill. The government’s taskforce produced a very well crafted bill and it should be introduced into parliament forthwith.

Moreover, of the 50+ recommendations of the 2025 Taskforce, only a handful are in the process of being adopted. And just this week New Zealand fell five places (while Australia rose two places) on the World Competitiveness Scoreboard.

New Zealanders who want to see the country prosper and enjoy higher incomes and better public services must call for and support more ambitious moves. The government should lead, and it should do more to educate New Zealanders on issues facing the country, but it cannot get far ahead of public opinion.

In the final analysis, as Shakespeare put it, the fault is not in our stars, but in ourselves, if we are underlings.

The prime minister has rightly ruled out disruptive policy changes, and a ‘big bang’ approach is unnecessary.

But many more ‘rolling mauls’ are clearly needed if we are to get over the Wallabies’ goal line by 2025.