Between a rock and a hard place
The Hon Bill English’s 4th budget comes at a difficult time for the Government.
The immediate crisis provoked by the GFC seems a distant memory but its effects linger on; the Christchurch earthquake recovery effort is proving more complex, slower and more costly than initially thought; and the second term blues have arrived on cue, amongst them the Sky City Convention Centre deal, the relitigation of partial SOE sell-downs, and the “Banks” affair. Proposals to increase repayment rates for Student Loans, alter welfare settings, cap classroom sizes and increase minimal prescription charges are met with astonished concern.
The Government has certainly begun its second term with a speed not seen in its first. For this it is to be commended not condemned. Changes are needed. To understand why we need to go back to the Finance Minister’s first and second budgets. Most commentators would agree that the Government got the balance about right in response to the GFC. There was a delicate combination of expenditure restraint and tax reform driven by the need for fiscal prudence, to cushion the worst impacts of the GFC, and to reorient the economy to growth through increased exports. In ordinary times these are difficult enough to achieve. But these are extraordinary times.
Firstly the Christchurch earthquake has blown a whole in the Government’s balance sheet – it is a shock that can be withstood but it limits options for dealing with other externalities. Secondly, economic growth is not rebounding as quickly as forecast. Partly this is a world problem with a horror story in Europe, anaemic growth in the US, and a slowing Asia – even Australia, the saviour of our manufacturing industry over the past few years, has hit a wall. But it is also partly a result of ordinary Kiwis responding correctly by tightening their belts – savings rates are on the rise and the consequence is lower spending and lower domestic growth.
A quick look at the numbers shows that the Government has done a reasonable job on the expenditure side. But the lack of growth is a real problem simply because it adversely affects tax collection – 2011 core Crown revenues are at the same level as they were in 2007. To balance the books the Government’s strategy needs growth, and growth has been hard to come by, and is likely to be for a year or two yet.
There will be those who blame the tax cuts but this is misleading – in the absence of growth the revenue shortfall would have happened anyway. The lost tax revenue between 2008 and 2012 exceeds $15 billion, dwarfing the cost of tax cuts and the tax switch.
So what does this all mean? The Government has made much of its goal of reaching fiscal surplus in 2014/15. While this is important I do not believe it should become an obsession. It is the direction of travel that is important not the year. A small deficit in 2014/15 with a trend to surplus in 2015/16 or even a year later will not result in New Zealand becoming the Greece of the South.
None of this is to say that pushing the year of surplus out should be used as an excuse to back away from some of the harder calls that will need to be made. The economy cannot go faster if government spending remains at an elevated share of GDP. The long term affordability of the Student Loan Scheme and NZ Superannuation remain issues.
The Labour Opposition has at least opened the door on a rise in the age of eligibility for NZ Superannuation. New Zealand is almost alone amongst developed countries in not having any plan to increase it. When we are still contemplating pre-funding through the Cullen Fund (when surpluses allow) and encouraging working Kiwis to save through Kiwisaver it is time to deal with this elephant in the room. It is not hard to see at some time in the future that New Zealand’s savings landscape will have compulsory Kiwisaver contributions and heavily means tested NZ Super as major pillars of its retirement savings approach. This is one area Australia has got right and we have got wrong – we should just admit it and follow them. Early signalling is crucial for changes to be manageable – the longer this is put off the harder the adjustment will be.
From a business perspective the Government’s economic growth agenda has become clearer as it has stepped up its communication and activity. The formation of the Ministry of Business, Innovation and Employment is a worthy initiative which if well executed could deliver real value to business. Business does not want more hand-outs. What it wants is efficient regulation, certainty, and efficient services. MBIE has a key role to play.
The partial sell-down of some SOEs remains in place. The debate on this issue at times defies belief. Opposition to it characterises it as asset sales when no assets are being sold; as foreign takeovers when the Government will own at least 51% and Kiwis will likely own most of the rest. Ignored are the benefits that will flow from deeper capital markets, more investment choices for Kiwisavers, improved financial performance, and diversification of the risks of ownership. There was a time when it may have made sense for the Government to own these businesses out right. Today there are higher priorities for investment.
The target for surplus inevitably meant this would be a “no new money” budget. What spending initiatives there are have come from reprioritising existing expenditure and some small increases in fees for services. It should be noted that given the wage and salary increases agencies will face there is real pressure to drive efficiencies if services are to be maintained. I would expect the Government to find it increasingly hard to defend attacks that there have been cuts to services.
But it should continue its drive for efficiencies. The number of central government employees grew by a staggering 50% between 2000 and 2008. Since then there has been effectively no change. In addition public sector wage increases out stripped private sector increases by 17% between 1999 and 2008, and have continued to by 30% between 2008 and 2011 – at a time when private sector employment has borne the brunt of the adjustment through the great recession. The Government has signalled that the public sector cannot be the source of new jobs - that task belongs to the private sector. But to characterise this budget as “austere” is to show scant regard for the meaning of the word. Look to Europe to understand what austerity really means.
So, slower than desired growth and spending restraint, combined with the usual second term blues, will likely result in grumpy voters. This next year or two will be a real test of the Finance Minister’s economic management skills and the Prime Minister’s political skills. They will be hoping that the economy is growing strongly by 2014 – we all will.
Budget 2012 Analysis
- Introduction - between a rock and a hard place
- Budget at a Glance
- The Nation’s Bank Account
- Mixed ownership model
- Public sector developments
- Tax reform tinkering