From BEFU to PREFU, from budget to election, our politicians are having to flip and flop to make their policies fit the times

Sometimes Michael Cullen can be too smart for his own good. This looks like being one of those times.

Voters will go to the polls next month, wondering how on earth the Clark-Cullen Labour-led coalition could suddenly convert nine years of prosperity into a future of ballooning budget deficits and borrowing as far ahead as Treasury eyes can see.

The cautious confidence of Treasury’s Budget Economic Forecast Update [BEFU] last June has evaporated into a cloud of gloomy uncertainty in its Pre-Election Economic Forecast Update [PREFU] last Monday.

Projections of GDP growth and employment growth have been cut. Forecasts of consumer price rises have been increased. Projections of wage increases have been trimmed. A new line showing a rise in unemployment has been introduced.

Weaker growth will reduce Government tax revenue by around $900 million a year for the next three years. Spending on benefits will increase by about $500 million a year over the same period.

New policies—such as Kiwisaver and the increased education spend—will cost around $480 million more each year than previously expected.

Labour’s happy history of budget surpluses and Crown debt reduction has been wiped away by new projections of substantial deficits for the next nine years.

Cullen’s favorite budget line, the true operating balance in the Government’s books—OBEGAL, excluding retained revenue from the NZ superannuation fund—will move into deficit of $31 million this year and the deficit will grow to $3.2 billion by 2012/13.

Between next year and 2013, net core Crown debt is expected to rise from 5.3% of GDP to 13.2% of GDP. Government debt servicing costs have been hiked by around $500 million per annum.

The really bad news is that this gloomy update is not up to date. The number-crunching for the PREFU finished on 28 August—before the perfect storm rolled out of Wall Street and the big bipolar flip began.

The notion that traders in the global money market are bipolar was advanced in yesterday’s New York Times in a fine piece of commentary by David Brooks, author of "Bobos In Paradise: The New Upper Class and How They Got There".

“When these traders are in their manic phase, they flood countries and economic sectors with capital. Without meaning to, they dissolve the moral fabric and spoil their own profit zones… Then, when things go bad, the social contagion sweeps the other way. One minute there’s an ocean of credit, the next minute there’s barely a drop.”

Brook says leaders around the world have to figure out how to stabilize economies amid these global capital flows.

That is why Helen Clark and Michael Cullen and John Key and Bill English are now dancing to the Bipolar Flip.

Clark and Cullen started their flip with the budget last June.

Their cunning plan was to kick in a “modest, prudent” tax cut just before the election. It would sweeten the voters’ mood as they went into the polling booth, and take the edge off National’s tax cut pledge.

The strategy was to show how Labour could manage the long-suppressed appetite for lower taxes, without cutting Government spending or increasing its borrowing.

As soon as National unveiled its more ambitious tax cut programme, Labour would hammer them to reveal just where State spending would be cut, or how much would need to borrowed.

Unfortunately for Labour strategists, the flip has flopped. The combined impact of the PREFU and the global credit crunch looks like blowing the cunning plan to hell.

Cullen has compromised his nine-year-old mantra that borrowing to fund tax cuts is not prudent economic management. That attack weapon has now lost its edge on the twin rocks of his last budget and the borrowing requirements revealed in the PREFU.

Another Labour attack weapon—fresh policy announcements saved for release during the campaign—has also been blunted by the PREFU.

In the current environment, new spending commitments will look like desperate, irresponsible vote-buying—especially when cost over-runs on recently implemented Labour initiatives have started showing up.

Key and English may find voters more receptive to a judicious pruning of State spending as they join the dance in Campaign 08.

Saving National’s tax policy announcement until the PREFU was published has proved to be sound strategy. Its content shows the caution was fully justified.

Announcing that the gloomy new forecast required some scaling back of National’s planned tax package also looks like a sensible response—conditioning voters not to expect too much too soon, but confirming that National remains committed to a programme of tax reduction.

In Campaign 08, Labour and National are flipping back to their traditional positions—Labour expanding the State’s role in the economy and National releasing resources to encourage private sector-driven growth.

Think back to where the two parties were positioned in 1984—another campaign dominated by depressing global market forces—and you will see what I mean about the Bipolar Flip factor at work in this campaign.

Comments (5)

by Tim Watkin on October 08, 2008
Tim Watkin

I agree with your analysis David, the numbers blunt Labour's attack plans and throw the main parties back on their core values. But will voters really blame Cullen for this recession? The blame lies (mostly) with Wall St, the US banks and US regulators, and given the massive coverage of the bail-out et al, don't most NZers realise that? Once the dust settles, might Cullen even get some points for producing books that are healthier than many other western countries?

by David Beatson on October 08, 2008
David Beatson

Tim, New Zealand's home-grown meltdown was evident well before the burnout on Wall Street. Goverment policies let irresponsible operators run rampant in the property market until the value bubble burst. Government policies grew public service commitments faster than they promoted business growth, particularly in the vital export sector of the economy. Government policies saw the Government rack up tax-fueled surpluses while the country's overseas merchandise traders consistently turned in deficits. Healthy? No.

by Matt Ensor on October 08, 2008
Matt Ensor

Agree on the parties are pushing different tacks. Just been catching up on the statements of today - initial thought was surprise that National's policies don't seem to be 'growth' strategies for the country, but then should we be retreating towards more conservative stance anyway?  Big surprise for me was proposed removal of R&D tax credit - perhaps it's not a financially efficient way to move companies to reinvestment in developing intellectual property, but surely important that companies do?

by Tony Norriss on October 09, 2008
Tony Norriss

Hi David,

Labour have been making some really irresponsible spending decisions that have not been helping. For instance, pouring hundreds of millions into worn out trains is looking rather silly now. Also, Labour has just forked out another 40 mil in nationalising more real estate, right when we need to make every cent count.

So I think there are aspects that National will be able to point to that demonstrate irresponsible financial management on the part of Labour that has contributed to the problems.

by Carolyn on October 09, 2008
Carolyn

I’m not clear on the timeline of the flip flop theory. It indicates flips to traditional Nat/Lab differences at moments of economic crisis. Wasn’t the difference between National & Labour along traditional lines becoming clear before the international financial situation reached crisis point?

Also the analysis doesn’t seem to factor in the potential changes in capitalism that Tim Watkin wrote about. No party seems to have any ideas about a new direction, though it may be too son for that. Does anyone detect a future direction towards a new form of capitalism, as asked by Tim, in the way any party is modifying its campaign policies?

National’s announcement yesterday, while being somewhat restrained due to the crisis, seems to assume neoliberalism as usual. It points towards a continued focus on an economy lead by a focus on consumerism or spending.


Overall I can see a high proportion of women being the losers on National’s tax/Kiwisaver equation, as they tend to be on more modest incomes. I also don’t think this plan is going to win National a lot of new voters, but will hearten many of those already planning to vote for them.

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