Is the fiscal pact between Labour and the Greens a defeat for the left?

The parliamentary left seems cowed by the neoliberals if the fiscal pact between Labour and the Greens is anything to go by. This column focuses on their fourth promise which observes that ‘Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.’ (On the other hand their deficit and debt paths are not so unorthodox; I’ll deal with them in later columns.)

To put the proportion in perspective, the December 2016 Half Year Economic Fiscal Update reported that this Government’s Core Crown spending for the current fiscal year (to June 2017) would be $78.3b, while GDP was $264.8b, a ratio of 29.6%. Were Labour and the Greens in power today, their promise amounts to their spending an extra $1.1b this year.

The list of what additional spending they might desire almost certainly exceeds a $1.1b. (Don’t argue that there will be additional spending in future years as the economy grows; National will also be spending more too. You can fiddle around with phasing but this single-year approach catches the essence of the challenge.)

Here are some of the big items on the list of desires.

  • Labour has pledged to eliminate tertiary fees – oops, that is about $1.2b a year by itself.
  • The public health system is struggling and desperately needs more cash – one estimate is about $2b a year.
  • If the housing crisis is to be addressed the state has to build more affordable houses; I do not see any alternative, the existing approach of leaving it to the private sector having failed over the last eight years. That will require a substantial equity injection even if it is primarily funded by off-balance-sheet borrowing.
  • It is easy to nominate a variety of items in the social services vote which desperately need additional cash. I have seen a list which comes to over an extra $1b a year – it was incomplete.
  • If we want to reduce income inequality in an effective way it cannot be done solely through the tax system (higher tax rates at the top would help, of course) or hiking the minimum wage. It requires substantial transfers of income to families with children. The Child Poverty Action Group thinks about $1.2b a year is required to get rid of the appalling anomalies in Working for Families and restore its effective levels to those of 2010. That would be a start. (I have wondered whether such transfers could be sneakily set up as a negative income tax for that is what they should be.)
  • Helen Clark would want more spent on the Arts, Culture and Heritage portfolio, and most Greens I know want to spend more on the environment, including the Department of Conservation, on public transport and dealing with rising sea levels.

 The list is already long enough to indicate that the target of government spending limited to 30 percent of GDP will strangle most of the leftish initiatives – even if Labour reverses its zero student fees pledge. I add that there may be some areas where government spending might be cut as not being of high priority or as really a hidden subsidy to friends and relations. But that will make only a tiny contribution to funding the above list.

What is a social democrat to think? Recall their view is that the balance between public and private spending is a pragmatic one. Sometimes private delivery manifestly fails as it has done in the environment, health and housing; sometimes the resulting private outcomes are antagonistic to social cohesion and life chances, and the income distribution has to be altered to be fairer. In such cases the social democrat supports government spending.

As an economy evolves one would expect public spending to rise faster than private spending because our demands for these public goods, services and transfers rises relatively faster. A social democrat might expect the ratio of public spending to GDP to increase a little over time (with the burden of taxation going up to pay for it).

As far as I can judge, Labour and the Greens have abandoned such an approach or perhaps they just do not want to distinguish their social democracy from that of National’s. Why vote for them then? The answer might be that, having sealed off any difference between the two sides on economic grounds, one might vote on the basis of non-economic issues, competence or charisma – matters outside this column’s scope.

This unwillingness to increase substantially government spending on, say, health explains an odd feature of the Opposition. You would have thought that when it complains about a particular instance of a (too frequent) failure in the public health system, their grumble would placed it in the context that it is (usually) a consequence of inadequate funding. But they cannot because they are not committed to spending a lot more on healthcare – perhaps a little bit more than the current government, but not enough to make a real difference.

Such whining is not exclusive to the Opposition. Last week the Minister for Children said that there was a serious shortage of child psychologists, therapists and other professionals for her new ministry. Wait a moment! This is the ninth year of her government and they have only just discovered this? Should they not have been doing something about increasing supply over the last eight years? (As tempting as it is, the solution is not the importation of foreign-trained specialists, many for whom English is a second language and who know little about Pakeha culture – and less about Maoritanga.)

There is one other factor in the balance: New Zealand First. I am not certain that they are as much committed to austerity as the other bigger parties. Recall that in 1996 they went into coalition with National partly on the basis of the government spending more, especially on healthcare. It would be easy for them to campaign on ‘a vote for NZF is a vote for more free healthcare’. We shall see.

Why did I start off provocatively arguing the neoliberals are winning? You may recall that at one stage they were arguing for government spending to be restrained to 18 percent of GDP. The spending plans of National, Labour and the Greens are well above that level. But the basic neoliberal approach holds. Government spending is to be discouraged. The fiscal framework of the Rogernomes and Ruthanasia – and the income inequality they have left us with – is not to be challenged.

Congratulations David Seymour. To most people you may seem to be laughingly ineffective. But you appear to be terrifying the parliamentary left.

 

Comments (10)

by Wayne Mapp on April 04, 2017
Wayne Mapp

The decision by Labour/Green on this issue may reflect their perception that societal expectations In New Zealand about the size of government, at least among middle voters who actually decide elections, has fundamentally changed over the last 10 years.

I always used to think that Labour was broadly comfortable with size of govt at 35% of GDP and National 30% of GDP. The tax and social spending priorties would reflect that. Obviously at 35%, taxes would have to increase somewhat, but there would be an extra $10 billion to spend. Though it should be pointed out that a $8 billion surplus (expected in 2020) is about 3% of GDP so that the tax take is a greater share of GDP at 33% than govt spending of 30%.

So this is a significant shift by the centre left in expectations of the size of govt. It also shows up the impact that James Shaw is having on Green policy. Presumably he convinced Meteria Turei this was a necessary step to gain the Treasury benches.

So why the shift in societal expectations?

I would put it down to the fact that New Zealand has done quite well in recent years. That middle voters are broadly comfortable about the share of their income they surrender to the government, and that they are unwilling to part with much more.

Sure they see things that need fixing, but not at a cost of say a 10% increase in their overall tax burden. So they are prepared to spend more, but not that much more.

Presumably Labour's focus groups have pretty clearly shown that this is the case with the key target voters, and Labour and the Greens have decided to accept that rather than trying to change the voters minds on that. They know they have failed to do so in the past, and the focus groups must have shown they would fail to change voters minds on this issue in the future.

 

by Alan Johnstone on April 04, 2017
Alan Johnstone

Not sure how you can write a post about state spending without mentioning superannuation

by barry on April 04, 2017
barry

Wayne,

I suspect it is not so much a question of what people want as what they are continually being told.  If Labour and the Greens went into the election proposing to raise the government spend to 35% of GDP there would be a lot of people (besides National and ACT) climbing in to call them irresponsible.  

Note the way you say "tax burden" instead of "contributions"!

L&G are not in a position to change that at the moment, but might be able to from government.  It is similar to National not proposing to sell assets in 2008, but putting it on the table for the 2011 election.

There is nothing special about 30% GDP.  It also depends on how you measure it?  If the something is paid out of taxes or out of rates, or donations, or if it is a user pays cost, the money still gets spent.  In the end any number is too high for some when it comes to government spending.

Yes it will be hard for L&G to promise anything meaningful within the cap.  As Brian says it leaves the room open for Winstone (and Hone).

by Lee Churchman on April 04, 2017
Lee Churchman

I would put it down to the fact that New Zealand has done quite well in recent years. That middle voters are broadly comfortable about the share of their income they surrender to the government, and that they are unwilling to part with much more.

Undoubtedly true, but Labour and the Greens will likely lose as many votes as they gain as former core supporters give up on the ballot. 

by James Green on April 05, 2017
James Green

I am of the opinion that total tax take of national and local government is optimally efficient at 50% of GDP. I'm not sure where this puts crown core expenditure, but probably somewhere in the low 40s. This is not to say government couldn't do more, but additional services would have to be user pays and extra capital expenditure debt funded.

Gareth Morgan has also made a similar promise: to be tax neutral overall, in his plans for tax reform.

There is indeed now only one economic ideology left in New Zealand's political parties. This is why electoral participation is declining (and declining more in local elections), because when it is so difficult to tell the differences many people can't figure out who is worth voting for and so don't.

by Charlie on April 05, 2017
Charlie

Brian:  Is the fiscal pact between Labour and the Greens a defeat for the left?

Not sure where you been these last 30 years but the left was defeated some time in the 1980's.

OK, that's a bit harsh. but really, left wing economic policy hasn't been a viable option since then. Any western politician that thinks otherwise gets his head handed to him by the electorate.

Going through each of your bullet points:

Tertiary fees

The education market is distorted enough as it is. The tax payer is already funding  impressionable young people to undertake degree courses in subjects which have zero value in the job market and condemn them to long term debt. We should be closing a raft of worthless university departments (half of the Law faculties for a kick-off, the economy cannot absorb 1000 law degrees every year) and redirecting them to the trades which are in desperate short supply and where they can earn real money.

Public Health

Public health will always have to be rationed because no amount of money will provide all things to all people. As it stands I think our DHBs do a damned good job for the money (i'm not in the health sector). Instead we should be cutting health funding to the morbidly obese and smokers. They've had warnings enough!

:-)

Housing

If you think government can build houses for less than the private sector, then I have a bridge to sell you!

If we want more houses at a lower cost, sort out the RMA and local council consenting rules. 

Social services

There comes a point when one wonders if some social services aren't creating a problem rather than solving it. I support continued tightening of rules for unemployment benefit and DPB.

Income inequality

Is a stupid measure. I think we've been here before. Only the 'mathematically challenged' worry about things like this.

The arts

Yes, I'm all in favour: Let's sponsor motorcross, MMA and racing at Western Springs. You know - the stuff people actually like.  ;-)

by James Green on April 06, 2017
James Green

It really is the quintessential question for any political party isn't it, at least for all their economic policy, which is most of what people care about. How much should government spend (although I would say how much should government tax)? From there all else follows. And now there really is no difference between any party that has a complete economic policy set out.

by Kevin McCready on April 08, 2017
Kevin McCready

Wayne says NZ has done well recently. It's impossible to take that seriously. Housing crisis, increasing poverty gap, filthy rivers?

And Brian, why ignore BBR Rule 1? The rest of your analysis fails because of it.

by Brian Easton on April 09, 2017
Brian Easton

The column is not strictly about state spending, Alan, but changes in state spending. As far as I know Labour and the Greens are not planning any significant change to New Zealand Superannuation in the immediate future.

I understand what you are trying to say Charlie. Let’s say I was asking whether it is ‘another’ defeat. However, the Clark-Cullen government made a number of reversals before it ran out of puff.

I assume you are referring to BRR Rule 1, Kevin. Of course I have not ignored it. I did not discuss taxation or the surplus at all. Another time.

by Joseph Cook on April 12, 2017
Joseph Cook
  1.  Is GDP the most accurate index to base government income and expenditure on?
  2. If GDP is not the most accurate index to estimate government income then what is?
  3. What exactly is the total government income, and where can this information be found?
  4. What exactly is the total government expenditure, and where can this information be found, including a comprehensive breakdown?
  5. If there is a lack of government income available to ensure high quality of public goods and services, and a high quality of life to all New Zealand citizens and residents, how can this income be supplemented?


I am not an expert on these matters, however, it does seem that GDP is certainly no accurate indicator of government income, nor should it be a basis to define expenditure.  Corporations not paying their fair share of taxes is just an example of how flawed GDP is an an index of government income or development.  Is it not the case that development should be defined by the quality of life of the inhabitants of a nation?  So let us please talk of total government income instead of pandering to the inept organizations that only represent the plutocracy and their interests for staters, surely this might help the debate having some sort of significance.  

"Total core Crown revenue for the 2015/16 year was $76.1 billion."

~ http://www.treasury.govt.nz/government/revenue

GDP for fiscal year ending March 2016 was 252 bn$

GST is 15%

252 x 0.15 = 37.8 bn$

As we can see here, if GDP is the total value of goods and services and GST is tax on on goods and services, GDP is not a good index or indicator of wealth at all.  All we have brought to the debate is confusion because we are using incomprehensive indices imposed by inept organizations.  

Let us please then upgrade this debate and discuss total government revenue, so that we can estimate actual ressources available to the government, compare these to deficits in providing public goods and services required, and then we can identify new sources of revenue if needs be.

"The Government's main sources of revenue come from tax, levies, fees, investment income and from the sales of goods and services."

~ http://www.treasury.govt.nz/government/revenue

We need a detailed and comprehensive breakdown of total government revenue.  Where is this data?

"

What are the government's main areas of expenditure?

The three largest areas of total Crown expenditure for the 2015/16 financial year were:

  • Social security and welfare: $28.9 billion
  • Health: $15.2 billion
  • Education: $13.8 billion"
~ http://www.treasury.govt.nz/government/expenditure

Where is the complete data for expenditure?

Now, with these requirements completed, we can have a meaningful debate, identify deficits and how to eliminate them by identifying new beneficial sources of income.

 

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