Leaked Cabinet plans list the government's infrastructure projects and show that even facing the worst economic crisis in half a century, the government intends to restrain its spending

Tim Watkin has been pursuing an important question on Pundit: the difference between fact and impression management in the National-led government's response to the economic recession. Thanks to some government leaks, I can add a bit of detail to this discussion.

I have been digging into these issues recently because of a growing feeling that the government is not taking the economic crisis seriously. Put simply: if nearly all of the government's responses to the recession are things they were planning to do anyway, without a crisis, then they're not really responding to the crisis at all.

The repackaging of pre-existing plans as a "Jobs and Growth Plan" can be made to sound like action, and even trifling announcements such as 69 new state houses have earned the government good publicity. Yet at present the real story seems to be that they are doing next to nothing. We are all going to live with the consequences of their inaction.

Business writer Rod Oram's summed up the gravity of the situation in a column shortly before Christmas. He wrote:

"Congratulations New Zealand! We have become the Road Runner cartoons' Wile E Coyote of nations. During the past year we have run full-tilt over the cliff. If we keep running and don't look down, our political and business leaders assure us, we'll be all right. Let's just take a quick peek to see if that's true."

He went on to describe the magnitude of the crisis.

According to a press release last week from John Key, the government's economic stimulus plans "will keep more New Zealanders working as the global economic crisis is felt here". But how big is the package? How many jobs can we expect it to save?

Watkin's probing has established that most of the government's "$9 billion" economic stimulus package is not new stimulus at all. It is spending and tax cut decisions made by the former Labour-led government and tax cuts promised by National, both from before anyone understood the intensity of the recession. That is, most of this impressive sounding sum isn't and never was intended to be a response to the recession.

The main candidate for being a genuine response to the recession is the government's "$5 billion" infrastructure plans. A few days ago, ministers announced the first stage of the plans, $484m of small 'fast-tracked' projects covering schools, roads and state houses. The rest of a so-called "rolling maul" of economic stimulus initiatives has not yet been revealed, with announcements being held until the May budget or later.

Some well-placed government leaks in recent weeks mean we can now judge this part of the "$9 billion package" as well. On January 15, finance minister Bill English met key ministers in Wellington and briefed them confidentially on the infrastructure plans. In the course of this meeting he described the fast-tracked projects that were announced last week and also the big ticket items that weren't yet being announced.

According to what the ministers were told, the government's infrastructure list is:
  • a major broadband upgrade, costing up to $1.5 billion
  • a new prison, costing around $200-300 million
  • completion of a four-lane road between Mercer and Cambridge, the "Waikato Expressway", costing $790 million over 10 years
  • a four-lane Central Tauranga Corridor, costing $100 million and expected to take 5-6 years
  • $500m of school building, $216.7 million of which was announced this week
  • insulation of state houses, a scaled down version of the cancelled $1 billion Green Party plan.

If it feels like you've heard most of this before, it's because you have. Most of these items were promised by the National Party before concerns emerged about global recession. They were mostly instant policy for election-winning purposes last year. Completion of the Waikato Expressway was promised by former leader Don Brash as long ago as the 2005 election campaign.

In other words, National's big infrastructure plans are mostly like the rest of the $9 billion "stimulus package". They are policies and promises that would have been going ahead whatever the state of the global economy.

Note also that this specific list of projects was not chosen with a recession in mind. Most will take a few years and it could take as long as a decade for the money to reach the economy. These projects were designed as a voter stimulus package, not as an economic stimulus package.

English told the ministers he will restrict new capital spending to $1.45 billion in this year's and subsequent budgets. Significantly, he intends to resist any calls for government intervention above this figure.

This new capital spending is what will fund things such as the broadband upgrade. Until December the figure was to be $1.2 billion per year. This means that there appears to be a genuine recession-time boost to government capital spending of $250 million per year (from $1.2b to $1.45b) that English approved at that time.

Ministers know that the public expects serious action in the face of the global recession, which is why the pre-recession plans are being re-spun and trumpeted. But the genuinely new capital spending of only $750 million over three years, when compared to the size of the economy, is an insignificantly small stimulus.

Why so small? According to sources, English has been persuaded that there is already enough stimulus for the economy (even though it's virtually the same level of government spending planned for a non-recession environment) and that he should be responding to the recession using monetary policies instead. This suggests that the National Government is being influenced by 1980s and 90s-style advisers ideologically opposed to the government making a priority of protecting people's jobs.

National has also been arguing that New Zealand was in recession nearly 12 months before the rest of the world and that the necessary economic stimulus occurred under Labour. This is disingenuous. Michael Cullen's 2008 budget was primarily about outmanoeuvring National over tax-cuts and other promises leading into an election campaign. New Zealand did have a local economic downturn early last year, but the economic decisions taken then were not preparations for a deep and possibly long global recession.

Beyond the items listed above, there will be "little new money" under National for other projects. I have been leaked a letter sent by Prime Minister John Key to each of his ministers just before Christmas, warning them that there would be little new money to spend on their portfolios. Key asked each minister to identify a small number of priorities that they most want to achieve – spending, legislation and "regulatory reform" –  and in particular "to concentrate on the top two or three priorities for 2009". He wrote:

"Given the challenging fiscal position that we have inherited and the weakness of the economy, we need to focus and target our efforts to achieve maximum impact."
"The Minister of Finance has written to you to outline the implications of the fiscal outlook....  It will not come as a surprise to hear that there is little new money, and that we will all need to reprioritise within our baselines."

The $1.45 billion cap was decided by English in December last year and included in his 18 December Economic and Fiscal Forecasts. Key's letter, four days later, makes it clear any new spending above that level will come from cuts to existing government programmes. The letter said that "reprioritising within baselines" means "scaling back on activities that are not as well-aligned with our priorities in order to make room for the new initiatives."

This, then, is what is actually going on in the National-led Government. As the country heads into the worst recession of our lifetimes, John Key and Bill English have decided against any significant economic stimulus package. As other countries acknowledge the magnitude of the crisis and spend, our Cabinet will be putting their energy into finding places to cut.

Comments (2)

by Tony Norriss on February 18, 2009
Tony Norriss

Hi Tim,

 

I think several points are worth making here:

 

1. It is the effect of the spending not whether it is new spending or not that is important. If the spending is going to have a stimulatory effect, then it is mere semantics as to who planned it or not. As I remember it, there was a lot of concern that spending promises from both sides were going to be highly inflationary and could effect interest rates etc. So, it seems that the spending that had been planned was going to have a stimulatory effect anyway. Also, some of the planned spending has been brought forward, meaning the impact of the spending is felt much more quickly in the economy.

 

2. From what I have seen, there is disagreement amongst commentators and in the market generally about whether the massive stimulus packages announced around the world will actually work. If they don't work, then these countries will have mortgaged themselves and future generations up to the hilt for nothing. So, a proceed with caution approach could be seen as justifiable.

 

3. Since we are a small exporting driven nation, it seems we are likely to be affected by the stimulus packages announced in other countries more than any stimulus from our own government anyway. Hence, if the stimulus packages in other countries actually do work, there will be massive spin-offs for our own exporters etc. Thus, we can gain the benefits of stimulus packages in other countries without the risks.

by Tim Watkin on February 18, 2009
Tim Watkin

Tony,

1) It shouldn't be an either/or. Yes, the ultimate impact matters, but it also matters what we're told as an electorate. And it's not just for the sake of political point tallying, or even a question of honesty. Most important is what it says about how this government is handling and will handle the recession. If it's a govt that dresses up old spending because it really doesn't believe stimulus works, then we should be debating that because it's at odds with what the Americans, Australians, Chinese, Japanese, Koreans and many others think.

2) True. Exactly why we need an hoenst debate about what this government is doing (or not doing). However while there's diagreement, I think the majority of commentators/economists think it's wise for the public purse to be opened when private purses are closed. And there's a question about what "working' actually means. They may not have made things much better as yet, but if they hadn't been spent perhaps things would be even worse.

3. Good point, although isn't it true that we're not quite as exporting as we like to think we are?

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