Grumpiness and Government Spending

The policy dimension of the election appears to be about the concerns with past restraints on government spending and the consequential social failures. But whatever the rhetoric, implementation of campaign promises is going to be much harder.

Last Saturday, the Minister for Social Housing, Amy Adams, admitted her government had a poor record on social housing but promised to do better. On the same day, the Prime Minister said the government would (might?) spend $1.2billion on the Dunedin Hospital which was a similar admission of poor past performance on capital funding for DHBs. (Apparently the promise was also made three years earlier.) There have been parallel admissions; I spare space and your patience by mentioning only mental healthcare. There will be further such implicit admissions.

The National Government has got the message from the public. While it has not pursued austerity as vigorously as, say, the Tories in Britain, there is a grumpiness which, in the more extreme form, led to the Brexit vote in 2016 and crippled the Tories in 2017. National is admitting that over the last nine years it has been stingy on public spending; it wants to do better.

Many of these promises are party policy rather than government policy, so they have not been approved by cabinet and wont be included in the pre-election forecasts and update (PREFU) to be released this week. To what extent they will actually be implemented if National is re-elected I cannot say (and they really cant either).

Of course the opposition parties not in government are making the same point. Government spending has been inadequate and there is a substantial social deficit. People are suffering as a result and of course they promise to address the deficit if they become the government. The previous paragraph’s caution about any government’s capacity to implement their promises applies here too.

Given current political thinking one is pessimistic. The National Government has given considerable priority to reducing taxes and public debt, which constrains their ability to spend more. Labour and the Greens have a memorandum of understanding with slightly more elastic parameters but I doubt that will give them much room to manoeuvre, especially after they have funded unrelated promises to groups such as students and the elderly to obtain their votes. (I am not sure about New Zealand First.) In any case whether the promises are made by the incumbent or alternative government there are fudge factors which may mean they are not as generous to their voters as they sound.

Whatever, the government after the election faces a challenge if it wants to reduce the stinginess. How can it pay for additional government spending especially if it remains committed to the lowering public debt track and is unwilling to increase taxes?

I am not as enthusiastic as the conventional wisdom’s desire to aggressively lower the level of public debt. Certainly we should have one of the lowest debt-to-GDP ratios among rich countries. And we have. On an OECD measure the New Zealand ratio was 38 percent compared to the OECD average of 111 percent in 2015 (the latest year available). Only Australia and Estonia were lower. 

So it is not obvious we should get it lower. The issue is complicated by a number of economic wrinkles which are hardly discussed. For instance, the government net worth – assets minus liabilities – comes to about $23,000 per head. That means every migrant gets a gift of $23,000 on arrival. (An alternative is the government has to spend an extra $23,000 on them; a simple illustration is that migrants use roads putting pressure on the overloaded road-building program.) Given the current rates of permanent net migration, that means that each year we share $1.5 billion with the new arrivals. Should we fund this by taxation or borrowing offshore?

The economic analysis is more complicated, of course. The general message is that we need to think more carefully about the debt track, rather than unthinkingly adopting neoliberalism. The potential gains may be significant. Were we to keep to the current ratio, then each year there would be about extra $2-3 billion which could be spent on worthy public causes or used to cut taxes. (Multiply this figure by four to compare it with budget expenditure statements which refer to spending over four years.)

(A naughty way around the restrictions placed on public investment by a falling debt track is public-private-partnerships which National keeps mentioning. In effect, the private sector does the borrowing so the debt does not appear on the government books, although it is still responsible for the debt servicing. I am reluctant to pursue this strategy because there are so many overseas examples of projects which have gone desperately awry and proved very expensive. (‘Think Big at home is another instance.) The problem has been to get the private incentives to align with the public requirements, particularly the sharing of risks. I am sceptical that we have the skills to manage the deals in the public interest; many better placed countries prove not to have them.)

Another means of financing more spending to quell the grumpies is higher taxes, again challenging the neoliberal framework. The Minister of Inland Revenue, Judith Collins, has announced some measures to reduce corporate tax avoidance worth $200-300m a year – enough to fund an effective mental health program? (Who were the nonentity ministers of the past who could have initiated the change years earlier?)

Labour has promised to investigate the feasibility of a capital gains tax; we have had 18 years of Labour governments since I recall the issue first being raised. Labour also supports a resource levy on water and a higher petrol tax. However the revenue goes to local authorities and will not contribute to central government coffers. (I am a fan for such levies not least because I support a more decentralised governance of New Zealand. Greater fiscal independence for local bodies levels is a part of that. However the local authority must initiate the levies; all central government should do is make it possible for a lower tier agency to introduce them.)

So there is considerable grumpiness by the population about the inadequacies arising from government-spending stinginess. Both the incumbent government and the opposition seem to recognise it. They are going to have a lot more trouble responding after the election, unless they are willing to rethink the current fiscal framework with its Austerian (neoliberal) tinges. It is to be hoped that if they do, they will combine increased social sensitivities with an ongoing commitment to fiscal discipline.