How Much Should the Government Be Spending?

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.