The Budget: A Longer Term Prognosis.

A major preoccupation of the budget was preparing for the next major financial crisis. To do so it is reducing government spending relative to GDP. Where do tax cuts fit in? 

Our politics reminds me those weekly serial movies where each week the heroine ends in an impossible situation but next week she miraculously escapes and the action moves on to the next impossible situation.

True for a budget too, as far as the populace is concerned – they will soon move on. Yet for serious analysts there is a lot in one but it takes time to draw it all out. (Written grumpily – I spent two hours on Friday chasing an oversight I had made in a spreadsheet.) When you have finally got your head around it, political life has moved on, and there is not much interest in any deep thinking.

The government encourages this by handouts which capture the attention of the superficial who faithfully reproduce them as news. Have you noticed how often the government mentions new policy (announced as a four year outlay to bulk the number) but fails to draw attention to closures and downward pressures in their spending programs? If they do not have any new policies the minister announces the department’s budget as if it is fresh, rather than a rollover from the previous year.

Thus far I have worked on two budget issues. The first is the Treasury forecast of the economy. They are expecting stronger growth in the economy than I expect (although their forecast will not be very different from that of the majority of economists who, in my experience, tend to be a bit optimistic).

In any case the big problem remains. Despite forebodings, the Chinese economy is still growing. I am reminded of a decade ago when serious economists were worried about the US economy, although no one exactly predicted the trigger for the Global Financial Crisis.. It is instructive that the Minister of Finance – but not the Prime Minister– has said he wants to get our public debt down to give the government more room to move.

I shant go through some other wrinkles but the main driver of the economy appears to be overseas borrowing. The Treasury does not give its estimate of the level of overseas debt but it appears to be rising faster than GDP or exports. This is private debt, which a neoliberal says is of no concern to the government. If you are a central banker you say ‘nonsense’, especially as most is coming through the banking system and the Reserve Bank may have to bail it out (as it did after the GFC); that usually requires some assistance from the Treasury.

I am sure that is what Bill English means when he talks about getting public debt down; it gives him room to manouevre when we hit a private debt wall. It is good to see there is some anticipation, although it is hardly a comprehensive strategy which would also address the private overseas borrowing more directly, especially as it is distorting the housing market.

The other issue I have looked at is the pattern of government spending. Sure, ministers have gone out of their way to baffle you with numbers, but actually ...

One of the major purposes of the government budget is to set the balance between private and public spending. This is largely a political judgement but the curious fact it that historically New Zealand’s right-wing and left-wing governments have both been committed to increasing public spending and, perforce, reducing private spending; the exception has been social security where National has been less enthusiastic than Labour.

That no longer appears to be the pattern. Quite out of character with its historic record (neo-liberal Ruthanasia in the early 1990s aside), this National government is committed to reducing public spending. It depends on how you measure it but, for a number of technical reasons, I use the Core Government Spending to GDP ratio In simple terms, the ratio has fallen, whereas traditionally National is associated with a rising proportion (excluding social security).

Under the previous Labour-led Government, Core Government Spending rose to a trend level of 31.8 percent of GDP at the end of its term; this (fiscal) year – under National – it is expected to be 29.9 percent (and is projected to fall further to 28.5 percent in 2020). The 1.9 percentage point fall represents a reduction of about $4.7b in public spending this year.

Every major spending area is experiencing reductions, with the exception of New Zealand Superannuation whose share relative to GDP is continuing to grow because of the aging population and because, unlike social security benefits, the rate is indexed to after-tax wages rather than just to prices. (Even so, many superannuitants are suffering from discomfort while on a public healthcare waiting list or from financial stress if they skip the wait by being treated privately; many face inadequate home and residential care if they become frail.)

So, for instance, public spending on healthcare is lower today relative to GDP than it was in the past (let alone allowing an increment for rising relative prices, population aging and our affluence). The reductions not only impact on the high-user elderly and their families. Recently the Minister of Justice (Amy Adams) complained about inadequate mental health care impacting on the justice and corrections systems; Law and Order spending is being relatively cut too.

Indicative of the short-termism of the government is how they dealt with a series of housing difficulties which came to a head just before the budget. There seems to have been no anticipation (despite the claim they knew there were problems) nor solid policy development about a housing strategy. Instead the government rushed around with its bandaids none of which will be particularly effective. (Blaming the Auckland Council will be of great comfort to someone living in a car in Invercargill.) Meanwhile government spending on housing is expected to fall slightly relative to GDP over the next few years.

The spending cuts are being used to fund past income tax cuts. The Prime Minister says he wants more tax cuts next year. (He has mentioned $3b, which amounts to about 1.2 percentage points of GDP.) The Minister of Finance has differed. His priority is reducing debt to be ready for the next global financial crisis. But he has also indicated that he is worried about further cutting of government spending. Perhaps through his portfolio, the Minister of Finance is more in touch with the difficulties the cuts are causing. But it also may be that English belongs to the traditional National Party with its preference for cautious incremental increases in public spending, whereas John Key is to his right with a preference for tax cuts and damn the public sector.

I am not sure one should get politically excited about their disagreement. It is normal in politics. But in New Zealand it usually occurs behind closed doors, not in the public arena. Will the public be aware of it in a week’s time?