Much of the commentary on the budget was shallow. What is really going on is that the changes are small but they reflect a particular political perspective. The financial threat was hardly discussed

Allow me to be irritated by the trivial discussion which surrounds the government’s annual budget. The budget is simply the government setting out its spending, revenue and borrowing plans for the year, as required by legislation and as has been a fundamental part of the constitution for three centuries. In most years – ones of benign growth without a crisis – any changes are incremental.

Over the long run, budget decisions can affect the quality of our life; in the short run they can have a large impact on particular, but typically small, interest groups who magnify any change (or lack of it) out of proportion to the overall significance. The government also has an interest in magnifying any favourable changes no matter how small, and it seduces commentators to do much the same thing. (Some commentators and the parliamentary opposition do the opposite, but they are playing the same game.) What is missing is the context.

Here I am going to use annual average changes from July 2015 to June 2019. I do this in order to smooth the fluctuations. The Treasury thinks that volume production (real GDP) will increase on average 3.5 percent p.a. over the four years. However, the population is expected to rise by 2.3 percent p.a., so per capita volume GDP rises 1.2 percent p.a.

The rapid population growth reflects high immigration. Because, given their ages, immigrants are more likely to work, the increase for the non-immigrant population will be less. I am afraid there are many such complicating details. I’ll concentrate on the big picture. I am not aware of any caveat that markedly changes the conclusions from the following analysis. (The calculations are in constant prices. Inflation (of about 1.5 percent p.a.) would add to the amount of data which has to be presented, but it does not affect the story.)

How much is a real rise of 1.2 percent in a year? The average annual household income is about $100,000. That is before tax (taxes will depend on household composition) and typically involves more than one earner in the family as well as social transfers (NZ Superannuation and social security benefits) and investment income. (The average wage is about $66,000 a year for men and $46,000 for women) So the average real increase for a household in a year is about $1200 or $24 a week. (This is before tax.)

Much of the annual increase comes from higher wages and social transfers. The Treasury expects real consumer wages to rise by about 0.6 percent annually. Thus much of the increase for an average household will come from a rise in market incomes.

At this point I could go into a confusing discussion of how households with different compositions of incomes and members are affected by ‘bracket creep’ (‘fiscal drag’), that is, as their nominal incomes rise the tax they pay rises more than proportionally. But I think you will have got the overall message by now: there is not a lot extra to go around.

When the government says its tax package is giving $10 or $20 a week additional to what the market will pay them, it is giving them a big share of the available additional income; the rest is public relations. When a household complains that there is not much in it for them, they are right; there isn’t. The economy isn’t growing enough to give a major increase in real incomes to a wide proportion of the community.

The government has been able to give a fraction more in tax cuts than the above calculations might suggest by restraining its own spending. Part of this restraint is that those on social security benefits will fall further behind average incomes. There is also restraint of wages in the public sector, cutting back services (mental health seems to be seriously underfunded) and cost-shifting so that users will be paying more for their education, healthcare and the like. (The tax and family incomes package is not implemented until April 2018. The government will explain it is an implementation lag, but because it is later, and represents more than one year's growth, it can be bigger than if it was implemented this year.)

The budget projections have total government spending (adjusted for consumer inflation and population growth) at much the same level between 2009 and 2021 (as far out as projected). That means that spending is falling as a share of the GDP.

The flatness is a deliberate political choice. It was also broadly flat in the mid- to late-1990s under the previous National government (after falling sharply in the Richardson years). On the other hand the public spending share rose under the Clark-Cullen Labour government.

The balance between spending in the private sector and spending in the public sector is one of the few economic issues which is affected by electoral outcomes. Vote right and it is for lower taxes (on some) and fewer public services (for some), vote left and it is the other way around. I shall be surprised if that is the way it is presented to the electorate, but that is the reality.

The other big thing which needs mentioning is that the economic projections suggest that our prosperity continues to be funded by overseas borrowing. The Treasury forecasts say that not only will it be large but that it will increase. They think that the net international investment position is currently 59.8 percent of GDP and expect it to rise to 62.4 percent by June 2021. In the interim we would have borrowed $42.5 billion, almost $45 a week per person.

I would be more relaxed if the funds were being used to invest in activities which would generate earnings to service the debt. The reality is that much of the borrowing will leak into private consumption. (Households save hardly anything.) The cynic might think that foreign lenders are more generous than the domestic government, but in due course they will have to be repaid.

Such issues were hardly canvassed in the commentaries around the budget. They will be in the next financial crisis but few will link the two.

For an argument that the budget’s debt target is too austere, see here.

Comments (7)

by Wayne Mapp on June 12, 2017
Wayne Mapp

A prettty good analysis of the ideological differences. 

However, the Labour/Green Budget Responsibility Rules actually narrow the divergence of left and right. At least in March 2017 they were saying the size of government should be essentially as it now is. Since then the govt has done a tax threshold and Working For Family package which the Greens and NZF have voted for.

Labour has said they would spend $1.7 billion extra on health, on top of National increase of $890 million. Labour has a bunch of other promises (education, housing, conservation, etc) that probably add up to more than another $2 billion. So they are now a bit stuck. They have to live with the fact of the 2017 budget; their coalition partners have voted for the central element of it.

So on 23 May Grant Roberston backtracked on the "no new taxes" committment. Basically as I see it Labour need to get an additional $2 billion. That means a serious tax increase package; tinkering at the edges will not yield $2 billion.

As the election draws nearer Labour will have to be upfront about this. Maybe they will have appealing packaging for their plans.

In any event it should result in a clear choice.

Except for the reality of MMP.

In practise NZ First, an essential coalition partner for Labour, will block tax increases, so most of Labour's programme will not actually be deliverable, certainly not the big ticket items.

So if we change the government, what will actually change (apart from the people in the ministerial offices)?

 

by Megan Pledger on June 13, 2017
Megan Pledger

If all that changes are the people in ministerial offices then that will be enough for me.

But I actually expect they will deliver a lot more - especially on integrity issues where the Nat Govt have got a woeful record.

by Wayne Mapp on June 13, 2017
Wayne Mapp

A further reflection on the results of the UK election. 

If Labour and the Greens conclude that Corbyn succeded in lifting the Labour vote from less than 30% to 40% due a more left wing programme, will they abondon the Budget Responsibility Rules? That gvies them the freedom to promote a programme of much greater public spending accompanied by substantial tax increases.

For instance no tertiary fees (already promised for 3 years study) plus a universal student allowance. Free doctors visits to age 18. And so on.

Easy to get to say $6 to 7 billion in promises, which would be a 10% increase in government spending, but would also require substantial personal tax increases.

It would be a real difference to National.

They must be tempted, given that most people are not even aware of the existence of the Budget Responsibility Rules, much less what they say. 

by Alan Johnstone on June 13, 2017
Alan Johnstone

Corbyn ran on a platform of no tax increases for those earning less than GBP 80k, which works out at around $165k NZ.

There'd be very little political downside for Labour to pitch tax increases at this threshold and couple it with some form of wealth tax.


by Katharine Moody on June 13, 2017
Katharine Moody

I think you're wrong on NZ First when you state this Wayne:

"In practise NZ First, an essential coalition partner for Labour, will block tax increases, so most of Labour's programme will not actually be deliverable, certainly not the big ticket items."

Here's a cut and paste from their website policy on tax:

"To replace the existing tax system with a fair and equitable system based on people's capacity to pay, so that people and businesses who benefit from the higher incomes made possible by New Zealand’s economic potential will bear a greater portion of the tax burden than those with lower incomes".

http://www.nzfirst.org.nz/finance_and_tax

 

by Ross on June 14, 2017
Ross

So if we change the government, what will actually change (apart from the people in the ministerial offices)?

Maybe the next PM could give the Israeli PM a call and tell his government to stop breaching international law, and that Israel is welcome to withdraw their ambassador anytime. That wouldn't of course come from Bill English whose motto seems to be: "These are my principles and if you don't like them...well, I have others".

 

by Ross on June 14, 2017
Ross

With National complaining about Labour's immigration and housing policies, I'm amazed that Wayne can't seem to spot any differences between the main parties. Oh and Labour supports a Criminal Cases Review Commission which National opposes...Judith Collins said that Teina Pora spending a mere 21 years in prison for a crime he didn't commit shows the system works well! 

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