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.