Pundit has finally received answers from Bill English's office about the government's stimulus package. Contrary to the spin, the government is re-announcing already promised money, it has not added a cent to its spending since December, and while the rest of the world ups the ante, New Zealand is sitting on its hands
If you've been reading Pundit over the past week, you'll know that I've been trying to pin down the government as to exactly what is in the $9 billion stimulus package that it has been trumpeting as one of the five largest in the developed world.
In recent days the National-led government has been announcing tax reforms and infrastructure spending as part of its "roiling maul" of initiatives designed to protect New Zealand through the worst of the recession. These plans, it has said, are part of a $9 billion, three-year fiscal stimulus, and that stimulus is the third highest in the OECD.
What is hasn't said – or at least hasn't said clearly – is that most of that $9 billion is made up of tax cuts and spending planned and announced by the previous Labour-led government. It is old, pre-global recession spending dressed up as a response to the current crisis.
Yesterday afternoon I got an answer – and an admirably detailed answer at that – from Bill English's office.
The short version is this: Last December the government confirmed that its new spending combined with Labour's already committed spending would total $9b over the next three years. Every spending announcement since – the business tax reform, the new bridges and schools – hasn't been about new money, it's merely been telling us how that $9b would be spent. While the economy tanks and the rest of the world commits hundreds of billions in new spending, New Zealand hasn't changed its fiscal plans one iota.
Let's get into the detail. The main chunks of the $9 billion are:
- Most of the $4.75 billion to be spent in the 2008/09 year, as announced by Labour in the May, 2008 budget. That includes the impact of the October 1, 2008 tax cuts in that year.
- $.165 billion in extra capital spending over the next three years, promised by the National-led government.
- $4.2 billion in tax cuts announced by both the previous and current governments, phased in over the next three years. Labour had budgeted for more tax cuts over that time, but of course they now take the form of National's policy, resulting in the $4.2m total.
The first thing you might notice is that these main chunks total more than $9 billion. As English's press secretary explained it, the $9 billion is "not a grocery list" of spending, but a Treasury analysis of total fiscal stimulus. For example, National's decision to change KiwiSaver contributions potentially means New Zealand workers will have more money to spend, rather than having it locked up in retirement saving schemes. So that's counted as part of the $9 billion. But on the other hand, there are "off-setting measures". For example, this government has axed the Fast Forward agriculture fund and the research and development tax credit, which were announced in 2008 budget and included in that $4.75b figure. So the figure is reduced accordingly.
The new capital expenditure? The current government has increased it by $550m a year for each of the next three years, taking the annual spend from $900m to $1.45b (or roughly $4.5b over the three years). Multiply that $550m by the three years and you get $1.65b in new spending that this government can fairly take credit for.
And just so you know, the infrastructure announcements this week, which totalled around $500m, come from that annual total capital expenditure budget of $1.45b. That's a mixture of old and new spending and means that the government still has around $1b to spend this year on other, bigger infrastructure plans.
What do these figures tell us? We now know for certain that most of the stimulus spending that National has announced since it has been in government was already planned and already announced. English's spokesman insists it's still new money, and he's technically correct. It hasn't been spent yet. But it had already been announced by the previous government. The most outrageous example, as I've noted, is the KiwiRail buy-back. National ridiculed the purchase while in opposition, but is now claiming it as part of its national rescue plan.
It's like Obama announcing all the policies in his new stimulus package, but funding most of them out of George Bush's bailout last year.
The point is, while other governments are racheting up their stimulus packages and adding new spending initiatives as the crisis deepens (Obama package is three times what he promised it would be three months ago, while Australia has announced three stimulus packages since last October), our government is adding not a cent to its spending plans. We haven't budged since December. That's a decision of immense significance. This government is taking a very different path from most western nations.
It also shows that tax cuts amount for something more than half of the stimulus. By contrast, 40 percent of the the US stimulus package agreed on yesterday is tax cuts. And it's worth noting a blog post by Scoop's Gordon Campbell on January 16th.
As a spokesperson in Bill English’s office told me, ‘about a third’ of the $9 billion stimulus package running from June 2008 to June 2011 will consist of tax cuts.
It seems that percentage has grown. That's an issue because New Zealand's tax cuts are targeted at the rich, and wealthier people tend to save their tax cuts, not spend them. Remember, if you earn $40,000 or less, you get exactly nothing from National's tax cuts for the first two years. So our stimulus package may be less stimulating than other countries'.
My concern through all of this is that the government is not being straight with us when discussing how it intends to handle the biggest economic crisis since the Great Depression.
To be fair, when they first took power the government was pretty clear about what money it intended to spend. Bill English has carefully not claimed that his government was allocating new money, and on December 18 said in a press release:
The economic and fiscal update shows the economy will benefit from a large fiscal impulse over the next two years totalling around 5% of GDP, or around $9 billion. This includes the 1 April tax cuts that were legislated for last week, the 1 October tax cuts, and the 2008 Budget. This will go some way towards cushioning families and businesses from the worst effects of the downturn.
That candour has been lost in the new year. Instead, John Key last week said:
The Government’s Jobs and Growth Plan is about keeping the economy running as strongly as possible, easing the sharpest impacts of the recession and preparing our economy for future growth.
He went on to read a list of National party policies, from the introduction of retail deposit and wholesale funding guarantees to the fast-tracking of infrastructure projects announced this week. He concluded that section of the speech:
The combined effect of this infrastructure spending, together with tax reductions, will mean that New Zealand will experience a fiscal stimulus amongst the top five in the developed world, when compared on a relative basis.
That stimulus package will help keep our economy ticking over even as global demand falls, and it will help many businesses and families keep their heads above water.
The clear indication is that the fiscal stimulus is part of this government's Job and Growth programme and it's this government's package that will rescue families and businesses.
Environment and ACC minister Nick Smith has been up to the same mischief. In a speech to the Nelson Rotary Club on January 28, which was about "the Government’s broader plan for navigating our way through these troubled times", he said:
The Government’s programme is directed around five key elements: tax cuts, investment in infrastructure, protecting jobs, putting sensible constraints on public spending, and embarking on a significant programme of regulatory reforms.
After a brief mention of the government's April 1 tax cuts he continued:
There has been debate about the size of different Government’s economic stimulus packages around the world. These tax cuts, and the other infrastructure investments amount to a $9 billion stimulus package over the next three years and proportional to GDP is amongst the largest in the world.
It's misleading at best.
Why does this matter? In part because it's spin. The government has repeatedly said our stimulus package is amongst the five largest in the world. That gives voters the impression they are acting proportionately to what is the most serious financial crisis in more than half a century. But the comparisons are bogus.
One, the comparisons come from an OECD report in November and so are three months old; a lifetime these days. Two, they compare New Zealand spending that was six months old – prior to the Lehman Brothers banking collapse in September – with spending that was only weeks old and as direct response to the credit crisis that exploded after Lehman Brothers. Three, those comparisons do not include any of the stimulus packages announced since December, including Australia's A$42 billion addition to its initial packages of A$26b and A$5b, Japan's close to US$300b that more than doubled its October stimulus of US$250b, and America's new $879 billion, which comes on top of President Bush's US$700b bailout last year.
Bill English's spokesman argues reasonably that New Zealand entered recession before the rest of the world, so of course our government responded earlier. But that ignores the point that while the global situation is worsening, we're sitting on our hands and getting left behind.
The way the government is spinning the package – and the way many media are reporting it – is leading New Zealanders to believe that this government is acting decisively, spending significant public money to maintain the economy's momentum at a time when the private sector is up against it. The government, for example, is promising more spending later in the year. What it's not saying is that that money will be part of the $9b already announced. The government, if it was honest, would say it has no plans to spend anything more than the $9b over three years it has already committed and explain why.
Yes, some of the already announced spending has been fast-tracked; yes, New Zealand will receive a fiscal stimulus over the next three years of around five percent; and yes, New Zealand has to be careful not to add too much debts to its books or it risks Standard & Poors downgrading the country's AA+ sovereign rating.
But we need more honesty from the government and an explanation why it thinks such limited spending is the best response to the recession, when the rest of the world is upping the ante week by week.