What is New with the HYEFU?

December’s Half Year Economic and Fiscal Update (HYEFU) was combined with the Government’s plans for its first 100 days.

Each December, six months after the budget, the Treasury reports on the state of the economy and the government accounts. Since the August Pre-election Economic and Fiscal Update nothing much has happened in the macro-economy, so the HYEFU reports little new. If it had been presented on its own, journalists would have been scratching around to find something of interest.

 Fortunately, the Labour Government came to the journalists’ aid with announcements and indications of what it is going to do. (Much of their fiscal impact does not really start until July 2018.) Journalists seized on its families package, although it had already been announced before the election.

 This redistribution package costs roughly the same as National’s proposed tax cuts which will not now go ahead. National’s package was more favourable to the better-off, Labour’s to poor families with children.

 When it was first announced I thought Labour was courageous. National’s package almost certainly made more voters better off because children do not vote. I wondered whether Labour had electorally miscalculated by promising to reduce poverty, reduce inequality and invest in children for the future rather than focus on self-aggrandisement. Whether the public did not understand this (National would not be given high marks for hammering its message home during the election) or whether enough of the public voted on social principle rather than self-interest I do not know. The fact is that Labour and its allies squeaked home. We wait to see whether they maintain their courage and public support through to the next election.

However, if the transfer packages cost much the same (with very different distributional impacts) there were some content in the HYEFU which suggested that Labour might be embarking on a slightly different course from National. The largest single indicator is that it plans to spend more on public services.

In simple terms, National planned to spend 27.0 percent of GDP on current government services in election year 2020 (to June 2021) but Labour 28.0 percent.  This is hardly going to bust the bank, and is certainly not the ‘fiscal blowout’ which National claimed during the election and since. (Indeed, it hammered numbers so huge that few seemed to believe them.) Additionally it plans to spend more on capital investment.

 Labour is proposing to fund this additional spending by borrowing, so its debt track does not fall as quickly as National planned. Perhaps Labour is not as Austerian as National, perhaps much of the additional spending is going into old-fashioned social investment – such as children, housing and regional development – with long-run benefits. I am not uncomfortable with this.

 Not all the spending is allocated. It takes a lot of work for Treasury to calculate the spending requirements of new policies. However, the Minister of Finance has advised Treasury of the expected policies; those for which there are no estimates are listed in the section ‘Cost Pressures by Portfolio’. It is the most interesting section in the HYEFU; in effect it is a list of policy areas with which the government will be fiscally grappling.

 Aside from decisions already announced, the HYEFU predicts that there is $13.7b of extra spending available over the three years. National rightly says that will not be enough. It never is, and National would have faced exactly the same challenge had it been in government (although it would have had even less to play with). As evidence, they point to the Minister of Finance’s demanding his cabinet colleagues look for savings in their portfolios. If National had remained in power, its minister would have given exactly the same direction. Perhaps the difference is that the Labour coalition government will eliminate some of National’s fads – to replace them with its own? (As well as reprioritisation of policies leading to some cuts, there will also be some repackaging in which existing programs are brought together; the gross cost of the new package will be trumpeted but the net cost will be considerably less.)

 I do not know how much of this discretionary spending will have to be used to deal with the wail about failures which cropped up after the election. Certainly concerns which were well signalled before it – such as child poverty, housing, mental health, water purity – are mentioned in the HYEFU. But there have since been some unexpected ones. Why the silences before? Are they political ploys for attention? The Labour Government is going to be under a lot of expenditure pressures, in part because the previous National Government did not address them.

 Perhaps there was little unexpected in the HYEFU (aside from shadowy promises in the ‘Cost Pressures by Portfolio’ section). Thus far the new government’s mantra is ‘what you get is what we promised’. The big ticket items are less poverty and lower inequality, housing, regional development, a more active public service and less outsourcing and privatisation.

 Does this amount to a new economic strategy? Perhaps Labour is trapped in the neoliberal paradigm its predecessors in the 1980s imposed and which has been largely, but generally more moderately, followed since. I notice some ministers seem already to be talking the rhetoric of their predecessors. We shall have to wait see whether the new government offers a fundamentally new direction.


PS. Treasury is one of our top forecasting macroeconomic teams; there is a section in the HYEFU, ‘Risks and Scenarios’, which ponders on how their predictions may be wrong. We may be sure that if the 2020 HYEFU looks back three years, it will tell a different story from that of 2017. Hopefully there will not be too many economic shocks in between.