Politics and economics are strange bedfellows

Economists and politicians make strange bedfellows. Heaven forbid our country should be run by just one without the other. Treasury’s Half-Year Economic and Fiscal Update (HYEFU), and the accompanying Budget Policy Statement (BPS), is when economists and politicians have to come together and talk to each other about the economy.

HYEFU is a set of forecasts, setting out whether Treasury thinks it will expand or contract and what effects that might have on a government’s books. The BPS takes those forecasts and sets out what a government will do with them at the next Budget: how much it plans to spend and borrow, and what its priorities for that Budget will be.

It’s an awkward marriage of politics and economics. If HYEFU were a piece of music, it is economists who would set the key, while politicians would be the ones to pick up an instrument and play.

Economists got one thing they asked for yesterday: infrastructure spending, although not nearly as much as they’d wanted. For years now, they’ve been calling on governments to turn on the tap and spend on infrastructure projects.

The first reason for doing this is that spending has a stimulatory effect, propping up the economy as it starts to slow down at the top of the economic cycle.

The second reason is that New Zealand has a shocking infrastructure deficit. At the very time our population began to expand, we cut back on infrastructure spending. That was a decision that put politics ahead of economics. Politicians booked the wins from hot economic growth as an increasing population boosted growth in consumption, but failed to invest.

The amount of new government capital spending for each 1000 additional people in New Zealand was roughly $160 million in 2009, but plunged to roughly $20m by 2014, according to a data from ANZ’s chief economist, Sharon Zollner.

It’s finally tracking up again, and hit nearly $80m this year. The $12 billion in additional capital spending announced yesterday will go some way to fill the gap, but it still needs to do more to backfill the deficit.

Most economists applauded the move, with some arguing for even more infrastructure spending.

The problem with even more spending is there are still severe capacity constraints in the economy. Announcing more building is one thing, finding people to actually pick up tools and build it is something else.

Economists weren’t too bothered by Finance Minister Grant Robertson wriggling out of his Budget Responsibility Rules promise to get net core Crown debt below 20 per cent of GDP by 2021-22. The forecast now is for it to hit 21.5 per cent in that year – hardly a dramatic increase.

KiwiBank senior economist Jeremy Couchman called the 20 per cent target ‘‘meaningless’’ and said yesterday’s announcement meant the Government still had more room to lift borrowing to tackle the infrastructure deficit.

But one place that target is certainly not meaningless is Parliament, where it holds immense political sway. The debt target, as one of five BRRs, was dreamed up by the Greens who were worried about voters’ perceptions of Left-wing parties’ economic management.

Unfortunately, they acted like a straitjacket, stopping the Government from doing the things it wanted to do, and preventing it from stimulating the economy when it should have.

Now the Government has different political challenges: it’s made of three very different parties, with often diverging priorities, and it has a slowing economy it desperately needs to fix.

The announcement of additional spending prioritised getting money out the door fast: $8b of the additional spending is meant to be allocated before Budget 2020, and $8b of it is meant to be spent before 2024.

The rate of new spending is astonishing too, $1.4b of it will come in 2021, $2.1b in 2022, and $2.2b in 2023 and 2024.

That presents a difficult problem. Some of the biggest ‘‘ready to go’’ projects are left over Roads of National Significance from the National government. Funding them risks conceding victory to the Opposition, but drawing up new projects risks another light-rail scenario: big on promises, but slow on delivery.

There are also calls from the economic community for the Government to focus on quality spending, rather than the quantity. That said, even if you count all of the Provincial Growth Fund and KiwiBuild as ‘‘poor quality’’ spending, you barely scrape the sides of the Government’s current capital spending programme. Wasteful spending is never good, but it’s not clear there’s an awful lot of it.

In one sense, this Government’s funding of additional roads robs National of the oxygen it needs in opposition. The party is yet to release its transport policy document.

But Robertson’s announcement yesterday of $6.8b in additional transport spending could steal National transport spokesman Chris Bishop’s thunder by gazumping some of Bishop’s promises.