Cash splash insults hard-grafting Kiwis
Ithink we all instinctively knew this Government and this Finance Minister were very big spenders. Rod Emmerson’s cartoon on the front page of Thursday’s pre-Budget Herald summed it up well as he showed Grant Robertson shovelling money into an inflationary furnace in the budget engine room. But surely even Emmerson couldn’t have realised how apt that image would turn out to be.
The Government’s spending plans this year are gargantuan. Forget the huge $6 billion budget allowance many were so worried about last week. Deep on page 31 of the Budget’s Economic and Fiscal Update, Treasury quietly reveals that the Government’s Budget decisions for new operating spending will total a whopping $9.6b in the 2022/23 year alone, and $38b over the next four years — that’s more than $9b in extra spending, every year.
This is because the new spending doesn’t just include the operating allowance. There is the balance of the Covid fund, once again doled out mostly on non-Covid spending, the climate change spending (which isn’t in the allowance) and the last-minute $1b cost of living sop, which also somehow didn’t need to be accounted for in the operating allowance. The term “operating allowance” itself has become meaningless.
This $38b in extra expenditure might need some context. This time last year there was a lot of concern about the impact on inflation and debt of the just-announced, mammoth at the time, $20b in extra spending over four years. This year’s fiscal firehose is nearly double the size.
It is one of the main reasons net government debt is continuing to rise so much over the next four years — peaking at $173b, or 41 per cent of our economy, if you ignore Robertson’s fiddling with the debt-to-GDP measure.
It is also the reason the Budget, again quietly, shows a permanent shift in the size of the government as a proportion of the New Zealand economy and society. Last year the expenditure increases were still supposed to be temporary, with the size of the state returning towards the long-run levels of around 35 per cent of GDP by 2025. Not this year. In this Budget the Government signals that the state’s share of the economic pie will settle at nearly 40 per cent of the economy.
This is a significant change which will have a permanent impact on New Zealand society. Big government has a suffocating effect on the business sector, long-term growth, and the living standards of all of us. If things play out this way, New Zealanders will be poorer than they would otherwise be. Of course, to believe the rot stops there, you have to believe two things assumed in this Budget, both of which are almost certainly not going to come to pass.
Firstly you have to accept Treasury’s central economic projection that we are experiencing the worst of inflation right now, and things only get better from here. I suspect that’s too rosy a view. Remember this is the same Treasury that predicted last year interest rates would remain low for the next three years.
Far more likely is Treasury’s socalled “downside scenario” where the Ukraine war prolongs supply shortages, inflation stays elevated, and New Zealand experiences a recession in 2023/24. In that scenario debt continues to grow as a percentage of GDP.
Secondly, you have to believe that Robertson will restrain himself to a new Budget spend next year, an election year, of $2.5b, which is all he has left after pre-booking the health budget. If you believe that, you have to be a special type of gullible.
This is the same Grant Robertson who told us at Budget time last year he would only spend $1.8b more this year, which has turned into $9b. It’s also the same Grant Robertson that is spending $23b more over four years than he told us just six months ago.
He has become fond of telling us this is the end of the largesse, and next year he will be more circumspect. Fool me once, shame on you. Fool me twice . . .
By far the biggest immediate concern about this Budget is its impact on inflation. New spending of this magnitude will do nothing to dampen inflationary expectations, and will likely make them worse. There is absolutely nothing here which will give the Reserve Bank pause on its trajectory of swiftly raising interest rates, squeezing Kiwi mortgage holders further, and making a recession next year more likely. This is reckless fiscal management.
There will be those from the finance minister down who will claim all the spending is necessary. There are plenty of people clamouring for even more. The massive boost to health expenditure certainly sounds impressive, but much of it will be chewed up in cost pressures, ie inflation.
That’s because we are now not just in a wage-price spiral, but also a government spending-inflationary spiral. We are chasing our tails.
Which brings me to the biggest confidence trick in the Budget. Many others have commented on the parsimonious nature of the Government’s last-minute $27-a-week, three-month cost of living payment, but to observe just how ineffective it will be it is worth seeing it in the context of the Government’s overall revenue and spending decisions.
To spend an extra $38b over the next four years, and offer only 2 per cent of that in temporary relief to mitigate the impact of rampant inflation made worse by the extra spending, is the fiscal equivalent of micturating into a hurricane. To do so while collecting an additional $13b in tax from New Zealanders next year is genuinely insulting. And then to claim the Opposition couldn’t possibly find a small percentage of that spending for inflation-indexing tax thresholds is just bare-faced cheek.
It would all be laughable if it weren’t serious. Hard-working Kiwi families are now making tough choices every week because the Government has no fiscal discipline, and this Budget will only make things worse.
As I said last week, this is a government that believes everyone else should tighten their belt, but not them. They aren’t just spending while people get squeezed, but enjoying a veritable fiscal feast at your expense. Worse than that, they are mortgaging our children’s future. It’s past time their wings were clipped.
Steven Joyce is a former National Minister of Finance. He is director at Joyce Advisory.
We are now not just in a wage-price spiral, but also a government spending inflationary spiral.