Budget buffer could come in handy
Calls for more spending ignore global risks
Over the next two years the Government plans to spend $11.4 billion more than National expected to.
That includes $7b more operational spending and $4.4b more capital expenditure (including contributions to the New Zealand Superannuation Fund).
So where is the extra money coming from?
About half of it, $5.8b, is a higher forecast tax take, partly as a result of cancelling National’s planned income tax cuts.
In addition to that, since the preelection economic and fiscal update (Prefu) — the most recent expression of National’s plans, whose revenue forecasts were finalised last July — the actual tax take has been running ahead of forecast. Three-quarters of the way through the current financial year, tax revenue was $1.1b ahead of forecast. The Treasury seems confident that trend will continue, partly because it has also revised up its forecast for the rate at which the net migration gain will taper off.
The Government also has other sources of revenue than taxation and the Budget forecasts $1.1b more nontax revenue over the next two years than the Prefu did.
And finally, the Labour-led Government is somewhat less fixated on bending down the curve of government debt, relative to the size of the economy.
The Budget expects net government debt to rise by $4.4b more than National intended over the next two years.
Altogether, that is $11.3b more money on the budgetary table for the next two years than National had planned.
But in a period of rapid population growth, the aggregate numbers can be flattering.
Economists at Victoria University of Wellington and the New Zealand Institute of Economic Research have analysed the difference between this Budget and National’s last year in real per capita terms. Over the next three years, they reckon core Crown expenditure will be higher by $954 per person, adjusted for inflation, than it would have been on National’s plans.
“The previous National-led Government’s Budget planned total core Crown expenditure to be broadly stable in real per capita terms between 2017 and 2021. This approach can be understood as government holding the line in terms of adjusting for population growth and changes in prices, but not adjusting upwards for real per capita GDP growth,” said Victoria’s Toby Moore.
“What we see in Budget 2018 is that government expenditure is now planned to increase in line with the overall economy. Productivity gains that we make as a country are matched by increased spending on the goods and services that government provides — such as a social safety net, health and education”.
Simon Chapple, director of Victoria’s Institute of Governance and Policy Studies, puts it like this: “What we see here is two competing political visions for the size of government relative to the economy. One — National’s — might be described as incrementally radical, reducing the relative size of government. The other — the Labour-led Government’s — might be seen as inherently conservative, maintaining its relative size.”
Underpinning last week’s Budget are some cheerful forecasts for economic growth. The Treasury expects the annual pace of output growth to accelerate by a percentage point to 3.8 per cent by the middle of next year before easing back to where it is now in three years’ time. That would be nice.
But the Budget economic and fiscal update is notable for its insularity. Of its 140 pages, barely one is devoted to the other 99.8 per cent of the world economy and its endless capacity to blow us off course.
Right now the threat level of an international shock is high — not least, but not only, because of the combination of stupidity and moral squalor prevailing in Washington.
The risk of all-out trade war between the United States and China may have receded, but it has not disappeared, while the risk of a literal war in the Gulf has climbed, with the US decision to renege on the Iran nuclear deal.
Should that happen, the effects would be bad, not only for the people of that unfortunate region, but for the rest of us via oil prices and the cost of living, and via the risk premium in interest rates in a world up to its nostrils in debt.
The Budget has drawn fire from the left as too timid, too constrained by the Government’s self-imposed Budget responsibility rules, especially the commitment to get the net debt-toGDP ratio down to 20 per cent by 2022.
Even more malign, argues BERL chief economist Ganesh Nana, is the passive acceptance of the idea that a Budget surplus is the test of fiscal responsibility.
“In the 1990s the nation swapped a fiscal deficit for an infrastructure deficit,” he says. “And many would argue we continue to pay the price in low productivity numbers that now see a low-wage business model at the heart of our economic mechanism.” Sure. But we also need to remember the fiscal consequences of the double whammy of the global financial crisis and the Canterbury earthquakes.
National ran Budget deficits for six straight years and added more than $40b to government debt, pushing the net debt-to-GDP ratio from the 5.4 per cent it inherited to 21.7 per cent last year.
Despite that, fiscal policy was contractionary, subtracting from economic growth, for six years until last year and the social and infrastructure deficits widened.
So the effects of a major shock cannot be airily dismissed.
And when the next one hits — and it is a case of when, not if — monetary policy will be much less helpful than last time.
Alan Bollard was able to cut the official cash rate by 5.75 percentage points. Adrian Orr, who inherits an OCR of 1.75 per cent, has far fewer bullets in his bandolier.
In light of those international risks, that recent experience and this starting point, a Budget which delivers a bit of a buffer doesn’t seem like a bad idea.
When the next [crisis] hits — and it is a case of when, not if — monetary policy will be much less helpful than last time