What’s Robbo going to spring?
Govt must help Reserve Bank control spending
At its most simple, the Budget is a piece of legislation that gives the Government the legal authority to spend money — an appropriation bill, to use the official terminology.
The annual circus we call the Budget is something bigger entirely. It can be boiled down to three important pieces of information, all released on the same day (although some are foreshadowed earlier).
The first part is a slim volume of economic forecasts, published independently by Treasury — the Budget Economic and Fiscal Update or BEFU. Forgive the soporific title, this is Treasury’s official, non-political verdict on whether the Government is growing the economy, keeping unemployment and inflation low, and what will happen with house prices.
If Treasury Secretary Caralee McLiesh, like a latter-day macroeconomic Caesar, gives the economy the thumbs down, it could be seen as a vote of little confidence in the Government’s ability to manage its way out of the current crises.
The second document is the even more soporifically named Fiscal Strategy Report. We know most of the details already because the Government began publishing them in December, in the Budget Policy Statement (still awake?). This document sets out how much new money the Government wants to spend on operational (day-to-day) and capital (oneoff infrastructure).
This year, the operating allowance is $6 billion, and the capital allowance is $9.8b (over the next four Budgets). This document also sets out the overall strategy of Government spending: what level of debt the Government wants to have, when it wants to return to surplus and how much tax it should take. In a time like now, with inflation at 6.9 per cent, this is one of the most important parts of the Budget because it gives an indication of how the Finance Minister wants to manage the wider economy.
The final document is what most people think of when they talk about Budgets. It’s the Estimates, and it sets out how much money the Government plans to spend and where. Next year, total Government spending is meant to be $120b, but what most people will focus on is the 5 per cent of that spend that is “new” — the $6b of new operating spending which is going to fund new programmes.
From this $6b you’ll see things funded like the Government’s $100 million (over four years) in specialist mental health, announced yesterday, or the $164.6m for new Tactical Response police, announced last week.
The other 95 per cent of that funding will go on keeping the lights on, and is of little interest to anyone.
This Budget will need to fund the $19.3b in superannuation payments next year, and $18.2b keeping the lights on in schools and universities.
That money will be published in the Estimates, but it will get next to no attention because the political mind focuses on how that new $6b allowance is divvied up.
This year, when New Zealand is beset by short-term challenges in the form of inflation and long-term challenges like climate change, it will be important to look at how the three parts of the Budget talk to each other. Is the amount of spending promised in the Fiscal Strategy Report creating inflation in the BEFU forecasts?
Is everything in the Estimates delivering value — addressing things like climate change and child poverty?
Former Finance Minister Ruth Richardson — who was the target of one of current Finance Minister Grant Robertson’s barbs in the last Budget, when he raised benefits to levels that reversed cuts she made in the 1990s — said the Government needed to take its “brave pills” and trim spending, which was leading to inflation.
There’s debate over where to lay the blame for inflation: the war in Ukraine, China’s lockdowns, or Government spending fuelling demand.
Richardson said the Government needed to see what it could do to help the Reserve Bank bring spending under control.
“You’re seeing the central bank go first. It’s on a journey where it’s just going to continue to ramp up interest rates. In turn the Government is going to ramp down its spending ambition,” she said of the recipe for controlling inflation.
Richardson said the Government’s unwillingness to trim spending to tame inflation was akin to someone who “wants to go to heaven but doesn’t want to die”.
She said there was a concern that on Budget day, the political focus was on the spending “wins” notched by ministers, rather than the grander fiscal strategy and its impact on the economy.
“I worry when everybody gets sucked into . . . ‘does $10m go here or there’ it really doesn’t get to the heart of the matter. Unless you’re willing to look from a first principles basis at the fiscal policy settings, all you’re doing is throwing fuel on the fire.”
CTU economist Craig Renney, an adviser for Robertson when the current Government put together its first Budgets, said Treasury’s forecasts would give an assessment of the extent to which Government spending had increased inflation, “but generally speaking it’s pretty marginal. Things that are really driving inflation are fuel, and building materials.”
The Government foreshadowed that a big part of new spending would go on health and climate change policies (it has funded most climate change policies through an ETS fund, outside of its $6b allowance).
Renney said a lot of the health
All you’re doing is throwing fuel on the fire.
CTU economist Craig Renney
spending could go on wiping DHB deficits, about $1b a year to “clean the books going into the future” and setting the new health system on a “sustainable financial footing”.
The Government also has two dental policies from the 2020 election — increasing emergency dental grants and funding more mobile dental clinics — which missed out on funding in 2021, but could get about $44m.
With inflation mounting, the Government will also come under pressure to put contingency funding aside for funding future pay settlements.
The current Government has made benefit changes in each of its Budgets. Major changes to lift benefits were made in the last Budget, so expectations are muted this year.
But Renney said addressing child poverty was like “pushing a cork down in a bath. Unless you keep pushing down, the cork comes back up”.
Budget day usually ends with a battle over the Budget’s nickname.
This reporter’s favourite is “short, crisp, clear and lacking jabberwocky” — the verdict of then-British Leader of the Opposition Margaret Thatcher of Prime Minister and Minister of Finance Robert Muldoon’s Budget in 1976.