Size suggests a loss of fiscal discipline

This Budget was always going to be big. It was delivered into a perfect storm of a global panic, short timeframes by an already bigspending centre-Left Government. In an election year. But history suggests this Budget could do more harm than good to the economic recovery.

First, the positives. Budgets must comply with the principles of fiscal responsibility in the Public Finance Act. The most important measure of fiscal responsibility is the operating surplus. The Budget meets this requirement by showing a path back to surplus by about 2025, after large deficits over the next four years. Crown spending as a share of GDP is expected to return to levels only slightly above those pre-Covid.

But the Budget is less favourable on other measures. After rising from 20 per cent of GDP to over 53 per cent, Crown debt is expected to remain above 40 per cent of GDP by 2034, one or possibly two global recessions from now. The Government’s net worth in 2034 is expected to be 16 per cent of GDP, compared to 44 per cent pre-Covid.

A good part of the new spending had to occur. Additional spending on benefits is mainly the product of recession. New spending on health was inevitable.

Yet there are signs the Government has overreached with discretionary new spending. This week the Reserve Bank released estimates that put the baseline GDP losses from Covid-19 at about

$36 billion. However, the Government is proposing to borrow $140b over the next five years, far more than the problem it says it is solving. New operating spending peaks in 2022, long after the economy is expected to have turned the corner.

It is also hard to find evidence of reprioritisation that Grant Robertson has talked about. Nearly every part of the public sector sees new spending, and that is before much of the $50b Covid-19 fund has been allocated.

To be fair, there is only so much that can be done in the short time available. Budgets are complicated processes, normally lasting six months. Today’s Budget had to be done in six weeks. Short times make reprioritisation hard. Credit is due to the Government and officials for what was delivered yesterday.

But the combination of enormous new funding and short timeframes should raise questions about quality of spending. There should be some commitment in the Budget to checks on new spending.

Checks that would normally occur before Budget day should occur after, as the immediate panic from Covid-19 passes. We should also see off-ramps – a commitment to cancel spending if the recovery goes better than Treasury expects.

The sheer size of the Budget suggests a real loss of fiscal discipline that could have immediate consequences for spending in the private sector. The Budget puts government at the centre of the recovery through to the mid-2020s.

Households and businesses will not fail to notice additional debts of more than $50,000 per household. Those will have to be repaid. Higher taxes are in our future. Households and businesses will also note the broad licence the Government has given itself with its $50b Covid fund. There is a risk that public spending crowds out private investment, muting the effects on demand and the recovery.

All this new spending comes as the normal checks and balances have been relaxed or discarded. Regulatory Impact Statements, a check on the quality of most new spending proposals, were recently suspended.

The Government continues to push legislation through under urgency. Concerns were raised about the lack of transparency around Covid decisions. Treasury is in the early stages of recovery from a decade of poor leadership, and remains underpowered.

Despite this, the Budget will likely go down well politically. The Government was always pushing on an open door with the public when it comes to new spending. It will see little resistance to the idea that spending means growth. But questions should be raised about whether the Budget is a proportionate response to the Covid-19 panic.

Matt Burgess was senior economic adviser to Bill English.