The government wants you to think of tomorrow’s Budget as the “investment Budget”. That’s right: spending is investment.
This is not ideology so much as it is language. Labour ministers woke up two years back to the need to sharpen the brand. And language is a big part of brand.
Steve Maharey came up with the idea of calling spending investment early in his time as Social Development Minister (1999-05) to reframe his role doling out huge sums in benefits.
Track the thinking this way. Spending on hard infrastructure is readily seen as investment because there is an economic return: in roads, providing electricity, ensuring internet access.
John Key would have to agree. He wants more debt funding of roads on the grounds that there is an economic return. Michael Cullen agrees with some debt funding on those grounds, provided the government balance sheet does not go backwards in GDP-relative terms. Key is less fussed about the balance sheet.
In part the debt funding argument revolves around how much of the benefit from a new road is calculated to be economic (justifying debt funding) and how much is just making life more pleasant (justifying only cash funding).
Education spending raises similar boundary questions: how much of the benefit is private to the educated individual, how much helps make a better functioning society and how much helps make a stronger economy by investing in building human capital.
The boundaries blur more in health but some health spending — for example, when it restores someone to the workforce — does give a direct economic return. Maharey’s innovation was to extend that reasoning to social assistance: sustaining people through needy times and readying them for work when they can work is also investment, he asserted.
He eventually won grudging acknowledgement from the Treasury — but only up to a point. Generally, to call social assistance investment invests the word with a wider meaning than the usual one of outlays which produce a direct economic return.
The next step in the Maharey chain of reasoning is to argue that spending which produces a better functioning society by reducing hardship (and maybe also collateral crime) is investment — a line private charities would likely agree with (though giving money or time to a charity can also be self-serving by soothing the conscience or the soul).
You can see the brand-building attraction of this reasoning. “Investment” has positive connotations, “spending” negative connotations. Voters are more likely to forgo tax cuts and endorse spending if they think there is a return.
The puzzle is that it took the Labour leadership so long to pick up Maharey’s lead. It was toyed with last year but there were other priorities. Then Labour got into a ding-dong tax-cuts-versus-spending battle in the election and ministers recognised they need a stronger rationale to put to voters if they are to win that battle next time.
That is because there is not the money in this Budget and probably the next two to throw heaps at key constituencies as ministers did last year.
Cullen had built up a war chest. He then spent the lot buying votes — and some more buying New Zealand First’s support after the election. That has endowed him with a cash deficit in 2006-07.
Cullen says this leaves no room for tax cuts without risking deficits in the operating balance, a deteriorating government balance sheet as a result of larger cash deficits and inflation. In essence, he is trying to claim that the tax/spending argument has been decided for the next few years.
He is right — if you accept his level of spending. Had National won in 2005, student loan spending would have been much lower and health spending likewise. That would have left room for tax cuts.
National’s argument is that individuals know better how to use their income than governments and moreover will invest some of it productively. So the economy would grow faster, incomes would rise and in the longer term make hospitals, schools and roads would be more affordable.
To put that in the “investment Budget” context, National prefers private investment to public investment. That is, tax cuts are investment.
That is the essential argument running through the Budgets of the mid-2000s. Will Labour have locked it up by 2008?
Certainly, National will face a tougher fiscal calculation in 2008 than in 2005 when it could promise large tax cuts without large spending cuts.
In 2008 just relying on cutting spending as a proportion of GDP by holding spending increases to the rate of inflation plus the growth in population (the essence of its 2005 proposal) will not allow the sort of big tax cut numbers that attracted some voters across from Labour last year.
And Tony Ryall is showing how hard even that would be with his attacks on hospital waiting list culls. Even accepting his line that the private sector could do more operations, his attacks imply more spending, not less.
But to cut taxes as a proportion of GDP requires spending to fall as a proportion of GDP. And that over time means expanding demand, particularly in health, cannot be met.
The 1990s spending constraints were unpopular. If National is to win the argument durably now, in 2008 and beyond, it will need some convincing language. Unfortunately for National, “investment” has been cornered.