There are two time measures of a budget: what it does now and what it sets up for the longer-term. How did Bill English do last week?
Short-term — the next five years — he has set up a track out of fiscal deficits and into rising surpluses. Labour’s David Cunliffe on Friday detailed a list of nifty accounting manoeuvres that generate the microscopic 2014-15 surplus but that does not deny the trend. Labour’s David Parker on Friday reaffirmed Labour’s commitment to a 2014-15 surplus.
That 2014-15 surplus comes after a whopping 7 per cent of GDP has gone to tide over and fix Christchurch. No other developed-economy treasurer has had to deal with anything remotely that big on top of the global financial crisis (GFC).
The earthquakes and GFC — which, added to a drought, gave us five quarters of economic (and so tax revenue) contraction in 2008-09 — underscores the value of a fiscal buffer. Had Michael Cullen not squirrelled some of his surpluses into the superannuation fund (English wanted tax cuts instead), English would have been mired in “austerity” with the British, American and many European treasurers.
Even with that buffer, English has had five deficit budgets. (Also, Cullen loosened spending from 2005.) And to get his surpluses, over the next five years the fiscal impact on the economy will be contractionary — that is, the government will hurt more than it will help.
And that says nothing about the other, more dangerous, deficit, to which Parker and Russel Norman pointed in speeches and on TV3’s The Nation last week: the huge deficit between the country’s income from the rest of the world and payments to the rest of the world.
As that current account deficit climbs back over 6 per cent of GDP, the risk will grow that foreigners ramp up the cost of funding this imprudent behaviour. That could get nasty.
As Parker and Norman point out, the trend is exactly the opposite of what English declared in 2009 his policies were going to deliver — by contrast, he said, with Cullen, who rode the current account deficit up over 9 per cent. English said he was going to rebalance the economy to be less driven by domestic activity (“non-tradables’) and more by export of goods and services (“tradables”) and investment income earned abroad.
The 2013 budget’s direct contribution to fixing this is to reduce the government’s share of the economy so that, in theory, enterprising “tradables” businesses can be more competitive.
A contribution the budget did not make was to change taxes to lift private saving and encourage it out of non-productive house investment (still the favourite). Renting out houses is in effect taxed less than other investments, as Bank of New Zealand CEO Andrew Thorburn has pointed out, because income from the capital gain is not taxed.
The 2013 budget assumes rocketing house prices are due mainly to a lack of new houses. So ministers are legislating to force councils to free up land real fast.
But bigger challenges loom. These will be flagged again by the Treasury in the long-term fiscal forecasts out to 2060 it will publish in July. As the baby boomers age, leave the workforce and demand pensions in much larger numbers and get ill over a longer lifespan than their forebears, they will write a large bill for the country.
Paying that bill will require some mix of rationing, cuts, higher taxes or higher personal payments.
Because it is slow-burning there is time to adjust. The lesson from the past decade is to err on the side of prudence.
At one level English’s 2013 budget passes the test. He focused on getting net government debt down below 20 per cent of GDP. That gives room for temporary deficit funding to ride out future global and natural shocks. It also gives headroom to ease into the adjustment to oldies’ higher financial and health needs and/or buy time till productivity-improving health technologies and/or different palliative and care techniques are devised and applied.
English has also backed the Treasury’s more thorough work on the long-term fiscal forecasts than previous such exercises. Also, he wants it to adopt an upfront “investment” approach to some spending.
But in two other ways, the 2013 budget falls short on the long view.
When a future fiscal challenge can be roughly calculated prudence says start early and spread the adjustment over time. There is little sign of that in the 2013 budget in health services and zero sign of it in superannuation because John Key insists nothing needs doing till next decade, when he is safely in retirement from politics. Labour has committed to (timidly) raise the pension qualifying age.
The other long-term challenge to fiscal policy is early action to avert an external accounts crunch and lower the savings deficit it represents. On that English had little to say last Thursday beyond hand-wringing, council-bashing and faith in deregulation and a smaller state.
Meantime, buy a house — or two. A house is “safe as houses”. Or is it?