Hey big spender, spend another billion on me

Dr Bryce Wilkinson
The National Business Review
7 June, 2019

Remember former finance minister Steven Joyce’s claim that Labour’s fiscal plan for its 2017 general election campaign had an $11.7 billion “hole”? 

Back then, Labour intended to spend $572 billion in the five years to 2021-22. That was “only” $12 billion more than the Treasury had projected would be spent in its pre-election fiscal update.

Labour intended to increase cumulative revenue during the same period by $10 billion. 

That still left substantial predicted fiscal surpluses but, with higher planned capital spending, it saw projected net core Crown debt in 2021-22 increase from 16.7% of GDP to 20.0%. 

It all added up if Labour stuck to its plan. There was no hole in that trivial sense.

The real point is that it was hard to see how Labour could stick to it. Labour’s provisions for wage and cost increases and contingencies looked seriously inadequate.

Fast forward to Labour’s 2019 Budget. Planned cumulative operating spending in the same five-year period is now $591 billion. That figure is $19 billion more than in Labour’s pre-election fiscal plan. At slightly more than $10,000 a household, that represents a hefty increase in tax burdens.

$11b higher

The gap between Labour’s spending intentions and outcome is more of a chasm than a hole.

Projected cumulative five-year revenue is now $11 billion higher than in the plan. That means much of the increased revenue burden has been deferred to beyond 2021-22.  

Of course, Labour’s detractors are criticising it for not spending more. (But could it ever spend enough to satisfy them?) 

In its defence, Labour can point out that it would have spent more if it could have prepared its spending plans faster – take KiwiBuild, for example. 

Only the most churlish would question Labour’s sincerity in this respect. It shows every sign of upping the ante. The front page headline of one daily newspaper last Friday was “Budget for the People.”  The article listed new spending of $1.9 billion for mental health, $1.1 billion for Oranga Tamariki, and $1 billion for KiwiRail. All these are in addition to Labour’s pre-election spending plans.

The newspaper’s list did not mention tax. It is as if spending is free. It is as if the editor did not care what people might have spent that money on otherwise or how effective the government programmes are likely to be?  

Fiscal transparency

The future fiscal burden of indexing benefits to wages rather than consumer prices will also be large. That cost would be transparent if Labour updated the actuarial liability estimates published annually by the previous government. 

Labour’s willingness to update actuarial liability estimates is a test of its commitment to fiscal transparency.

One commentator approved of the additional spending on mental health, observing that otherwise he might have spent his contribution on buying a pair of shoes. He seemed to lack the wit to donate to the Mental Health Foundation instead.

To be fair to the newspaper’s editor, the minister of finance’s budget speech creates the impression of largess without regard to efficacy. The speech did not set target wellbeing outcomes for each new programme for which Labour could hold itself accountable.

When good intentions are good enough, accountability goes out the window. 

Neither did the speech stress the importance of finding out what programmes work through disciplined, well-structured trials and data analysis. 

Since inadequate accountability for outcomes is nothing new, what is new about Budget 2019? Finance Minister Grant Robertson reportedly declared it represented a “significant departure” from the status quo.

The Budget priorities were based on evidence of what would make the greatest contribution to the long-term improvement of New Zealand’s living standards and wellbeing.

Economists would widely agree faster productivity growth would best serve that purpose. Low productivity growth has been the Achilles heel of New Zealand’s economic performance. It makes everything less affordable from food on the table to a cleaner environment and better mental health care.

Productivity growth is acknowledged in the minister’s budget speech but there is no diagnosis. To what degree are existing regulations and tax burdens a factor? 

Absent any diagnosis, the budget proposes minor increases in forms of corporate welfare related to innovation, emissions reduction and venture capital, the efficacy of which are unexamined.

The unavoidable impression the government is creating is that whatever the perceived problem, greater government-directed spending is the answer.

There is a sense of deja vu over this. The Labour-led governments under Helen Clark increased government spending enormously, leaving the National-led government to wrestle with fiscal deficits for the foreseeable future following the global financial crisis and the Christchurch earthquakes.  

Bidding war

It took National the better part of nine years to turn fiscal deficits into forecast surpluses.

That turned the 2017 general election into an unseemly bidding war to spend those surpluses. We are seeing the result.

The economists’ concerns about fiscal sustainability are familiar. Labour has benefited from a fortuitous increase in national income and thereby tax revenue. Projected gross domestic product for the five-year period is now $40 billion higher than Treasury was forecasting in 2017.

Such gains are fortuitous and the sustainability of what is occurring will be tested by the next economic downturn.

When spending is driven by political popularity and good intentions, value for money and sustainability become matters of hope and wishful thinking.

The government’s intentions to focus on wellbeing can be applauded if real discipline is being applied to wellbeing assessments and clear accountability is accepted for outcomes.

I suspect neither Prime Minister Jacinda Ardern nor Robertson would disagree with that observation. They probably see Budget 2019 as a material step in that direction.

But, on this analysis, much greater discipline and accountability need to be seen being applied. Hopefully, the government and officials will take this message on board.

Dr Wilkinson is a senior fellow at The New Zealand Initiative.

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