Today is perhaps the most exciting day of the year for political tragics, for it is the day on which the Government releases its annual budget. For the past decade I have made a habit out of sitting down every budget day and listening or watching the Finance Minister present the Budget and every year I would try my best to understand what it meant from a macro-economic stand point. Individual policies, expenditure cuts or increase, or revenue cuts and increases did not, and do not interest me. You cannot assess a Budget on the basis of whether or not it includes your pet project or special interest. You cannot assess a Budget based on how much extra money you will receive or how much money will be taken away from you. Rather, a Budget should only ever be assessed in its entirety. What does this Budget tell us about the direction the Government is guiding us? What implications does this Budget have on the wider economy, both domestically and internationally? And what effect does this Budget have on growth, wealth, and inequality throughout society?
From a Māori perspective, there will be initiatives targeted towards specific Māori issues, some of which have already been announced. I do not intend to go into those in any great detail, although I will look to provide an analysis early next week once I have had time to assess the data. Bottom line, the budget for Māori Affairs is relatively small, and not since Labour’s ill-fated Closing The Gaps strategy has there been a Budget which focused primarily on Māori issues. Central questions specifically relating to Māori will be the extent to which Whānau Ora is funded, and the Crown’s resourcing of Māori institutions such as Te Puni Kokiri and the Waitangi Tribunal.
I write this primer to provide a bit of wider context for readers of Māori Law and Politics on this year’s Budget, and to highlight some of the implications that will flow from it.
There has been a lot of comment in the media over the past months about “austerity”. Austerity occurs when a Government seeks to cut a budget deficit by reducing spending. That qualifier is key – by reducing spending. This National Government is not engaged in austerity. It is not cutting Government expenditure. Quite the opposite. Since 2008, Government spending has increased 33%, from $75bn to $100bn per annum. This Government is spending more on welfare payments than any previous Government. It is also investing money in infrastructure (roads, broadband and the Christchurch rebuild) at a rate unprecedented in New Zealand’s history. In fact, only Muldoon’s Think Big project in the 1970s and 1980s and Julius Vogels’ Nation-Building project in the late 1800s come anywhere near this level of Government investment in infrastructure.
This is not to say that each individual infrastructure project being undertaken by the Government is the most effective use of its resources. Some projects, such as the Fibre to the Home Broadband project and the new Kopu Bridge should ultimately prove to be good investments. Other projects such as the Warkworth to Wellsford highway are more controversial. And that is even before you start debating the relative merits of investing in road over rail.
The point remains, however the Opposition seeks to spin it, that there has been a substantial amount of new spending by the Government over the past three years. It is, however, unlikely for that trend to continue as the Government has been quick to point out that there will be “no new spending” in this year’s budget as they seek to return to Government accounts to surplus. Many are even calling it the “Zero Budget”.
“No New Spending”
National has been selling this Budget on the basis that there will be “no new spending”. No new spending is, according to the Government, required in order to bring the Government’s accounts back into surplus. Critics like to paint no new spending as austerity, and will often focus on cuts to specific programmes to prove their point. However, the infographic prepared by Keith Ng over at Public Address is incredibly illuminating on this point. While funding for some programmes are being cut, the Government is redistributing that funding to other programmes. The net effect is that overall Government expenditure either remains the same, or, as is the case currently, continues to increase due to the effects of population growth, an increasing unemployment rate, and an increase in the number of people receiving superannuation.
The issue of debt is perhaps the most complex issue in New Zealand politics at the moment. In raw terms, Government debt has increased from $20bn in 2005 to $40bn today, and is expected to increase further over the coming years. As I stated above, this Government has been spending at a rate which is almost unprecedented in our Nation’s history, and the majority of that spending has been financed by borrowing money from overseas banks.
The issue of debt is a complex one because of the two competing narratives that are being told. The opposition on the one hand seek to criticise the Government for engaging in austerity and cutting spending when it should be expanding spending; yet on the other hand the Government stands accused of financial irresponsibility for overseeing such a massive increase in debt levels – debt undertaken in order to pay for the spending increase discussed above. It cannot be both!
This belies a bigger question: Is debt good or bad? One school of thought is that because the Government can borrow money at such a low rate on the international markets, then it makes sense to borrow and invest that money in infrastructure in New Zealand. Borrowing from overseas sources provides an inflow of money into our economy and this helps promote economic growth. So far so good. If the Government did not borrow money from overseas then it would have to raise domestic taxes in order to meet its spending obligations. Such a redistribution of wealth within a society does nothing to improve economic growth, but does at least attempt to deal with inequality within a society.
The second school of thought is that debt is not a good thing. Not only does the Government have to pay back what it has borrowed, but it must also do so with interest. And while interest rates are low at the moment, there is no guarantee that they will stay that way into the future. With current debt at $40bn and the cost of borrowing at 4%, the Government is required to pay approximately $1.6bn a year in interest payments. However, if the Government continues to borrow money and debt reaches $75bn in 2016 then rising interest rates will drastically increase the cost of borrowing. At 4%, the Government will pay $3bn in interest, but if interest rates rise to 6%, then the Government will have to pay $4.5bn a year in interest costs alone. To put that into context, the current Budget for education is $4.2bn and the Māori Affairs Budget is $191 million.
Growth and Trade
Everyone nowadays seems to be a mercantilist. For those who did not study economics, or who were not born in the 1800s, mercantilism is the economic theory that, crudely defined, seeks to promote exports and reduce imports as a means of increasing national wealth. The major flaw with mercantilism is that not every nation can “win” when engaging in mercantilism. Simply put, if I was trying to sell goods to you while not buying anything from you; and you were trying to sell goods to me while not buying anything from me; then trade would not happen between us. So while a focus on supporting exporters should be at the core of every Government’s approach to economic growth, it is incredibly naive to pursue it as your main strategy.
There has been a lot of talk from opposition parties, and several economists, that the Government or the Reserve Bank needs to intervene in the currency market to drive down the NZ dollar so as to make it easier for our exporters. This in turn will somehow, magically, improve our countries wealth. Again, such a strategy is incredibly naive. A lower NZ dollar will bring in more money for our exports, but it will also mean that we pay more for the goods that we import into New Zealand. A lower NZ dollar means higher petrol prices, higher car prices, higher TV and electronics prices, higher clothing prices. Basically, as the NZ dollar falls, the price of any good that we import will increase. So while devaluing our dollar to promote exports might sound like an attractive idea, in reality the benefits are overstated. The wider economic impacts of a lower NZ dollar are not being discussed in the same breath as the amazing benefits that will accrue because of it.
No doubt there will be a lot of special interest groups and party activists tomorrow either decrying the budget for the cuts that have been made in their specific areas of interest, or applauding the vision of the Government in allocating funding towards them. The Budget is always a trade-off over competing interests, and this years will be no different.
Overall, the Government’s desire to finally rein in its spending will lead to a greater emphasis on cutting funding to programmes deemed inefficient and directing that funding to more efficient programmes. Such redistribution of spending is not austerity, rather it is a re-prioritisation of emphasis. If you want austerity, go and look at what Richardson did in 1991 or Nordmeyer’s efforts in 1958. Both Finance Ministers looked to increase excise taxes (Nordmeyer) or cut welfare spending (Richardson, and to a lesser extent Nordmeyer) in response to a widespread recession and increasing Government deficits.
Here is what I will be looking for in today’s budget:
- A clear path to surplus, and a reduction in Government borrowing;
- A halt to the increase in Government spending;
- Measures to broaden the tax base, including the closing of tax loopholes for high income earners;
- A clear policy around investing in infrastructure (road, rail, broadband and other essential works), including a move to more rational and economically justified spending on the Roads of National Significance; and
- A clear strategy to improve the growth, wealth, and equality of New Zealand.