Tuesday 19 May 2020

Gemmell on the budget

Norm Gemmell's piece over at Newsroom is harsh but fair. 
Before the Budget, I called for a stimulating, but prudent, Budget. That meant:

- moving away from universal, to more targeted, wage subsidies

- setting up flexible spending programmes now that respond to needs as they arise

- reprioritising spending away from short- and longer-term ‘nice to haves’ to essential recovery support

- presenting a credible future debt track beyond the immediate recovery.
Pretty reasonable. 
What did the Budget deliver? Arguably none of the four.

Firstly, another two months of universal wage subsidies with slightly stricter conditions (a bigger fall in business revenue) doesn’t make them ‘targeted’. This is despite projections that the economy is already getting back to 80 percent or more of normal working, with a few sectors likely to continue suffering. And when we’re two months closer to that election, the $20+ billions of ‘unallocated’ Recovery Fund can be strategically dropped into the election battle as further subsidy extensions and other vote-targeting sweeteners.
There's good reason to have unallocated funding when you can't guarantee that there won't be renewed outbreaks. But where a lot of the current budget and post-budget spending announcements really sound like election campaign spending - like the increases in Early Learning Centre funding for places with 100% qualified teachers - we may fear that contingency funds will be put to similar purpose rather than held against worsened Covid conditions.  
Thirdly, what of ‘reprioritising’ spending? There is negligible evidence of the Minster’s pre-Budget promise that some spending would be ‘put on ice’. On the contrary, almost every spending ‘vote’ (or should that be ‘special interest group’?) gets a boost over 2020-24, including making sure future inflationary costs are covered. Sweeteners everywhere, from arts and culture to conservation to $75 million for the Ministry of Social Development’s office refit programme. No fiscal constraints here, no public sector pay restraint or postponing ‘nice to have’ project for a year of two.

Do we really need those new Inter-Islander ferries right now when we have massive, more urgent spending needs? And an extra $1.6 billion for ‘retraining’ and apprenticeships. How many Air New Zealand flight attendants or Queenstown tour guides does he think are up for retraining to move on to farms?
Why are we paying $3 billion (up from $0.4 billion ‘prescribed by formula’) to the New Zealand Super Fund in 2021-22 to pre-fund future pension spending, while we also borrow massively to fund today’s crisis? Answer: Labour in opposition criticised the National government for precisely this after the global financial crisis. It dare not be seen now to be doing the same, even though suspending payment makes more financial sense.
I wonder instead why the government isn't going even further: spending down the Super Fund while cutting entitlements from a decade or more from now to balance the thing out. 
From a healthy Crown net worth of 43 percent of GDP at the time of last year’s Budget, this FSR forecasts net worth at 34 percent in 2020. Fair enough – we are coping with extra crisis spending and lower revenues. But, following the Budget, Crown net worth is projected to drop to just 9 percent of GDP by 2024 and only get back to 12 percent by 2030. In other words, a decade from now, during which time another serious crisis could easily have hit us, the Government’s plans for net worth are so diminished that we would be woefully unprepared financially for another fiscal bail-out of the economy.

Let’s be clear. New Zealand economists are not calling for future ‘austerity’ to get the Government’s books back into balance within a few years. Instead, there is widespread support for suitable, not profligate, spending to assist faster growth of the economy to reduce the debt burden to previous levels over, say, a decade or more.

But the Crown’s projected financial vulnerability a decade on reflects Robertson’s failure to offer any credible plan to raise net worth through fiscal prudence down the line. This is despite official forecasts of quick economic improvement: real GDP growth is forecast to be massively positive at 8.6 percent in 2022, and 4.6 percent in 2023.
And Robertson wouldn't say whether he views 42% debt-to-GDP ratios in 2034 as the new normal for fiscal prudence. 

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