The Budget’s tightening noose

Judging by the Budget, the good news is that Finance Minister Bill English is not the beady eyed ‘lets take this theory and see if it works on people’ sort of ideologue that we saw in the 80s, early 90s. That’s about where the good bit ends. The bad news is that for all his team of pricey advisers, English seems to have no more clue than you or I about how to lift productivity, reduce rising unemployment, combat the recession and put the country on a growth path. As the likes of Graham Scott used to say back of the bikesheds at Treasury : ‘Borrow and hope’ is the last refuge of the mediocre, when politically, everything else seems too hard.

If this Budget is supposed to be a response to a unique set of recessionary circumstances, why will the action on both the Super Fund and levels of government borrowing – which will escalate to more than $15 billion a year out towards the edge of the forecast period – extend for so many years beyond the current recession ? During a recession, borrowing can be the right thing for governments to do, but only if the right stimulatory/productive settings have been put in place beforehand.

The problem with the 2009 Budget is that English’s borrow and hope trajectory are in the service of a random set of proposals – drop the tax cuts, cut payments to the Cullen Fund, build more roads, start investing in broadband now and figure out the details later, insulate some homes, invest in broadband, put more police on the beat, build a handful of new schools etc – that will do little to correct the nation’s downward slide.

Wasn’t the alleged problem with the Clark government supposed to be that it didn’t have a plan to get us back into the top half of the OECD? Well, there’s no plan in this array of things foregone and things plucked from the air that will be likely to lever up this country’s levels of productivity.

The related complaint from National when in opposition – that we had to do something about the wage gap with Australia – now need to be viewed in the light of Budget 2009 projections that show wage increases falling away and tapering off until 2013 at least. (See table 1.3, and the ‘wages’ line here.)

Sure, blame the recession. Or, taking a longer view – blame the low wage economy set in concrete by National in the early 90s, which the boom years this decade had only begun to address when the roof fell in again, last year. Either way, that wage gap with Australia is due to widen, and there is nothing in Budget 2009 that will help to bridge it.

Yes, the big moves had been well signalled. No more personal tax cuts this term. And no more donations to the Super Fund, English explained, until we can pay for them from a surplus – which is an all but extinct animal not due to be seen again in New Zealand until 2019 at the earliest. Plainly, Gen X, Y and Z will be paying higher taxes in future to finance those baby boomer pensions, or otherwise pension levels and the age of entitlement will need to change – thus cutting off younger taxpayers from the hope of eventuallyu getting the sort of pensions they are currently paying to their boomer elders. Yet with a straight face, English denied that such changes were inevitable – provided that growth somehow, sometime, came to the rescue.

Growth and productivity ? The rhetoric on these was desperately thin – in that the new infrastructure ( more roading, faster broadband) envisaged by this Budget will not transform our productivity levels. Faster broadband is a good idea that only some of us will be able to afford. The Australians have embraced it with a $43 billion (and growing) plan for rollout that is relatively rich in detail about its technical and funding framework, and its regulatory rules. Here, the details on how our $1.5 billion government contribution to faster broadband will be rolled out and regulated are still barely past the drawing board phase, and are still being contested by the major players, even as the first $250 million tranche ( of the $1.5 billion government contribution) has been set aside in this Budget.

Infrastructure = more roading > greater productivity and growth ? Well, more roading may create jobs during the building stage, but that’s about it. Once built, as the environmental movement have argued for years, motorways tend to foster greater oil dependency, create more emissions and attract more cars onto the roads, thus rendering any motoring advantage short-lived. All of which are good reasons for funding public transport, which reduces cars on the roads etc etc.

The reason why I’m mentioning it in this context is that the Budget rhetoric that links the infrastructure spend to increased productivity just doesn’t stack up. Getting our widgets to the factory 20 minutes earlier – or even getting our existing messages to and fro faster on broadband – does not directly enhance the creative wealth and entrepreneurial skill of New Zealanders. That lift will come only from greater investment in the science, r & d and higher education that are the real engines of growth, productivity, and entreprenurial invention.

Last year on gaining office though, National canned the tax credits for r&d. In this Budget it scrapped the $700 million Fast Forward scheme, and provided instead a $321 million science research package that will translate to about $70 million a year ( depending on matching funds from the private sector ) and some photo opportunity Science Prizes to be handed out by the Prime Minister. Pathetic. The spend on higher education was only inflation adjusted, and a tertiary salaries scheme by Labour to help retain highly qualified university staff in this country, has been scrapped.

The other main structural element in the Budget is the planned decline in new government spending. While this year government is not being shrunk to the point where it can be drowned in the bath –it will increase by $3 billion this year – the cap of $1.1 billion planned for next year and subsequently, is really chilling. Instead of its The Road to Recovery subtitle, this Budget could more fairly be called The Tightening Noose.

For all the talk about re-directing spending on services to the front lines, the front line of schools’operational funding has been all but ignored. Many families were struggling with the costs of ‘free’ education even before the recession hit, so the $80.1 million boost in operational funding will be no more than token, when spread between the nation’s 2,150 schools. Other signs of tokenism :

Overseas aid These days, the Budget papers say, overseas aid is to be measured in terms of “outcomes” and not via the previous formula – which would have enabled us to track whether the Key government is making progress ( it isn’t) towards meeting the UN Millennium Goals that New Zealand has signed up to, and that require us to donate .7 % of GNI in overseas aid by 2015. In fact, as Treasury officials told me, our ODA will stay around .3% of GNI – but this is mainly because the economy is contracting ! As the supplementary estimates indicate, the government has actually taken out $166 million from ODA over the next four years.

Bailing out the banks. The amounts allocated to cover taxpayer liabilities for the retail deposit scheme ( mainly for finance companies) are more than double at $3.7 million, the amount set aside for the wholesale guarantee scheme ( mainly for banks) but these estimates are already hopelessly out of date, in that they derive from a period when banks were barely accessing the scheme. In recent weeks, the ANZ ( which has just taken out a billion dollar liability) the BNZ and Westpac have all tapped into the wholesale guarentee scheme. Meaning : that while everyone else is tightening their belts, the banks are accessing more protection from the taxpayer, and are paying less for it. In January and again in March, Treasury lowered the amount that banks have to pay for the privilege.

Peddling Up the Road to Recovery Yes, John Key’s loopy cycleway idea got its $50 million. Only now, that figure is said to be for improving regional cycle ways, that will someday lead to a national cycleway – presumably after even more money is spent on it, and provided it always excludes the Auckland Harbour Bridge. So the people who said all along that a national cycle way would really cost circa $200 million have been vindicated.

One of the more startling moments of the Budget lockup came when finding Jeanette Fitzsimons mug shot ( and press release on home insulation ) nestled in amongst the government puff press releases about its Budget accomplishments.

For now, the Greens seem confident there will no ‘halo effect’ from its memo of understanding with the Key government. It plainly believes it can team up with government on its pet policies – and lend it social and environmental credibility in the process – without undermining the credibility of its criticisms of the government on other fronts. On home insulation, the process is even more complex – in that this policy actually began life as a co-operative project with the Clark government. During the months since the change of government. the details have continued to be quietly developed by EECA, the Energy Efficiency and Conservation Authority. Bureaucratic creep does have its uses.

Briefly,the $323 million scheme will offer grants for two purposes – home insulation, and the installation of clean heating – on homes built before 2000. The subsidies will provide one third of the cost up to $1,300 for home insulation, and up to $500 for clean heating devices. Higher concessions will be available to those with Community Services Cards. In a recession, no one knows how many people – and how many landlords in particular – would want (or be able to ) sign up for what will still entail a major outlay on home insulation, amid a lot of other pressing calls on family budgets. At the press conference, Fitzsimons expressed the view that people on higher incomes ( who would be able to afford to run their heating for longer ) will provide most of the climate change benefits, while those on lower incomes will be able to access most of the health benefits from the scheme.

During its previous grant scheme to promote solar heating, the Greens did hit some bottlenecks that were largely created by the inadequate numbers of skilled tradespeople trained and available to install the technology to the correct standard – but as Gerry Brownlee and Jeanette Fitzsimons indicated at their joint press conference yesterday, while this problem was still a factor, it would not arise to the same degree this time. Some 180,000 homes will potentially qualify for the home insulation scheme, which will come on stream on July 1st Some 2,700 jobs per year are expected to result, over the four years of the scheme’s operation.

Overall, as it has for most of the year, the government seems largely an impotent bystander to the problems that are currently besetting the country. In that respect, Budget 2009 seems less like The Road to Recovery, and more like A Road to Nowhere.


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