It wasn’t as if expectations were sky high, exactly. Chances are, it was always more likely that we’d be seeing Bigfoot rampage through the Beehive lock-up than catch a glimpse of a credible growth agenda from this government. Finance Minister Bill English did not disappoint on that score. Ever the Cautious Kiwi, he did his best to dress up his allegedly no frills Zero Budget as prudent management in uncertain global times. Except…it’s not really a sensible response. Not when almost every indicator you can mention – unemployment rates, GDP figures, retail spending, the trade deficit, commodity prices, manufacturing output etc etc is in dire trouble and heading south. Compared to the rest of the world, our levels of government debt leave room for creative leadership and productive investment. Yet like Bartleby the Scrivener, English prefers not to.
In the face of the negative realities – which are causing misery in households up and down the country – what English had to offer was a series of tweakings and Peter-to-Paul transfers that plugged a few holes here, and scratched an ideological itch there. As we knew beforehand, prescription price rises are to help finance more elective surgery and enhanced cancer treatment, and cutbacks to student allowances and support for graduates will be financing the tertiary sector investments in science, maths and technology – even if there are few career prospects for the science graduates likely to benefit, due to the chronic underfunding of the sector. The monies allocated to research in this Budget – which amount to less than a $100 million a year – are a pretty classic example of too little, too late that will not keep us globally competitive. (Public science is being commercialised and put at the service of business, but there was nothing in the Budget to encourage the private sector to cease its freeloading, and pay for its own r &d.)
On the revenue side, the Budget offered a few tax grabs from smokers, low income earners and schoolchildren (!) working part time, and it also reduced (but did not abolish) a couple of tax loopholes for people wealthy enough to afford housekeepers and/or able to extract rental income from the family bach. Overall, the government is pinning its hopes on the Christchurch rebuild as offering a stimulus powerful enough to ignite the national economy. (See below.)
Getting into surplus by 2014/15 has become a fetish object. Even if all goes swimmingly from now until then, said surplus is forecast to be below $200 million at best by then. It will be a vaporous thing, existing only in margin of error territory and will be achieved by such contortions as deferring sensible steps on Kiwisaver. The surplus-by-2015 exercise didn’t look like the product of honest forecasting. It looked more like the torturing of a spreadsheet to achieve a pre-determined political outcome, and thus enable the government to carry a surplus! a surplus! into the next election campaign. Even so, we face the prospect of a simultaneous current account deficit by 2016 that will be 6.7 % of GDP. Rarely will have so many suffered so much, for so little.
Asset selldowns Not that the Budget papers were entirely devoid of interest. Yesterday’s Budget will not determine the fate of the Key government and define its second term – but the state asset selldown certainly will. The details on that issue were pretty fascinating. Let’s assume for starters, that the name of the Future Investment Fund – which is what the Big Piggy Bank in which all the profits from selling down state assets will go is to be called – isn’t merely a rhetorical device. Let’s assume that it really is a fund that makes…. you know, investments. So, what might be the expected rate of return from those investments, and when might the country begin to receive the returns? Uh oh. There isn’t any such figure, the helpful Treasury boffins at the Budget lock-up told me, or an estimated time frame. It’s just not like that.
Right. So we are selling down our stakes in high performing state assets in order to spend the money on things for which we can’t estimate a return, at least not in any foreseeable time frame. This is exactly like selling the family car to buy the groceries. Not that we know what we’ll be getting from the transaction, because the menu keeps changing. Last year, we were told some of the selldown proceeds would be spent on irrigation schemes. (Not yet, Finance Minister Bill English told the Budget lock-up.) Then we were told it would be spent on good things like schools and hospitals. Well, it transpires that some fairly trifling sums will go in those directions, but of the $559 million disbursed from the Future Investment Fund this financial year, a whopping $230 million will go/already has gone to refurbishing Kiwirail. Again, we’re selling down our stakes in high performing assets in order to bankroll an investment in a low performing one? And that’s sensible prudent management in a crisis?
A central problem with the Budget figures on the asset sales fiasco was pinpointed yesterday on Scoop. The Budget Summary (pages 42-43) show that over the expected four year sale period up to 2016, the government forecasts it will raise $6 billion in sales proceeds, or $1.5 billion on average each year. (As you pass “Go” deduct at least $200 million to pay the consultants who set up these sweet deals.) As Scoop pointed out yesterday:
This will result in foregone dividends of the period of $460 million and foregone profits of $900 million = $1.3 billion.
On the other side [of the equation] they forecast NZ will save $575 million in tax revenue. Which equals a $725 million loss in value.
As Scoop suggested to English in the Q&A session at the lockup, this is “irrational.” In reply, English said that selling down its stakes in New Zealand’s electricity generation-retailers would lessen the risk that the Crown might otherwise face in its ownership of electricity assets in a market in which English claimed, “demand is flat, and dropping.” Wow. So let’s just cross our fingers and hope we can sucker those Mom and Dad investors into buying a share of these dogs, right? Wrong. In reality, as Scoop also pointed out yesterday:
The New Zealand electricity market is continuing to see price increases of 10% per annum, and generation capacity is being built at pace….[And] once fully sold down, the forecast foregone dividends and profits are an annual $540 million = indicating an assumed price multiple on sale of around 12x = which is not the typical profile of a business sector which is considered to be in decline. Which begs the question – is it rational to consider renewable energy assets to be risky assets for the Government to hold?
There is a still a lot of water to flow under this particular bridge. For now, it underlines how the government has been unable as yet, to advance a credible economic rationale for the assets selldowns. The option of advancing its social goals – i.e. spending on schools and on the health needs of an ageing population – are demonstrably able to be financed far more cheaply and sustainably by temporarily taking on more debt. Government debt is not a major problem – private sector debt is. Compared to other countries, we are relatively well positioned to take on more Crown debt – and one of the more worrying aspects of the Budget is the total absence of policies likely to help reduce the levels of private debt, and that omission will be of concern to the credit rating agencies.
Look beneath almost any boulder in the Budget papers though, and you’d find similar pleas to suspend disbelief. Smokers are going be hit by a further 10% rise in the excise tax on cigarettes next January 1st, and so on every year for the foreseeable. Price hikes are aimed at cutting smoking, and on the evidence they’re a successful tool in doing so. (Although it’s a deterrent tool the government resolutely refuses to use with respect to alcohol, marketed to the young.) So should we believe the government forecasts that this measure will still raise north of $520 million over the next four years? The precision of that figure suggests someone in Treasury has a crystal ball located at the intersection between price hikes and smoking cessation, and they really should patent that thing.
The global financial crisis, the Christchurch earthquake and the Greece Bogey. These are the main reasons the government uses in the Budget to justify its current course. Hey, we’ve done pretty good is a recurrent theme. Why, as Key and English both trumpeted yesterday, we’re “forecast” to do better on growth than many other countries, including mineral rich Australia, Japan and the US ! If only it were that easy, and if only those unrealistically rosy Treasury forecasts (of 3% growth on average over the forecast period) could make it so. Unfortunately, the Treasury forecasts are not even in the same ballpark as reality. As was made clear on RNZ this morning, the “downside” Treasury forecasts contained in the Budget (which are premised on a meltdown in Europe and slow growth in Asia markets) are actually what the BNZ forecast to be the likely norm, without the Armageddon events elsewhere. Goodbye, surplus by 2014/15.
As I showed last week, for example, Australia has outgrown New Zealand by nearly five to one since National took office, while the US and Canada outperformed us by more than 2.5 to one. In fact, you would expect New Zealand to have an advantage over the US in dealing with the GFC, because our domestic banking system did not face the same crisis as theirs. Despite that advantage, New Zealand has performed poorly.
New Zealand has, however, grown faster than many countries in the Eurozone, largely because the risk of Greece and others defaulting on their government debts has wreaked havoc across the continent. It is pretty rich for National to take credit for New Zealand’s low government debt, however, when it spent much of the last decade decrying the debt-reducing surpluses consistently run by Labour, and more recently has been borrowing for tax cuts.
Far from merely being the victim of global and natural forces, this government has enjoyed a sustained period of high commodity prices, favourable terms of trade and proximity to healthy markets in Austarlia and China – and it has blown the lot, wasted the whole opportunity on unsustainable tax cuts and a GST trade-off that proved to be anything but fiscally neutral. Our long-term problems remain unresolved – up to and including the cost of National Superannuation – the crunch point for which, English continues to say, is still fifteen or twenty years away. Right. So lets just unload that crisis onto the next government, and leave it to make the politically unpopular decisions. Again, this is supposed to be a sensible and prudent Budget?
Finally, there’s the Christchurch rebuild – the little engine that is being expected to provide the national economy with all the stimulus it will need, that will drive our future growth, that will lift the compensation paid to employees ( page 42 of the Budget summary) and reduce unemployment etc. etc. That’s assuming that we can attract tens of thousands of skilled workers to live in trailer parks in Christchurch – and that these skilled workers will be in such demand they will be able to drive up their labour costs and thus lift the average wage – without any of this driving the whole exercise into gridlock, or creating a two tier economy – a Christchurch economy, and the rest of the country. (And if skilled workers needed in Christchurch can gain such wage bargaining power, chances are the rebuild will be seizing up through the skills shortage that situation will reflect.)
In all likelihood, the economy of the Christchurch rebuild will be just like the mining economy in Australia – a boom almost entirely divorced from the fate of the rest of the country. Only on Treasury spread sheets will they come together. And that was the whole problem with yesterday’s Budget – it seemed to exist in a vacuum entirely detached from the realities being encountered by the rest of the population. In the Budget debate afterwards, watching Key, English and Co bouncing around the parliamentary chamber and crowing about their spreadsheet achievements was a curiously alienating experience, like watching a roomful of partygoers on nitrous oxide. The rest of the country may like to have what they’re having, but that’s not how it works.