The Budget lockup retains a symbolic value these days, but little more than that. This is the government’s best annual opportunity to bury its usual screw-ups and regale the public with power-pointed examples of its vision, shrewd thrift and judicious generosity. This is the day when the official pageant of economic management is staged before a captive audience of media celebrities and seers of commerce. “The Treasury A Team” was also there yesterday, we were told.
In his role as M.C., Finance Minister Bill English did his best to make rank ideology sound like common sense, but the austerity rationales were wearing pretty thin this year. Talk to him – as someone tried in the Budget q & a yesterday – about the inadequate stock of social housing and the government’s apparent indifference to the scale of the housing problem and English replied – astonishingly – that we should be “thankful that government wasn’t building the houses” because, he went on that sort of “short term decision making” just isn’t what governments are good at. Coming from a John Banks this would have sounded like the propeller head nonsense it was. When expressed in Blinglish, it sounded merely like a rote reply that he didn’t really believe.
Among yesterday’s main talking points:
1. We are apparently on track for a margin-of-error $75 million surplus, now in sight for 2014/15. But this sickly creature is hobbling out of the lab on the basis of all kinds of facilitative conjuring: such as trimming by $200 million the amount of new spending next time around. With this strictly nominal surplus in sight, the 1984-ish justification for eternal austerity will have a news talisman: namely, getting Crown debt down to 20% of GDP by 2020. More on that below.
2. In a good example of how this new mantra is already impacting on sensible planning, the government confirmed in the Budget that it will not resume its contributions to the Government Superannuation Fund until government debt gets reduced to 20% of GDP, a target not expected to be reached until oh, 2020. Suspending those contributions barely made sense as a reaction to the Global Financial Crisis. With an ageing population, suspending them for what will be in effect, ten years, is an absolute dereliction of long term planning.
3. Some $1.7 billion has been raised by the selldown of Mighty River Power. Of that nearly $940 million will be spent on the Christchurch rebuild, and Canterbury will also receive a further $80 million boost for its irrigation schemes. Few New Zealanders would have realised beforehand that the asset sales programme was really intended to bankroll the earthquake recovery to quite this degree. Moreover, given the prominence of earthquake-related economic activity to the government’s overall strategy, selling down the family silver appears to be all that this government has to offer, in lieu of any coherent plan to boost the country’s exports.
4. Housing affordability and housing provision are two areas of policy where the government is politically vulnerable. On the issue of provision, Housing Minister Nick Smith announced earlier this week two initiatives costing $377 million that would see up to 3000 new state house bedrooms and 500 new homes built. At the political level this was an attempt to head off the emphasis placed late last year by the Labour Party on housing provision to meet the pressing need, especially in Auckland. At an ideological level, the government will also be shifting some of its stock to so called “community providers” – and time will tell whether this really means the likes of the Salvation Army, or the government’s developer friends in community provider drag.
In an attempt to staunch the inexorable rise in house prices, the Budget announced the government’s intention to (a) to empower central government to over-ride local council consents and thus fast-track the approval of new housing developments (b) to enable a Reserve Bank crackdown on excessive bank lending for housing and (c) to extend the eligibility rules for income related rent subsidies.
The problem here is that the provision measures are plainly insufficient, given the scale of social need. The recent Children’s Commissioner Export Advisory Group report on Child Poverty calls (at recommendation 22) for government to increase the number of social houses by a minimum of 2,000 units a year through to 2020. Nick Smith by contrast, is offering only a quarter of that figure. Nor, as BNZ economist Tony Alexander has already pointed out, will the Budget measures have much impact at all over the next three years on house prices – which reportedly rose by 9% nationwide last year, and by 14% in Auckland. Seen in that light, the Budget moves on housing looked purely like a response to the government’s political needs, than to the extent of social need out there in the community.
5. The promised massive cuts in ACC levies – a large tax cut for business in drag – are plainly being timed with 2014 electoral gain in mind.
6. For all the trumpeting of an “internationally focused growth package” in the Budget, the delivery largely consisted of a puny $75.2 million boost to business R&D grants (over four years!) and a $31.3 million scheme of repayable R&D grants for start-up businesses, the access criteria for which will not be released until next month. This will do very little to reverse the chronic short fall in research and development funding racked up by New Zealand when compared to the other countries with which it competes for trade. At this rate, the graduates that Tertiary Education Minister Steven Joyce is trying to force feed through New Zealand universities will have little choice but to head overseas for jobs, once they complete their studies.
7. As many have already noted, there were virtually no significant measures to combat child poverty and the social effects of the low wage economy – or to create jobs in the tradeable sector. True, there was a token amount set aside to treat rheumatic fever in children, a pilot scheme to create a Warrant of Fitness for rented properties, a home insulation scheme for the needy and a miserly $1.5 million funding increase for budgeting services. The scale and causes of poverty however, require far more substantive and wide ranging responses.
As Mangere Budgeting Service chief Darrell Evans told RNZ earlier this week, of the 240-270,000 children living in poverty in this country, and some 40% of the households in which they live contain at least one adult in full time work. In other words, low wages – as much as unemployment and lack of skills training – are underwriting poverty, but the Budget resolutely refused to tackle such issues. If things truly are coming right and on track, the government could, and should be offering more than the Budget’s random spray of token responses.
One small indication of the triumph of ideology over common sense: rather than regulate the loan sharking sector and its exorbitant interest charges, the Budget offered to investigate a pilot a scheme of low income (or no income) loans for low –income borrowers. So rather than outlaw the loan sharks and their predatory practices, the government will assist their victims to take out a loan to repay the loan to the sharks, and by that circuitous route, help the poor to meet their obligations to them.
As mentioned, the Budget signalled that the rationale for cost cutting and austerity will shift over the next couple of years from producing a (virtually meaningless) surplus to attaining an (equally meaningless) reduction in the Crown debt ratio. Both goals are excuses for the National/Act pursuit of small government, and a reduction in the quality and range of public services that the public can expect governments to deliver. By contrast, a previous generation expected the government to build social housing – and it did, spectacularly well. Yesterday, Bill English was trying to say that its just not the sort of thing that governments can do, or should be expected to do. Only the will to assist has changed, not the ability to do so.
Worldwide, the arguments in favour of continued austerity are looking more and more threadbare. The prevailing myth that the governments of Spain, Ireland and Italy spent themselves into their current situation simply doesn’t stack up, as this article shows.
Ireland and Spain weren’t overspending at all—but the banks and investors speculating on their housing markets most certainly were. When their banks went under, their economies collapsed, driving their unemployment rates, and their budget deficits, sky-high. If Ireland and Spain could do it over again, they’d have adopted far tighter bank regulations—something that the [German- French] deal doesn’t call for. As for adhering to fiscal restraints—well, they already did that, and look at them now.
The problem in Europe has not been about Budget deficits, but current account deficits. Martin Wolf in the Financial Times has published the data.
Wolf charts the fiscal balances and national debts of the eurozone nations between 1999 and 2007 and finds that every one of Europe’s currently beleaguered nations, with the single exception of Greece, actually complied with [demands] that they keep their budget deficits lower than 3 percent of their gross domestic product.
In other words, budget deficits weren’t the problem. So what was?
The one factor that did foretell the performance of national economies after the bubble burst, Wolf demonstrates, was a nation’s current account balance—that is, a nation’s international balance of payments, which is composed chiefly of a nation’s trade balance. Charting the balance of payments of Eurozone nations from 1999 to 2007, Wolf shows that those Eurozone nations with a favorable balance—the value of whose exports exceeded the value of their imports – are the nations that have weathered the storm: Finland, the Netherlands, Belgium, Germany, Austria and France. Those nations with negative balances—Italy, Ireland, Spain, Greece and Portugal—are now the sick men of Europe. As Wolf writes: “This, then, is a balance of payments crisis.
(BTW, those same healthy countries of Europe have also maintained their social welfare systems.) In yesterday’s Budget, New Zealand’s current accounts deficit was expected to rise to 6.5% of GDP over the forecast period. So much for us being on a track likely to re-assure the rest of the world. That’s why the lack of export-enhancing measures in the Budget is so alarming.
Could we afford to do more? (Can we afford not to?) In recent weeks, business analyst Bernard Hickey has been usefully publicizing the US debate on the relationship between indebtedness and economic growth – and the lack of research evidence that indebtedness impacts negatively on growth…or does so only when debt levels far in excess of New Zealand’s current position are reached. This NYT article is a good place to start, and will be essential reading if we persist with the nutbar 20% by 2020 goal.
One final point: much of the symbolism of the Budget lockup is intentional, but the unintentional symbolism was far more poignant. Budget Day makes the symbiotic relationship between politicians and the media absolutely explicit. Usually that is a free range exercise. On Budget Day though, the media is locked up and force fed the desired messages, is given inadequate time to consume the supportive evidence, and then has the Finance Minister wheeled in for coaching on the key message points. No wonder that after a few hours, some of the subsequent questions put to English – e.g. “what got you over the line to achieving the surplus?” – sounded a bit like versions of the Stockholm Syndrome.
In another example of the same process, a Treasury A-Team official – after giving out at 10.40am USB keys containing thousands of pages of economic information, charts, tables, forecasts etc – let it be known that Treasury would like those USB keys back at the 2pm end of the lockup for re-use next year. It seemed like a pretty bleak assessment of the news cycle. Not only would it be physically impossible to do more than glimpse those tundra-like expanses of data between 10.30am and 2pm – an hour of which was taken up by Bill English, and by lunch – the assumption was that no-one would be interested in taking the data home or back to the office to do it justice, now or later.