Hate to hurt Bill English’s feelings, but yesterday’s Budget looked like a document the Labour Party might have written – and no, that’s not meant as a compliment. Basically, English will be keeping it steady on the economic fundamentals, while sweetening them with a few social spending gestures aimed at blunting the appeal of already signalled Opposition policy in these areas. They’re tactical blocks thrown in election year for vote-catching purposes, and they’re not being pursued on the basis of what’s affordable – more spending certainly is – or in response to social need.
For example, English announced that the government in 2015 will begin phasing in a two step increase in Paid Parental Leave (PPL) from the current 14 weeks to an eventual 18 weeks. The Opposition has been pressing for 26 weeks. The government’s paler facsimile (a) takes the political edge off the alternative, with the aim of (b) making the Opposition’s more generous (and eminently affordable) version look like extravagance. Would a gradual transition to 18 weeks of PPL by April 1, 2016 in any way future-proof New Zealand’s PPL entitlements? No way. We will continue to drag our feet. Eighteen weeks for PPL was the OECD average five years ago. So in two years time, we will reach parity with what will have been the OECD average seven years beforehand. And moreover:
In New Zealand’s policy, paid maternity leave always equates with paid parental leave. However, this is not the case in all OECD countries. This means that it is likely that the average for total PPL (maternity + paternity + family) across the OECD is even higher than 18 weeks. This makes New Zealand’s policy appear even less generous by comparison.
I’ve mentioned the PPL example at length because it is pretty typical of the crumbs-from-the-table generosity of this Budget. The 2014/15 Budget offers:
1. Free doctor’s visits and prescriptions for children under 13. Interestingly, this is budgeted to cost $90 million over four years from mid 2015 onwards and will benefit an estimated 400,000 primary school children. To which one can only say: if it costs only $22.5 million a year, why has it taken so long to deliver? Compare this to the $535.5 million being set aside in this Budget to “strengthen” the Defence Force. Compare it to the $1.1 billion annual cost (in revenue loss) of the 2010 tax cuts.
No one wishes to decry making medical care for children more affordable. Yet in this case, the “free doctors visits for children under 13” masks the fact that Health spending overall moves from $14.4 billion to $14.7 billion – and according to Labour finance spokesperson David Parker, this means that when inflation and demographic changes are factored in, the Budget is overseeing a 2.3% reduction in Health spending at a time when the population is getting older, and their health needs are increasing. Plainly, the “surplus” is coming at a considerable cost to taxpayers.
2. There will be an increase in the parental tax credit (PTC) from its current maximum of $150 a week to $220 a week, plus a gradual four week extension of the period (to 10 weeks as from next April, and 12 weeks a year later.) for which it is paid, after the birth of a child. Couples with a joint gross income of $99,847 will henceforth not qualify for the PTC at all. Note: beneficiaries – already denied access to Working For Families – do not qualify for this tax credit, although they pay tax.
While better than nothing, the new PTC policy continues to distinguish invidiously between the working poor and beneficiary poor, and thus rewards/punishes babies according to the work status of the family into which they have been lucky/unlucky enough to have been born. This is what the government spins as being a “family friendly” Budget.
3. The government will produce a surplus of $372 million next year, and Treasury is forecasting larger surpluses from then onwards, topping out at $3.5 billion in 2018, if current trends are sustained. This sounds good – and it is being praised to the skies – but very little attention is being paid to where much of the surplus has come from. That’s unfortunate, given that a cool $1 billion of social and infrastructural spending in yesterday’s Budget – from the extra $200 million in Health spending to the $67 million for a new hospital on the West Coast, to the next $172 million instalment of Kiwirail’s Turnaround Plan to the $40 million irrigation scheme to the housing plans in Hobsonville have all come out of the proceeds from asset sales via the ironically titled Future Investment Fund. For a government that prides itself on running its affairs like a household and balancing its books accordingly, this is exactly like selling the family car and furniture to pay the rent. The government has sold down what were revenue-generating assets and ploughed the money into things we like to have, but which do not generate income. You can label this a lot of things, but ‘sound economic management’ is not one of them.
4. While beneficiaries get either ignored or demonised in yesterday’s Budget, the big ticket item in welfare spending – National Super – remains politically radioactive for this government. Not only does the Budget leave the age of entitlement untouched; but, in line with its head-in-the-sand refusal to plan for an ageing population, National is not going to resume paying into the Superannuation Fund for another six years.
5. Talking about what’s on the horizon….Tax cuts – or “tax reductions” as English calls them – are now back on the table. On RNZ’s Checkpoint last night, English indicated this would be a “next term” consideration and the funds involved could either be spent on public services or in tax reductions. Note: only $500 million seems to be being set aside for this exercise, which is a figure dwarfed by the $1.1 billion a year in ongoing lost revenues from the 2010 tax cuts (estimate by the Parliamentary Library) and is roughly comparable to the $535 million in Defence spending cited in this Budget.
6. There will be cuts of $480 million in ACC levies next year, spearheaded by major reductions in motor vehicle levies– which could fall by as much as $130 a year from mid 2015. Is taxation theft? If so, someone should tell Jamie Whyte and the Act Party about this case of highway robbery, and belated repentance. The concocted crisis in ACC finances and the over-hiking of levies by the incoming government in 2008 has now been reversed to the tune of $1 billion in recent ACC levy reductions. Again, it’s hard to feel grateful for the payback.
7. Among the rest: there will be reductions in duties and tariffs on buildings components, and the cost of building an average new home could fall by $3,500 as a consequence. While welcome, this comprises only a 1% saving in the cost of building a new home. Nice, but hardly a deal maker.
Time and again, the Budget busies itself in this fashion with political tweaks that will render some issues less problematic for National on the campaign trail, while leaving the government in apparent denial about the nature and extent of socio-economic needs. To this government there is no compelling need, as mentioned, to do anything about superannuation, despite the ageing population and its related health costs. Similarly, the Budget offers nothing substantial to address income inequality and wealth concentration, and the social malaise that comes with that territory.
There is also no vision – or evidence of planning –for long term, sustainable growth, which continues to rely on ad hoc, transient strokes of good fortune: high commodity prices, the Christchurch rebuild, and consumption spending on cheap imports via a high dollar that’s torturing our exporters. In this climate, the tax relief offered for start up companies on their r & d spend is (typically) a step in the right direction – while also merely a baby step in addressing our glaring shortfalls in private sector r&d spending.
What is infuriating is that New Zealand could afford to do far better by the people who pay their taxes, and who are being drip-fed only morsels in return. Core Crown expenses have fallen from 34.4% of GDP at the height of the GFC in 2008/09 to a forecast 30.3% in this financial year and are headed below 30%. This is spectacularly low by global standards – in the US the comparable figure is 103% and it is a blood chilling 243% in Japan. No one would want to replicate those figures here: but we have the reverse problem, where fiscal anorexia is seen to be a good thing, and something that voters are expected to reward at the ballot box.
Meanwhile, out in the real world, real needs are going unrecognised and unmet. For an example of short sighted miserliness….within the Budget press releases, Tertiary Education Minister Steven Joyce revealed that for at least another two years, the earnings threshold at which students begin to repay their student loans will not be lifted as they formerly used to be, in line with inflation. “This will marginally increase the total repayments made by student borrowers,” Joyce concedes, but hi-ho silver lining: this hardline approach will allegedly reduce “both repayment times for borrowers, and future lending costs for the Crown.” That last bit being all that matters, right?
Yet get this: in New Zealand, the earnings threshold for student loan repayment and interest charges is only $NZ19,084, which amounts to $384 gross a week. Thereafter, interest payments of 12% cut in on those loans. Compare this with Australia where this chart reveals that a comparable obligation falls upon Australian students only after they have begun to earn $A50,000 a year. And just in case anyone thinks is a residual sign of Gillard/Rudd extravagance, the comparable figure in the UK is 21,000 pounds. No wonder that so many of our graduates are planning their escape from New Zealand. Out of these and similarly myopic policies, a faux surplus has been generated. Flood victims in Christchurch for instance will receive no relief in this Budget from the asset sales proceeds being disbursed to CERA from the Future Investment Fund; For now at least, the cost of flood amelioration is being pushed back onto local government – perhaps in order to increase the pressure on the Christchurch City Council to sell some of its assets.
The fact that this year’s Budget is about titivation of the New Zealand economy – rather than transformation – has wider repercussions. At the Budget lockup, I asked BERL economist Dr Ganesh Nana whether he had spotted any glaring sins of omission that might have usefully enhanced productivity, longer term. “I don’t know about sins of omission,” Nana replied. “But I’ve never been of the opinion that the government’s deficit or surplus was the number one priority in the New Zealand economy. The sin of omission here is that we continue to focus on the government’s books, but ignore the nation’s books. At the same time as we’ve got the government going into surplus, we’ve got the nation going into deficit, even more.” Commodity prices evidently, do not raise everyone’s boat.
The worry, Nana continues, “is that we seem to be near the peak of the boom times, and yet we are still facing an external deficit that’s growing. We’re facing an export sector that – to be honest – is looking pretty miserable by Treasury’s own forecasts. It has been this way for a while. Scratch beneath the surface and what you find is that we’ve got an export receipts boom that is based on dairy and logs, with the rest of the export sector struggling.”
While the government continues to be fixated on the risks of inflation, are there any deflationary signs in the economy deserving of equal policy attention? Nana smiles wryly. “The tradeables sector has been in deflation for quite a while – and that’s how we’ve been hitting our inflation target, because the tradeable prices are declining, while the non-tradeable inflation is over 4%. So yes, there are deflationary pressures in certain sectors of the New Zealand economy. In particular, in the tradeables sector. And if you look through some of the retail trade data, some retail outlets are under price pressures downwards…”
To what extent are consumption levels being kept aloft by the high dollar, and by the spending it makes possible on imports? “Well yeah, it’s a high dollar/cheap imports argument. I wouldn’t say that’s all of the explanation, but that’s a fair bit of it. Going into the future, that’s the depressing thing about the Treasury forecasts. They’re largely about consumer-led/consumption spending growth.”
To be fair, although the Key government seems to have no clue -– either in this Budget, or beyond it – about how to foster a wide-ranging export-led path of growth, the Opposition lays it on a bit too thick when it attributes much of the current economic recovery to the Christchurch rebuild. Given that its other complaint is that the rebuild has been slow to start/hasn’t started yet, it can’t have it both ways. Rather than having a big spike, Nana says, the impact of the Christchurch rebuild is proving to be smaller, but more long lasting, than was initially expected.
For most voters this year, their main concerns will be over job security and wages. At best, these factors seem likely to flatline and may well decline. In his Budget speech, English pointed to the jobs being created by the government, and the rise in the average wage – now at $54,700 and forecast to rise to $62,300 by 2018. The figures are misleading and that’s mainly because – thanks to the extremes at both ends of the income spectrum – the average wage figure conceals as much as it reveals. The median wage would give a truer picture of the income spread but, according to Treasury, that figure isn’t collected. However, judging by the charts in the small blue “Key Facts” Budget handout, 69% of income tax payers in New Zealand are earning less than $50,000 a year. Two thirds of us are earning below $40,000.
Treasury wage forecasts are not particularly rosy, either. Treasury routinely over-estimates low wage increases and under-estimates high wage increases, according to CTU economist Bill Rosenberg. In the year to March 2014, wage increases were tipped to reach 3% but came in at 2.5%, Rosenberg says, and 46% of New Zealand workers received no wage increase at all. [That 2.5% average currently puts wage increases ahead of an inflation rate that is being depressed, as Nana says, by the deflationary pressures in the tradeables sector. Not a healthy situation, however much English may applaud the fact that wage increases of late have been running ahead of inflation.] “They’re forecasting unemployment to still be above 5% in 2016, and the government is bringing in employment laws that will make it much harder to get wage increases…”
In this age of the French economist Thomas Piketty and his best selling book Capital in the 21st Century, is there anything in the Budget that addresses the problems of income inequality and wealth concentration that Piketty has identified? “On the contrary,” Rosenberg concludes, “one of his analyses is about labour’s share of income. And in fact, the Treasury forecasts show that there’s been a falling labour share, of overall income.”
So there it is. A Budget that does contains a few desirable bits of positive social spending – just sufficient, perhaps to blur the outlines of a programme of government spending that will see services either flat-line, or contract. Unemployment will still be above 5% in 2016, mortgage costs are on the rise, wages are set to lose ground against inflationary pressures that are largely being generated by the non-tradeable sector, while our tradeable sector sinks further into deflationary territory. Overall, the current economic recovery is almost entirely reliant on dairy, logs, consumption on cheap imports and the rebuild in Christchurch.
Looking ahead, the public’s reward for the past six years of belt tightening is the prospect that these gains will soon be hosed away on tax cuts (during the next term) that will disproportionately reward the people least in need. It is a scenario where income inequality, wealth concentration and the related social problems are bound to rise. For this performance, National is receiving a round of applause for its tactical brilliance, and its skill in triangulating Labour’s social policy programme, for a relative pittance.
National seems to have perfected the art of lowering the ceiling of expectations, and then painting a few pretty pictures on it to divert the paying customers. It’s nice to have free doctor’s visits for kids under 13. It would be even nicer to have a government that knew where it was going, and had a sustainable plan for getting there.