Debate time: In contrast to most debates, political debates aren’t simply about winning on points of logic, but are also about looking likeable on television – which is why good political debaters often have to pull their punches on TV, lest they seem unkind to dumb animals. Chris Hipkins is likely to have the same problem tonight, since repeatedly showing that Christopher Luxon is not the sharpest tool in the box could easily end up winning Luxon a sympathy vote.
Hipkins has to show that his opponent is unfit to govern, but do it kindly, and cheerily. Luxon has a simpler task. He has reduced expectations so much that he merely has to stay upright for 90 minutes.
Money for contingencies?
It isn’t exactly a surprise that National seems dis-interested in setting money aside for contingencies – which are those unforeseen events that crop up during the term of every government. Currently, National is finding it hard enough to strike a credible balance on the (outgoing) money for tax cuts and its (incoming) revenue. Who knew that Grant Robertson’s job could be so hard?
Here’s a small but telling example of National’s inability to get its policy ducks in a row. Last week, Erica Stanford announced a policy to attract skilled techie talent to New Zealand:
A new global growth tech visa – a residence visa for people with highly specialised skills who have worked at a top global tech company earning at least $NZ400,000 per annum. This visa will initially be capped at 250 successful applicants in the first year.
Question: Will these wealthy residents-but-not-citizens have to pay the 15% levy to buy a home and settle down here? If so, adding an extra $300,000 tax burden onto the cost of a $2 million home would contradict the whole point of the global growth tech visa initiative. If not, granting an exemption would reduce by “250 successful applicants in the first year,” the number of foreigners fronting up here to buy homes and pay the foreign buyers levy. National’s revenue from the levy would take a further, self-inflicted nose dive.
Currently, no one not wearing a blue rosette thinks that National’s tax numbers stack up. To remedy the shortfall, National will have to resort to further cuts in public services, and/or more borrowing and a larger debt burden. As last month’s detailed CTU breakdown of National’s economic programme has shown, the hole in the party’s finances runs into the billions:
The size of National’s current commitments exceeds the available funding in the operating allowances by $3.3bn–$5.2bn. This estimate does not include billions worth of policy promises that are too vague to quantify. This spending creates a fiscal gap that would need to be filled with additional revenue, additional borrowing, asset sales, or additional spending cuts above what has already been announced.
Repeatedly, the centre-right parties have demonised any and all increases in government spending since 2018 as being wasteful and irresponsible. Yet given the rate of inflation – and because pensions and other benefits have been indexed to wages or to inflation – that spending was bound to rise.
Point being, much of the related government spending was not discretionary. Other intrinsic contributors to spending have been population increases (partly driven by the migration that has eased our labour/skills shortages) and the ageing population, which requires more spending on healthcare.
Given the rate of inflation, government spending has to increase simply to maintain the current level of services. Otherwise, there will be more students per teacher, fewer nurses on the wards, fewer Police per capita etc etc. Such declines BTW, became a regular feature of the last National government.
So far though, these drivers of government spending have barely been mentioned during the election campaign. Yet as the CTU analysis points out:
Core Crown government spending for 2022/23 was $128bn. 73% of that spending is superannuation, health, education, Working for Families, benefits, and housing support. Transport, law and order, and defence are another 12%. Interest on debt is 5%.
The remaining 10%, or $12.8bn a year, pays for every government department, the environment, water infrastructure, heritage, economic development, tax collection, climate change, rural communities, food and agriculture support. It pays for Māori Development, Pacific Peoples Ministry. It covers research and development, Foreign Affairs overseas assistance, and disaster assistance. It pays for every other activity of government.
In Budget 2023 Treasury states that $2.8bn of the $3.5bn operating allowance will be needed to cover cost pressures from inflation and wage growth alone. Effectively, this leaves $700m a year for the net cost of any new initiatives.
In other words, the centre-right claims that it can fund its tax cuts by scrapping a few examples of “wasteful” government spending are fanciful, and misleading. Significant cuts to services, more borrowing, and/or asset sales are the only ways a future National government can keep the promises Christopher Luxon has made.
Not that National is showing its hand. In sharp contrast to the practice under Judith Collins, the National Party led by Christopher Luxon has repeatedly refused to release detailed evidence for how its policy programme will be funded. By doing so, National is denying voters the ability to make an informed assessment of National’s socio-economic credentials to be the next government.
So… A lot of campaign heat has been generated by the gap between National’s tax cuts, and the revenue to fund them. Also as mentioned National’s economic plans don’t set aside funds for contingencies i.e. for the unpredictable challenges every government gets to face, and to which only central government can effectively respond. (Everyone loves small government until a disaster hits.)
We’ve been here before. Due to the running down of public health services, the last National government left New Zealand badly prepared for the Covid pandemic. That’s why the size of its allocation for contingencies says a lot about whether National is going to be a prudent and conservative manager of the country’s finances, or as reckless as its ACT coalition partner. So far, National doesn’t seem to be setting anything aside to enable it to deal with future crises. As the CTU analysis says:
Assuming that $0.5bn as an unallocated spending contingency was set aside per Budget, which would be a remarkably low amount, this would add $3bn across the forecast period in new costs.
Yikes. So even a scarily low level of funds set aside for unforeseen events would blow an even wider hole in National’s current financial reckonings. That crisis could come in the form of a deadly new strain of Covid. Or in the shape of another health pandemic caused by bird flu. Or there could be a further collapse in demand from China, resulting in a need to subsidise exporters while they develop new markets.
El Nino? Nada
The crisis could also arise from something we already know about– i.e. the extreme weather events arising from the El Nino weather pattern. What, if anything, is National setting aside to cope with the impact of the El Nino pattern that’s already on our doorstep?
In the NZ Herald, Thomas Coughlan has already written about National’s flimsy policies on climate change. For months, the global network of meteorologists, commodity traders and food crop insurers has been predicting that a moderate to strong El Nino is under way. This is likely to have expensive impacts on New Zealand internally, and on global markets.
For example: A moderate to strong El Nino will produce drought conditions (akin to the last strong El Nino experienced here in 2016/2017) on the eastern coast of both islands, and very wet conditions with the potential for flooding, bridge and road washouts etc on the West Coast…
Besides the domestic impact, El Nino seems likely to affect everything from food commodity prices, to the global spread of diseases like cholera, malaria and dengue fever, to a heightened potential for regional armed conflict. As Bloomberg News recently reported:
“A typical El Niño can reduce harvests for important crops, increase the disease burden, hammer the economic prospects of developing and middle-income countries,’ increase armed conflict risk in the tropics, and fuel maritime conflict and territorial ambitions in the East and South China Seas.”
The assistance that warmer temperatures will give to the spread of disease will raise the risk of tropical diseases (e.g. dengue fever) migrating here. Warmer temperatures will also raise the risk that various fruit flies and bugs that threaten the kiwifruit industry will arrive here. In addition, the overall cost of food production– both here and offshore – will come under pressure. (El Nino is likely to provide no relief at the supermarket checkout during the coming year.)
If National is lucky, some of these impacts may not play out immediately in the political domain. As with the impacts of climate change, some costs attributable to a strong El Nino will be incremental, and be apparent only with hindsight. That does not make those costs any less real. As Bloomberg News recently reported:
The risks are most acute in the tropics and the Southern Hemisphere. El Niños can trim almost half a percentage point off annual GDP growth in India and Argentina, according to Bloomberg Economics modeling. Peru, Australia and the Philippines can see GDP reductions of about 0.3 percentage point.
Steep price increases worsen the impact. Even back in 2000, the International Monetary Fund warned that strong El Niños can add 4 percentage points to commodity-price inflation — and that’s before taking into account the current impact of climate change.
Since the IMF survey, research at Dartmouth University and elsewhere has put the subsequent cost of El Nino patterns in the trillions of dollars of lost economic activity. This body of research also indicates that climate change will increase the frequency and the severity of El Ninos. In the light of these risk perceptions, the elevated cost of financial hedging against potential crop losses from El Nino is also due to add significantly to the cost of food production, worldwide.
Meaning: Besides the bills for immediate repairs and industry support measures called for by a strong El Nino, there is likely to be (a) a level of food commodity price inflation (b) disruption in global export markets and (c) a direct negative impact on New Zealand’s GDP growth.
All of this should be reflected in the size of the funds that National and the ACT Party are holding back to deal with El Nino and other contingencies. But is National doing so? It really doesn’t look like it.
Man in the mirror
Maybe, we’re better off not knowing what the politicians feel at the end of another day on the hustings, trying to act out a 4-D simulation of whatever it is that other people want to see. The best song about biding your time, faking it until you make it and not having to answer to anyone ever again …Has to be Kanye West’s early hit “Can’t Tell Me Nothin.” Luxon and Hipkins must know these sentiments by heart, even if they’ve never heard the track before.