Archive for the ‘Progressive Fiscal Policy’ Category

Core Crown Expenses 1999-2009: an overview [re-post]

Wednesday, September 1st, 2010

Originally posted on 6 April 2010. This was the first post on the Policy Progress work programme topic ‘Progressive Fiscal Policy – Lessons from the Fifth Labour Government’.

It may come as a bit of a surprise that there really isn’t any readily available database that shows the fiscal record of any particular administration. We will have to construct this for this topic, and there will be some complications involved in doing so.

For today, however, I just want to use some currently available information to present a bit of the ‘big picture’. I’m going to use Core Crown Expenses, which is the standard measure, and look at the period from 1998/99 to 2008/09. I think that timeframe is the best one for a simple analysis, but no year-to-year analysis is perfect. The budget for 1999/2000 was actually set by Bill Birch in the Shipley government, but the incoming Clark-Anderton government committed significant additional spending during 1999/2000 ahead of their own first Budget in June 2000. Similarly, the current government made significant changes to the 2008/09 appropriations but the budget for this was originally set by Michael Cullen.

Plus, of course, the Core Crown Expenses are a mix of deliberate initiatives, responses to cost and salary pressures, and automatic adjustments (benefit CPI increases, additional superannuitants etc). With these caveats in mind, then, let’s look at the figures.

The graph above shows the growth in Core Crown Expenses from the 1999 fiscal year (1998/99) to the 2009 fiscal year (2008/09). The yellow line is the CPI index for this period, so the area above that line represents a real increase in government spending. Anything below that can be argued to be simply reflecting general price inflation.

We can see that expenses increased from $34 billion to $62 billion during the period. That’s an increase of $28 billion, or almost a doubling of Core Crown Expenses. Probably about a quarter of that, or $7 billion, can be accounted for by general CPI inflation, so the real increase would be about $21 billion.

Where did all that additional money go to? We have data breaking the money down into Core Crown Expense Classes, a slightly odd grouping of spending areas that don’t seem to be used anywhere except the Crown accounts.


The graph above presents the composition of the $28 billion increase by Core Crown Expense Class. It shows that the two largest areas of additional spending were ‘Social Security and Welfare’ and ‘Health’, followed by ‘Education’. Between them, these three classes accounted for almost two-thirds of the total $28 billion increase.

Such broad categories, however, raise as many questions as they answer. For instance, what drove that extra ‘Social Security and Welfare’ spending? It might be thought that it went on additional benefit expenditure, but actually it was more likely to have been a combination of an ageing population increasing the cost of Superannuation, and Working for Families tax credits.

Also, since some Expense Classes are much bigger than others, those large slices of pie above may simply reflect the fact that those areas made up a large proportion of spending to begin with.

To test that, let’s use an index approach to show the growth pattern in each Expense Class over time irrespective of the overall size of spending in each.

This shows that, when viewed in relative rather than absolute terms, growth in ‘Health’ and ‘Education’ was actually only mid-range amongst the Expense Classes, and ‘Social Security and Welfare’ was one of the lowest-growth areas.

By far the fastest growing Expense Class was ‘Economic and Industrial Services’ followed by ‘Transport and Communications’. ‘Defence’ by contrast has grown quite slowly — however Core Crown Expenses do not include capital expenditure such as military equipment.

All this is just the first layer of the onion. Over the course of this topic I intend to peel further and look at the particular initiatives and expenditure lines that have driven costs in each of these Expense Classes, and also look at other areas like capital expenditure that are left out of this initial analysis. Let me know of any insights you have about how to proceed, or requests about particular areas of expenditure that you feel are important.

Update: I should also reference my data sources. Most of the data comes from the very useful Treasury file Fiscal Time Series – Historical Fiscal Indicators 1972-2008. The data for 2008/09 is from Core Crown Expense Tables in BEFU 2009.

Outlook: a lost decade?

Tuesday, August 31st, 2010

Phil Romans // CC 2.0


We seem to be in the midst of something that’s been recurring every few months in this post-Global Financial Crisis world: financial markets and financial commentators around the world are sniffing the wind and asking themselves whether the sky is going to fall again. Last time it was around the Greek bailout; this one seems to be triggered by jitters in the US economy and the focussing of attention on Jackson Hole, Wyoming, where central bankers meet each year.

It will probably come to nothing — or at least nothing dramatic. But there does seem to be a slowly rising tide of anxiety, as the natural resilience of the market economy continues to fail to spring to life.

The economists I tend to read regularly — Paul Krugman, Joseph Stiglitz, Brad DeLong, Nouriel Roubini, Martin Wolf — are pessimistic, but then they always have been. That’s the ‘camp’ they (and, I guess, I) are in. Maybe they’re wrong: maybe the private sectors of the world will spontaneously recover, as more neoclassical writers seem to think, and the main threats are overly-indebted governments and suddenly-reemergent inflation (Krugman & co see deflation as a more evident threat).

We should hope the optimists are right, but we would be unwise to discount the pessimists. Events so far have done more to bear out their fears than their opponents’ hopes.

But amongst the pessimists (realists?), there are also two views — or rather, most of the pessimists feel that things could still go either of two ways. The first is a ‘double-dip recession’, where rather than recovering properly the economy sinks back into decline again, possibly worse than last time. That’s the more commonly discussed prospect, and the one that is haunting Jackson Hole this week.

The second is a ‘lost decade’ (or longer). The model here is Japan, which after decades as a ‘miracle economy’ suddenly ground to a halt in the early 1990s after a financial crisis, to be plagued by years of sluggish growth, and deflation or virtually-nil inflation, from which it has still not completely recovered. Krugman, in particular, has carefully studied the Japanese experience and the range of largely-unsuccessful efforts by the government there to lift their economy out of the mire.

To me, the ‘lost decade’ is in many ways the more worrying scenario. A ‘double-dip’ would be terrible, but it would also galvanise policy-makers and impel action. With a ‘lost decade’ we might be like the proverbial frog in the gradually-heating pot: adjusting our expectations to the changing environment and ‘defining prosperity down’ as Krugman puts it. We can already see indications of this both in US and New Zealand as higher levels of unemployment get accepted as normal by the government and media alike. (A kind of structural and social divide between the ‘kind of’ people who get hit by unemployment and the ‘kind of’ people who decide the news agenda helps with this.)

So what would this mean for New Zealand, and how would it affect the agenda for progressive politics? It is possible that, even if Europe and the US were afflicted by a ‘lost decade’, Australia and New Zealand might escape by hitching our wagon to China and other Asian economies. But this is a precarious hope, and, in any case, it is beginning to look as if China will not be as immune to the global doldrums as had earlier been thought.

For progressives in particular, the implications are dispiriting. The Key-English-Hide government has miraculously solved our Crown debt predicament (with enough left over for lashings of tax cuts for everybody, and an extra scoop for the very rich) through two feats of accounting wizardry. Firstly, they have taken a ‘holiday’ from saving for our future through the New Zealand Superannuation Fund. And secondly, they have assumed downwards the amount of money that future governments will spend in future Budgets — which means the projected growth-path for health, education and other public services over the next decade looks very meagre indeed.

In both cases, Key-English-Hide were robbing from our future in order to make our present look rosier. But the trick for the next progressive government will be to undo these shortsighted decisions — restore contributions to the Super Fund and restore real per capita growth in public services — without causing Crown debt to blow out in the process. That may not be too hard if economic growth exceeds Treasury’s current forecasts, but under a ‘lost decade’ scenario it might instead come in lower than Treasury thinks.

Of course, the first priority for a progressive government in that situation would be to do everything it can to strengthen our economic performance, while taking active steps to assist the unemployed. But if the whole world has gone the way of Japan, then there will be a limit to how much domestic economic policy can do.

We would probably need to look at options for boosting revenue, but we would need to move cautiously. The international tide would likely be in favour of public austerity, with most other countries facing much worse public debt situations than ours. (Thanks, Michael Cullen!) But that could foster a climate of antipathy towards new revenue and spending measures both amongst supposedly ‘informed’ people at home and amongst ratings agencies abroad — even when those measures balanced each other out fully.

It’s not a pretty picture, but nor is it an inescapable one. Leading progressive economists are convinced that determined action by governments and central banks can avoid a ‘lost decade’ — if the will is there. But that will not be decided in New Zealand. Our progressive movement will need to hope for the best, prepare for the worst, and send our best wishes and support to our counterparts in the leading economies.

Budget 2010 puts the squeeze on progressive ambitions

Tuesday, May 25th, 2010

I’m going to avoid doing a Budget post-mortem on this blog. I’ve recommended a handful of good progressive analytical pieces in last Friday’s newsletter, and I would add Rod Oram’s Sunday column, Budget won’t budge economy out of morass, to that list.

I want to restrict my own comments to discussing a particular challenge that the Budget poses for the next progressive government, in a way that dovetails into our Progressive Fiscal Policy work programme topic.

Looking at the Budget documentation, I was interested by a graph that, according to Finance Minister Bill English, showed that, “New spending allowances between 2003 and 2008 tended to be large relative to the size of the economy, and even then were repeatedly exceeded.”

I asked the Treasury for a copy of the data for the graph, and was impressed by their prompt response. I’ve therefore reproduced the graph, with the addition of data labels on the columns, below.

Source: Treasury

The ’spending allowance’ for a Budget is set by the government in advance, often at the beginning of the parliamentary term, and gives people an indication of how much the government intends to spend on new initiatives in each Budget.

Personally, I’m not particularly concerned that the Fifth Labour Government exceeded the ’spending allowances’ it set for itself (nor, for that matter, does the figure demonstrate that they were “large relative to the size of the economy”). Without the context of the economic situation at the time and state of the operating balance, these ‘allowances’ have very little meaning. In fact, I’m inclined to feel that their existence was mainly to pacify those who saw additional government spending as a necessary evil, to be kept to an absolute minimum wherever possible.

I would also note that 70% of the cumulative spending in excess of the ‘allowances’ over 2003-08 took place in Budget 2007. Arguably, the main reason for this was the enhancement of KiwiSaver, which cost $1.2 billion by year three. This was a major initiative intended to significantly increase saving levels in the New Zealand economy, which in turn would “strengthen capital markets and contribute to higher living standards”. It should be judged on whether it achieved these aims, and whether it did so in the most cost-effective manner possible — not on how well it reconciled to some ’spending allowance’ set the previous year.

Past years’ spending allowances are therefore of limited use or interest, but this figure provides a valuable service in bringing together the actual amount of spending on Budget initiatives from the past 8 Budgets together in one place.

it is important to emphasise that these figures cover only ‘Budget initiatives’ — in other words, deliberate spending choices of the government of the day. This differs from most of the analysis of government spending (including, by necessity, my earlier post on this topic), which includes automatic adjustments (like population increases to school rolls and CPI increases to benefits) and also the pipeline effect of earlier government decisions.

So it gives a rather different perspective on fiscal policy.

On the other hand, these figures do have their limitations. They relate to different time periods and therefore can’t really be added together to form an aggregate picture of a government’s fiscal record. As best I can tell, each figure represents the average spending on Budget commitments per year over the first four years covered by that Budget — this may tend to understate (or overstate) the long-term costs if the costs of some large initiatives grow (or decline) in outyears. So the figures relate to differing time periods.

Nevertheless, they do provide a good idea of how ambitious (or spendthrift, depending on your perspective) each Budget was at the time. It’s quite apparent how different the Fifth Labour Government’s Budgets were from the two most recent Budgets from National.

Moreover, we can also compare them to the amount available for spending in the next term (and the one after that), because the ’spending allowances’ for those Budgets have already been set.

And this is where the challenge becomes apparent.

In Budget 2009, Bill English adjusted down the ’spending allowances’ for future Budgets as one of his measures to bring down future deficits and reduce the long-term growth in Crown debt. In fact, as Keith Ng astutely identified at the time, this change accounted for a greater impact on Crown debt by 2023 than the deferral of the tax cuts (remember them?), the spending cuts (which brought in relatively trivial amounts in the big fiscal scheme of things), or even the ten-year ‘holiday’ from the New Zealand Superannuation Fund.

These lower ’spending allowances’, which were reiterated in Budget 2010, are set alongside the ’spending allowances’ from 2003-2008 in the following graph:

Source: 2003-08, as above; 2012-17, Fiscal Strategy Model

(From 2014/15, allowances are exclusive of approximately $320 million “that is already included in projected baselines as a result of demographic growth”.)

Now, of course, as the experience of 2003-08 demonstrates, governments don’t always stick to their own ’spending allowances’, let alone those set by a previous government. Which is why English’s ‘wizardry’ in tackling long-term indebtedness is rather illusory.

On the other hand, a government’s ability to exceed those allowances is dependent on them being able to find revenue from somewhere to do so — especially when the Crown accounts are already projected to be in deficit until 2016.

And it is likely that the new flatter tax structure that National has created will be less susceptible to fiscal drag creating unexpected tax revenue windfalls, as happened repeatedly to the Fifth Labour Government.

That places a dilemma upon the progressive movement, as we look towards the next progressive government.

It seems likely that we would need to significantly curb our ambitions, at least in terms of additional public spending, or else come up with new revenue measures with which to fund them.

Core Crown Expenses 1999-2009: an overview

Tuesday, April 6th, 2010

This is the first post on the Policy Progress work programme topic ‘Progressive Fiscal Policy – Lessons from the Fifth Labour Government’.

It may come as a bit of a surprise that there really isn’t any readily available database that shows the fiscal record of any particular administration. We will have to construct this for this topic, and there will be some complications involved in doing so.

For today, however, I just want to use some currently available information to present a bit of the ‘big picture’. I’m going to use Core Crown Expenses, which is the standard measure, and look at the period from 1998/99 to 2008/09. I think that timeframe is the best one for a simple analysis, but no year-to-year analysis is perfect. The budget for 1999/2000 was actually set by Bill Birch in the Shipley government, but the incoming Clark-Anderton government committed significant additional spending during 1999/2000 ahead of their own first Budget in June 2000. Similarly, the current government made significant changes to the 2008/09 appropriations but the budget for this was originally set by Michael Cullen.

Plus, of course, the Core Crown Expenses are a mix of deliberate initiatives, responses to cost and salary pressures, and automatic adjustments (benefit CPI increases, additional superannuitants etc). With these caveats in mind, then, let’s look at the figures.

The graph above shows the growth in Core Crown Expenses from the 1999 fiscal year (1998/99) to the 2009 fiscal year (2008/09). The yellow line is the CPI index for this period, so the area above that line represents a real increase in government spending. Anything below that can be argued to be simply reflecting general price inflation.

We can see that expenses increased from $34 billion to $62 billion during the period. That’s an increase of $28 billion, or almost a doubling of Core Crown Expenses. Probably about a quarter of that, or $7 billion, can be accounted for by general CPI inflation, so the real increase would be about $21 billion.

Where did all that additional money go to? We have data breaking the money down into Core Crown Expense Classes, a slightly odd grouping of spending areas that don’t seem to be used anywhere except the Crown accounts.


The graph above presents the composition of the $28 billion increase by Core Crown Expense Class. It shows that the two largest areas of additional spending were ‘Social Security and Welfare’ and ‘Health’, followed by ‘Education’. Between them, these three classes accounted for almost two-thirds of the total $28 billion increase.

Such broad categories, however, raise as many questions as they answer. For instance, what drove that extra ‘Social Security and Welfare’ spending? It might be thought that it went on additional benefit expenditure, but actually it was more likely to have been a combination of an ageing population increasing the cost of Superannuation, and Working for Families tax credits.

Also, since some Expense Classes are much bigger than others, those large slices of pie above may simply reflect the fact that those areas made up a large proportion of spending to begin with.

To test that, let’s use an index approach to show the growth pattern in each Expense Class over time irrespective of the overall size of spending in each.

This shows that, when viewed in relative rather than absolute terms, growth in ‘Health’ and ‘Education’ was actually only mid-range amongst the Expense Classes, and ‘Social Security and Welfare’ was one of the lowest-growth areas.

By far the fastest growing Expense Class was ‘Economic and Industrial Services’ followed by ‘Transport and Communications’. ‘Defence’ by contrast has grown quite slowly — however Core Crown Expenses do not include capital expenditure such as military equipment.

All this is just the first layer of the onion. Over the course of this topic I intend to peel further and look at the particular initiatives and expenditure lines that have driven costs in each of these Expense Classes, and also look at other areas like capital expenditure that are left out of this initial analysis. Let me know of any insights you have about how to proceed, or requests about particular areas of expenditure that you feel are important.

Update: I should also reference my data sources. Most of the data comes from the very useful Treasury file Fiscal Time Series – Historical Fiscal Indicators 1972-2008. The data for 2008/09 is from Core Crown Expense Tables in BEFU 2009.