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.
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:
(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.