Budget Philosophies

Listener 8 July, 2000.

Keywords: Macroeconomics & Money;

Just as nostalgia aint what it use to be, neither are government budget presentations. Once they were given in the evening when financial markets were closed, and were filled with surprises such as excise tax increases. Today, the budget is presented in the afternoon, there are few surprises (tax increases are announced at other times). The reduction in significance may be no bad thing. But the media still treats the budget as one of the great political events of the year. A few days later the news returns to normal, and the dispassionate observer wonders what it was all about.

What is disappointing is that for this year’s budget, like previous ones, the government has not take the opportunity to set down its economic philosophy. That may reflect the essential pragmatism of the politics in New Zealand, perhaps compounded by the inherent difficulties of a coalition government agreeing on such philosophical issues.

One can see some new directions. The approach, which began a decade ago, of continually reducing government expenditure has been abandoned. I am not sure what past governments thought they were doing, but the outcome has been a public service which was becoming dysfunctional, and a grumpy electorate which wanted more public spending on things it valued: arts and culture, education, the environment, health, and so on. National realised this in for health spending, after its ill informed reforms of the early 1990s did not produced the productivity increases that were promised by the well-paid consultants and officials. But, as the incoming government found, many other activities were dying from the tourniquet of spending cuts. Had National been returned it too would have had to bale out the Symphony Orchestra (which had funding only till last May) and a raft of other public agencies in as dire circumstances. Meanwhile mental health and other areas desperately needed extra funds, if they were to do what the electorate wanted from them.

The ‘closing the gaps’ initiative is more peculiar to this government. I am not sure what it means. Certainly the Maori and Pacific Islanders are worse off than on average on many social indicators, but it is not clear how the announced package will markedly reduce the inequality. The consequences of the last 160 years are not going to be reversed overnight. The package may not even be the most effective way to spend the money. After fifteen years of ignoring equity in economic policy, we now are without the intellectual capacity among the government’s advisers to tackle issues such as reducing inequality and poverty. Instead, the government responds to those who shout loudest. They may not be the most deserving. A number of spending decisions in the last six months, justified in terms of social equity, are almost certainly a waste compared to more directed policies.

Probably the single most practical way of reducing inequality is to create sustainable jobs. The issue was hardly addressed in the budget, perhaps because of the shambles in Work and Income New Zealand. Until that is resolved, and it will not be easy to do so, both the taxpayer and the unemployed will suffer. In the longer run job creation is about macroeconomic performance, a topic on which the budget was almost completely silent (except for the forecasts). The indicators are that this government is fiscally conservative, running a substantial budget surplus in good years. But compared to predecessor governments it may give a greater emphasis on growth through tradeable sector expansion (especially exports). Given the nation’s vulnerability to external shocks when the external deficit is so large, we should not be surprised.

This government is probably going to be more interventionist at the microeconomic level. There is to be substantially more spending on industrial and regional assistance, although neither I – nor, I suspect, the government – knows the details of how it is to be spent. Effectively allocated the spending could be beneficial, but like the spending on reducing inequality, much could be wasted.

The political story of the budget may be the uneasy relationship the government has with business. Admittedly previous governments were far too sensitive to business demands, no matter how unreasonable they were. Like spoilt children some businesses and their acolytes seem to have been angry that the electorate has indicated it wants a more even hand. At one stage, though, the new government’s seemed to go to the other extreme. In any case under MMP it cannot blitzkrieg through legislation without consultation, as the previous government did with the Employment Contracts Act.

What is needed is an economic (and political) philosophy which assures the business community that it has an integral role in the government’s account of how the economy works. Even if the government rebalances the economy towards a modestly larger public sector, as the electorate seems to want, the majority of goods New Zealanders consume, the jobs which employ them, plus almost all foreign exchange earnings will still come from the business sector.

Thus the lack of a comprehensive philosophy was the serious lacuna in the budget. Until the government expounds one, its economic policies will look as fragile as some of its critics claim.