The Budget Deficit and Future Generations
Listener 1 June 2002.
Keywords Macroeconomics and Money
MMP has meant the better parliamentary representation. Those whose parties dont make the threshold (75,306 in 1999), who vote informally (19,887), whose votes are disallowed (41,382), who are enrolled but dont vote (382,602), or who are eligible to enroll but dont (who knows?) miss out. But the remaining voters (1,990,188) selected a parliament that better reflects them ethnically and genderwise while a quarter (560,0057) voted for minority parties which better represented their politics than the two main ones. The people’s representation is further enhanced by MMP tipping the balance against the autocracy of single party government.
There is a substantial group of who have no vote. Anyone born after 1984 will be under the age of eligibility to enrol for the 2002 election (around 900,000 New Zealanders). An Australian economist, Peter Saunders of the Social Policy Research Centre, has argued that were they given the vote, parliament would soon become much more interested in child poverty, education, health, a nd rights.
The unborn’s interests are not directly represented either. Yet parliament will take decisions about the environment, heritage and the economy which will impact on their welfare too. Over the next month it does so in the settling of the annual budget, for the fiscal deficit generates future debt servicing which has to be paid, in part or full, by those yet ineligible to vote. An obvious strategy for voters and their representatives is to borrow and spend now, expecting future generations to pay the bill running a huge fiscal deficit.
The strategy cannot continue indefinitely. Debts pile up and at some stage those financing them call a halt, as happened in Argentina. Years of fiscal deficits sustained Argentinian consumption levels above what could be afforded. The foreign lenders are no longer willing to continue to increase the debt, and Argentinians face substantial reductions in their standard of living. Their anger is aimed at the banks, but they should direct some towards past generations who spent up, financed by debts they would never have to honour.
Of course there is a case for a government borrowing. A good reason is to build up the capacity of the economy to produce (rather than spend the borrowing on consumption). But what constitutes an investment in the future? Some education spending is such a investment, and so are new roads. The convention is that education is a consumption activity while roads, though physical investment in the national accounts, are funded out of road taxation. Second, and this provides a partial answer to the first question, how is the debt servicing to be financed? Sometimes there is a direct connection. When a State Owned Enterprise invests in power stations or planes there is an expectation this will directly lead to increased revenue which will pay the interest. In the case of public education there is no direct connection to additional higher revenue (although indirectly more productive workers may pay more tax). New roads may even reduce road revenue through more efficient vehicle travel.
The New Zealand government funds some of its investments out of current revenue (mainly taxation).The result is that since the mid 1990s, the Crown’s net worth – its assets minus liabilities – has been rising. Last March this net worth was around $14b dollars, with $67b of assets offset by $53b of liabilities. However, well over $14b of assets are like roads and do not directly generate income, while most of the liabilities require debt servicing. By international standards the New Zealand government has a strong balance sheet (and an exceptionally transparent one) but even so, in a major economic downswing the government would struggle.
We can debate whether the annual budget surplus is too large. (I’ll write a column on the superannuation fund later.) But we need a strong government savings surplus to offset the weak private savings surplus. Strong domestic savings are necessary for strong economic growth. Insufficient savings has to be covered by an overseas inflow, which drives up the exchange rate and destroys key growth industries.