Will the Budget Be Fair?

Listener: April 26, 2011

Keywords: Macroeconomics & Money;

‘We object so strongly to having our own incomes further reduced by taxation that we think the incomes of pensioners should be reduced instead … In times of depression it is necessary to curtail the community’s consumption of many goods and services. Already people with large or moderate incomes have diminished their expenditure on many of the pleasant but unnecessary things which formerly they enjoyed. Most of them are, however, still tolerably comfortable. A great deal of money is spent on motor cars and holidays, on racing and other amusements. But rather than curtail further expenditure of this kind, we think it will become necessary to reduce expenditure … [that] would be most advantageous to the whole community.”

So wrote University of Otago professor Alan Fisher in 1932, satirising the attitudes of many of the elite as New Zealand struggled with the impact of the Great Depression. Are those attitudes still widespread? Are there people who are saying today that despite being well-off they should not contribute to the sacrifices made necessary by the Christchurch earthquakes and the global financial crisis?

Of course there are – there always are. Fisher’s point was that they were persuasive during the Great Depression, and that instead of the burden being shared across the community according to ability to pay, it was the weak and vulnerable who carried the greatest load in unemployment, loss of income and deprivation.

Is it happening again this year? I cannot tell yet. We should be able to make a judgment when the Government announces its tax and spending plans (the Budget) on May 19.

You won’t be able to tell from the public comment. Nowadays economic commentators (and professors of economics) rarely speak out for the weak and vulnerable. Those who do comment are rarely as transparent as Fisher was. Many will dress up their self-interest by pretending they are speaking on behalf of others. That’s the nature of the rhetoric of today’s politics.

Part of the problem is that today’s economists are not trained to think about fairness and equity. The discipline, rightly, says that economists have no special expertise for making such ethical judgments.

But the danger is that, instead, individual economists implicitly make them. Because they are not thinking about fairness, their judgments may reflect their own politics, which, more often than not, gives a low weighting to equity.

It is easy to say that the Budget will be “fair”, providing you are not challenged over what you mean (remember it is rare for an economist – or a journalist – to be well enough trained to make the judgment). Politicians will say their policies are fair when manifestly they are not. From 1985 to 1995 they said they were creating a fairer society, but as a result of their policies, inequality was objectively growing faster in New Zealand than anywhere else in the rich world.

Of course, an honest politician could say, “Yes, I am increasing inequality”, or “My policies place the burden of adjustment on the weak and vulnerable”, accompanied by an explanation of why they are doing this. (Hopefully, the reason would not be that the MP is politically dependent on the well-off who are as unwilling to make sacrifices today as Fisher says they were 80 years ago.)

Unfortunately, we don’t have good measures of inequality and fairness. (Why? Perhaps because the people who choose the measures we have don’t think these are important issues.)

But there is a simple way to evaluate a package. Ask whether the reductions in the Government’s deficit are funded mainly by additional taxation or by lower spending. If the former, it affects the well-to-do; if the latter, the weak and vulnerable.

And what if we don’t carry out the deficit reduction? Then the burden falls on future generations; you can’t be more vulnerable than they are. The future impact may be soon – perhaps as early as next year, if the international lenders become increasingly reluctant to lend to us. Then the adjustment will be harsher. Who will bear that burden? Go to the start of this column for an answer.