Over the days since the Minister of Finance presented his fourth Budget, there has been extensive debate about the details of the Budget’s growth projections (will New Zealand achieve growth of 3.4% in the year to March 2014?), about whether the government’s accounts will be in surplus of 0.1% of GDP by 2014/15, and about whether more should have been done to help low-income people.
I’ve got a view on all those questions (of which more later), but they are actually relatively trivial questions. The real questions which should be being debated are: What will the Budget do to accelerate our long-term growth rate? What will it do to reduce our heavy dependence on the savings of foreigners? And what will it do to resolve our long-term fiscal problem?
An acceleration of our growth rate is crucially important. Over several decades, our productivity growth (which ultimately drives changes in living standards) has been slower than that in most other developed countries (a brief period following the reforms of the late eighties and nineties excepted). Over the six years to 2011, productivity grew on average by just 0.2% annually, comparable to the productivity growth achieved by Portugal and Italy in the decade prior to the Global Financial Crisis. As a consequence, our living standards continue to drift down relative to those in other developed countries, and more and more Kiwis leave for greener pastures abroad.
The Key Government made a commitment to have New Zealand incomes match those in Australia by 2025 when it was first elected in 2008. Four years have gone by, the gap between incomes in Australia and those in New Zealand is bigger than ever, and the Prime Minister doesn’t talk about that goal any more.
Treasury boldly assumes that productivity growth in the years ahead will be 1.4% annually – but there is precious little evidence to justify that optimism. It’s positive for economic growth in the longer term that the Budget attempts to constrain government spending over the next few years (though core Crown expenses will be almost 6% higher in the year commencing 1 July than they are forecast to be in the year ending at the end of June, only partly because of earthquake-related spending slipping from this year to next), and there’s a bit more money for science and innovation. But there is nothing which will radically increase our growth rate.
What about our dependence on the savings of foreigners? Government debt at this point is low by international standards – largely thanks to the 1994 Fiscal Responsibility Act, one of Ruth Richardson’s enduring legacies to New Zealand – but as a country we have borrowed heavily from foreigners over many years to finance the purchase of imports of goods and service we haven’t earned. The Budget projects that to continue. Despite the best export prices in a generation, and relatively slow growth in import demand (related to the slow growth of the economy in recent years), we didn’t get close to a balance of payments surplus over the last couple of years – and the deficit is projected to increase over the next five years. If the Government hoped the Budget would help that trend, it clearly falls a long way short of even stabilising our net indebtedness to foreigners. At the moment, that net indebtedness is one of the highest in the world. The Government’s own figures suggest it is going to keep on rising.
And there is no sign that the Government is willing to tackle the long-term fiscal problem. The OECD recently argued that New Zealand has a bigge
r challenge to keep its government debt below 50% of GDP by 2050 than any other OECD country except Japan – very largely as a result of our failure to do anything serious to address the fiscal implications of our ageing population. The most obvious thing to do is to flag the need to raise the age of eligibility for NZ Super, as even the Labour Party now recognises. But John Key says that won’t happen while he’s Prime Minister.
It is an enormous tragedy that this Government failed to grasp the nettle when it first came to office in late 2008. They had a strong mandate for action; they could legitimately blame the Clark/Cullen Government for the explosion in government spending which had taken place in Labour’s final term of office; the international crisis was obvious for all to see. Instead, they tinkered, and all New Zealanders will pay the price for that timidity for decades to come.
Oh, and no, we won’t manage growth of 3.4% in 2013/14 and the government won’t achieve a surplus in 2014/15. But although getting the immediate fiscal deficit under control is an important objective, the really important objectives are to increase our growth rate (that’s by far the best way of helping those on low income, and those unable to get a job), to reduce our dependence on the savings of foreigners, and to signal a clear intention to get our long-term fiscal deficit under control by flagging the need to increase the age of eligibility for New Zealand Superannuation. Judged by those criteria, the Budget was another missed opportunity.
This column is based on a speech given to the Institute of Chartered Accountants, 25 May 2012.