The good thing about being government is that you don’t have to make ends meet. You just borrow. Bill English is borrowing big and will go on borrowing big after his budget on May 28.
The 1960s’ Prime Minister Sir Keith Holyoake used to talk about the government budget rather like household budget: income out had to equal income in, plus maybe bit over for rainy day. But governments learnt to borrow in the 1970s. Now the big rich economies are borrowing heavily to maintain their citizens’ lifestyles.
Households in many rich economies, including this one, got big into borrowing in the 1990s. Here, households tripled their debt as percentage of disposable income between the early 1990s and the mid-2000s.
Debt went from something you had to pay back sometime to magical creator of instant wealth.
The baby boomers created the new ethos. The next two generations adopted it: get another credit card to pay the interest on the ones you already had.
Hey presto: faster growing economy. New Zealand’s growth rate was among the highest in the OECD through most of the 2000s. This piled up big profits, rising incomes and windfall after windfall at the Treasury.
The Treasury began to think the huge operating surpluses – in part the result of bubble-time financial “assets” rising in “value” – were “structural”, that is the result of step-change in economic performance. The Labour-led government in 2005 adopted this thinking and helicoptered in big lolly scramble for voters.
Labour had an excuse. National said the surpluses were available for large tax cuts, which it promised to voters. Labour’s big spending was to outbid National’s big tax cuts.
Then the party came to an end. The “structural” surpluses vanished. We are now headed into structural deficits. It is hard work getting out of structural deficits. Bill English’s budget will reflect that.
English has three imperatives in the budget.
The first is to spend money in ways that partially offset the worst effects on employment of the downturn. That includes the April tax cuts.
The second imperative is to stop the rise in state sector spending, except on health services, education and social security. Beginning in December, state sector chiefs were told to hold or reduce staff numbers and refuse salary rises except for special merit – and to recoup those rises with cuts elsewhere.
Around Wellington in early April there was talk of “Nordmeyer” budget: in 1958 Arnold Nordmeyer, finance minister in newly elected Labour government which had paid out promised tax rebate even though export earnings had plunged, clawed it back in his budget through tariff rises and tax hikes on petrol, alcohol and tobacco. There was public outrage and Labour was out in 1960.
The third imperative is to enhance productivity growth. That means rearranging the state sector’s priorities and over time chopping out the lowest-priority ones and changing government policies in ways that help business make the economy more internationally competitive. English’s budget will talk about cutting regulation, keeping downward pressure on taxes and government spending and building infrastructure and human capital.
The budget will project diminishing deficits predicated on return to growth in the international economy and at home and undoing some of Labour’s generous spending. English might thereby be able to contain debt and trade through to better times in his second term.
But if there is no swift and sustainable return to global growth – and the evidence doesn’t look promising – English’s budget test will get progressively tougher. Nordmeyer’s 1958 “black budget” was followed by ones of lighter hue. The odds are English’s budgets will stay dark through this term.
That poses big questions for second term.
One will be what to do about debt: one obvious answer, ruled out for this (but only this) term is to sell down or sell outright government commercial enterprises.
A second will be what to do about spending and especially social assistance, which takes the lion’s share. Can, for example, the GP subsidy be maintained? Can 65 remain the age of entitlement for the pension?
And beyond that there is deeper conundrum.
If the world recession is deep and long, we will not go back to business as usual and by English’s third budget we will know if that is so. His task then would be to find policies for different economy. That would make this year’s budget look breeze.
Colin James is New Zealand’s leading political commentator and NZ Management’s regular political columnist.
