Sir Michael Cullen & Steven Joyce
Rating Budget 2021
The biggest questions flowing from this year’s Government Budget are not so much about the initiatives contained within it, as the economic assumptions that lie behind it.
It is the economic assumptions that make the Budget all add up, and every Budget has some. However many of the key assumptions this year are looking more than slightly heroic.
First, our economy is apparently going to grow faster than Australia’s in three of the next four years. Given where we are both starting from, with Australia growing at the end of last year while we shrank, that seems ambitious. Add in the key differences between our respective economies and it looks a bit more so.
Then there is the matter of inflation and interest rates. Inflation is going to tick up in the September quarter, but will then remain very benign for the next few years. According to the economic outlook, the Reserve Bank won’t be forced to raise interest rates off their historic lows for the next three years. This rosy view is not unique to New Zealand policymakers, but no less courageous for all that.
Commodity prices, meanwhile, are going to continue to rise. All the extra money washing around the world is going to keep flowing through to our commodity export prices, while magically not flowing through to consumer prices here or anywhere else. That will be quite impressive to see.
The assumptions around house prices are also quite magical. The new government interventions in the housing market are going to help bring house prices perfectly under control. We will go from a 17 per cent increase in house prices this year down to just 1 per cent next year, and they will stay like that for years afterwards, neither overshooting on the downside or the upside. And all without any material change in mortgage interest rates.
Another assumption in the Budget documents is that the Finance Minister is going to show much more fiscal restraint in the future than he is today.
This year he has truly opened the financial spigots. The Government is spending nearly $20 billion more over the next four years as a result of decisions made in this Budget, which equates to around $5b a year. That’s over $10b more than the minister signalled he would spend as late as December last year. Though again, none of it will be inflationary.
This extra spending is possibly the reason why you haven’t heard too many complaints around the initiatives in this year’s Budget. It’s hard not to be popular when you are throwing that much money around.
This largesse with the taxpayers’ chequebook means government expenditure is running at about one third of the size of our whole economy.
That’s all okay, because from next year the Finance Minister will rediscover his fiscal restraint and be spending a lot less. He’s reserved only $1.8b a year in additional spending for next year’s Budget, and then $2.7b a year for the two after that.
By then, of course, he is likely to be under significant pressure from the large group Labour used to call the squeezed middle. These are the people on low and middle incomes who are doing the right thing by working hard to support their families, and who are at the sharp end of electricity price increases, rates rises and the like. They have been completely ignored in this Budget, in favour of those who don’t work or are unable to do so.
It’s hard to see how these increasingly squeezed people in the middle will be prepared to put up with nothing, in the form of income tax relief for example, for another three whole years.
And then there are the things that are not mentioned in the Budget documents at all. Not content with just recovering from Covid-19, our Government wants to completely reengineer our economy by reaching back into the past and recreating a more centralised fortress New Zealand.
They have made two major announcements in the last fortnight that will have very significant effects on the labour market and businesses over the next several years. That is, a major clampdown on migration, and a return to centralised wage bargaining across much of the productive economy. These can’t help but have a negative effect on investment and employment as they roll out, but they have been completely ignored in these Budget projections.
To be fair to Treasury, the announcements were made after the economic forecasts were put to bed at the beginning of April. However they have been signalled for a long time, and presumably Treasury was aware they were coming.
Similarly, there are very worrying signs emerging in our electricity market as a result of Government policy changes, but they also don’t rate a mention.
Given all the economic uncertainties that remain post-Covid and the Government’s own ambition for regulatory change, you’d think it might make sense for ministers to show a bit more actual caution about the future than is demonstrated by their spending in this Budget. We need a lot of things to go right for this Budget to play out in reality.
It’s no secret we are living on borrowed money — much of the world currently is. Australia’s core debt as a result of all their extra pandemic spending is going to peak at 40 per cent of GDP.
Ours is predicted to top out at 48 per cent, an uncomfortably high number for a small internationally exposed seismically-active country with high levels of private debt.
And stopping at 48 per cent only happens provided we grow faster than Australia, inflation doesn’t appear, interest rates don’t go up, commodity prices remain high, the border is open at the end of this year, house prices are tamed perfectly, the Finance Minister rediscovers his fiscal restraint, and the Government’s move to remake the New Zealand economy in its own image doesn’t have any negative effects on business investment here.
If you believe all of that will happen, then I have a bridge to sell you.
Not content with just recovering from Covid19, our Government wants to completely reengineer our economy.