Sludge Report #190: The Band-aid Budget

Column – C.D. Sludge

The headline numbers out of today’s budget will scare no horses. And hopefully not the Standard and Poors’ examiners anyway. And afterall that was – according to the PM John Key – the plan.


Sludge Report #190
Budget 2009 – The Band-aid Budget


By Alastair Thompson

The Budget That Wrote Itself

The headline numbers out of today’s budget will scare no horses. And hopefully not the Standard and Poors’ examiners anyway. And afterall that was – according to the PM John Key – the plan.

And in a sense that sums up budget 2009 – “The Road to Recovery” – or as Kiwiblog’s David Farrar remarked in the lockup today, the budget that wrote itself.

So far as the road to recovery is concerned – Budget 2009 is more about packing the car and preparing for the journey than actually setting out.

Finance Minister Bill English acknowledged as much during his lockup press conference saying that a work programme was beginning on working on strategies to exploit New Zealand’s competitive advantages in terms of access to water.

At the conclusion of his press conference Mr English talked about the new set of “wise old heads”, people who have been through tough times in the past, and who are now helping him with economic strategy for the future. These heads include Dr Graham Scott – former Secretary of the Treasury from the 1980s and 90s – who has recently made the headlines for his six month $40,000 contract as a Government purchasing advisor.

And so Budget 2009 is not a transformational budget.

It is a budget which is neither likely to unduly upset large segments of the public – nor really please any large interest groups either.

It’s the sort of budget that Michael Cullen might have written in the same circumstances. It is centrist and moderate.

The left will be surprised at the relative absence of draconian cuts, though the devil may yet be in the detail.

And on the other side of the political spectrum Roger Douglas and Roger Kerr will doubtless be a little disappointed with Bill English’s first effort. Douglas has been talking in recent months of a need for dramatic and deep cuts to government spending. They were not delivered.

The razor gang of government purchasing advisors have had a relatively minor impact.

The main impact of the reprioritising – as promised – has been in the area of central Government public service with the funds being moved to new direct to the public initiatives. For example in the Education budget – professional development budgets have been cut in favour of building new schools and funding existing schools.

There is no definitive list of what has been cut by the razor gang in the mountain of budget documentation. Precisely where the bodies are buried in terms of the line by line review will be very interesting when fully revealed.

And these cuts will doubtless cause considerable upset in some sectors once identified – but they are far from slash and burn. From the cursory look that has been possible since the budget documents were released at 10.30am there are a lot of relatively small programmes – many of which are probably delivered by contractors – which have been axed.

Overall the razor gang found around $500 million of savings per year. And most of these savings have been promptly reinvested in the same budgets that they have come out of – albeit in parts of those budgets.

Asked whether more dramatic cuts had been considered , Mr English’s response was to say that had he delivered a budget of that ilk, media would be swiftly complaining of the 1000s of job losses which his budget was delivering.

When how many jobs were being created by his budget he pointed to the infrastructure development plans – more roads, more schools, more broadband, more insulation. Which taken together will create several thousand jobs.

He also pointed out that those that do lose their jobs are not facing entitlement cuts, and that social spending in health and education is being maintained overall.

And so we have here a budget where the interests of the vulnerable are looked after while the overall fiscal position of the Government is painted as not too ugly – albeit still anticipating 10 years of substantial deficits.

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The Macroeconomic Outlook – Optimistic

In terms of its economic underpinnings the scenario on which Budget 2009 is based may yet prove to be somewhat optimistic – certainly in terms of the international outlook.

In his presentation Mr English said the view of treasury was that the period of large negative international financial shocks was now over, which may prove to be a brave assumption. The truth is that nobody really knows what is going to happen next with the economic crisis.

That said the consensus views used for economic forecasting are certainly a better basis for sensible decision making thn preparing for financial Armageddon – even if that is what comes next.

The deferral/cancellation of tax cuts and deferral of contributions to the “Cullen Super Fund” are the twin big economic items in this budget which drive the bottom line.

Both have been well and truly flagged and these are the two items which David Farrar meant wrote themselves.

These two policy changes make the main contribution to turning around what previously looked like a disastrous path of fiscal deficits.

According to Treasury forecasts, without change the budget path would have seen gross debt to GDP move to over 50% by 2014 and 70% of GDP by 2023.

Largely thanks to these two policy changes (tax and super contributions) the gross debt path now reaches a maximum of 43% of GDP (from 25% current) in 2016 and declines thereafter.

Somewhat craftily – and presumably for the benefit of the Standard and Poors folk – the government has now adopted a new measure called “Net Debt” (which records things like Student Loans as assets) which makes the position look a great deal more rosy, and sees the “net debt to GDP ratio” rise from a shade under 10% now to about 35% at its height.

It is good that the Government has found a measure which makes the future look less ugly – as the reality could well turn out to be a great deal nastier than current forecasts indicate.

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Future Spending Path – A Period Of Unachievable Abstinence?

The “New Operating Initiatives” line – which is where new $$$ gets doled out each tear – continues to be not that far from historical norms at a little over 1.4 billion on average over the forecast period with $1.7 billion planned for this year.

That said the government has actually described this figure as 1.1 billion plus inflation adjustment. By way of contrast the previous Labour Government’s provision for new initiatives had grown to $1.7 billion per annum.

However the devil as always is in the detail and this spending track may not ultimately be achievable.

Take health for example. The headline number says $3 billion is to go into health over the next four years. Effectively this means $750 million a year over four years – matches election commitments and is broadly similar to historical health budget increases.

However no provision has been made for further expansion in health beyond 2009-10 at this stage – and if historical levels of health budget expansion continue – then health alone will soak up the vast majority of all future provisions for increased expenditure.

The overall government spending track is forecast in the budget documentation as follows.

Year to June 30th
2009 + $5.4 Billion to $62.4 Billion
2010 + $2.9 Billion to $65.3 Billion
2011 + $2.1 Billion to $67.4 Billion
2012 + $3 Billion to $70.4 Billion

These figures include contingency funding for new spending each year of just $1.1 billion – and in coming year to June 30 2010 the contingency provision (beyond what is in this budget) is just $254 million.

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The Band-aid Budget

The challenge ahead for this government as it plans its next budgets will be to move back towards the transformational as it simultaneously avoids spending any real money.

If the fiscal red ink is to be stemmed as forecast then the spending track forecast is possibly a minimum – albeit one which may prove very difficult indeed to achieve.

Real productivity growth comes from investment – what this budget indicates is that this investment is unlikely to come from the Government. Meanwhile the Government is also forecasting borrowing of $200 million every week – funds which might otherwise be invested in business.

In the absence of investment in the likes of education, science and technology – the traditional approach to increasing productivity – the alternative path to increasing economic performance would be to change the levers in terms of investment.

And here the elephant in the room is tax free gains on housing investments. Mr English acknowledges in his budget the presence of structural imbalances (meaning the propensity to invest in housing not business) but this budget does nothing to address these imbalances.

However in the circumstances this is probably fair enough.

The New Zealand economy – like that of the rest of the planet – is wounded and the first objective is to stem the bleeding. Since the election just seven months ago the Government has been scrambling for solutions.

So far it hasn’t found any.

And so in the meantime Mr English is applying a band-aid. This budget addresses the bleeding fiscal wounds, but does little to start a healing and growth process.

Presumably following delivery of this budget this is where Bill English and his wise heads will now turn their attention. They will need a great deal more ideas than we have seen thus far.

Anti©opyright C.D. Sludge 2009

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