Sunday, May 28, 2023

Bryce Wilkinson: Government profligacy is unkind

Last week’s government Budget increased projected government operating spending over the next four years by $8.4 billion while projected revenue fell by $10.7 billion. Projected government borrowing rose by $20 billion.

Treasury now projects net debt in June 2027 to be $84 billion higher than in June 2019.

Those are massive sums when spread over less than two million households.

Deficit spending hides households from affordable reality. As any household struggling with debt knows, the pain comes later. It will come with some combination of higher taxes and less spending.

One prominent statist commentator praised last week’s Budget as compassionate and kind. He asked National if it prefers to dish out “unkind austerity”.

His list of “kind” budget measures included “childcare subsidies for two-year-olds, allowing children to ride free on public transport, and. most importantly, the abolition of prescription charges”. More on those measures later.

Such measures are only beneficial if the benefits to those who receive such largess exceed the benefits forgone by those who miss out.

Taxpayers’ money is not a free lunch. To spend it on one thing is to not spend it on something else, or cut taxes.

The trade-offs are inexorable and to fail to justify a choice is to disparage community wellbeing.

Evaluating tradeoffs is central to economic analysis. Economists aim to assess the likely benefits from the chosen option relative to the lost benefits from the best of the forgone alternatives. If the net benefit is negative, why choose that option?

Yet the view that there is no tradeoff seems to dominate current public discourse.

To illustrate, last week my wife and I received a very nice unsolicited letter from a mere Member of Parliament – Chris Hipkins. His ‘kindness’ was borderline effusive.

His “More Support for Over 65s” letter gave us several reasons to appreciate Labour’s kindness. Labour was increasing NZS payments by 7.22%, and fuel tax cuts were being extended as will be half-price public transport. Winter energy payments will shortly follow.

The letter saw no need to justify such ill-targeted largesse. It was as if the spending was not costing anyone anything. The unsatisfied needs in public infrastructure, housing, hospitals, schools, and welfare must be of less value.

Government subsidies for electric cars are another example. They benefit the relatively well-off but make no difference to New Zealand’s net emissions under our Emissions Trading Scheme, let alone projected global warming.

The ramping up of corporate welfare is another galling example of ill-justified spending.

The last week has seen two more cases, subsidies for the innovative gaming industry and paying $140 million to Australia-owned New Zealand Steel.

Subsidising an activity just because Australia does makes no sense. To do so is to tax every other activity. It is like shooting oneself in the foot. New Zealand consumers of games can enjoy them regardless of where they are developed. The bigger the Australian subsidy, the better.

The case for the New Zealand Steel handout seems to be that it will reduce greenhouse gas emissions by 800,000 tonnes of CO2 annually. But under a well-designed Emissions Trading Scheme a company does not need the subsidy to reduce emissions when it is economic to do so. The Scheme’s tax on emissions tax should be a sufficient incentive.

The generic problem with the ‘kindness’ argument for handouts is that to tax people with one hand only to give it back to them in cash or in kind makes the community worse off. It does so because people change their affairs in otherwise welfare-reducing ways. They do so both to avoid the tax and to make themselves eligible for the handout. It is better not to tax them so much in the first place.

This is why there should be a presumption against government handouts for those who are comfortably off.

That is the well-being argument. What about the kindness case?

Kindness is incoherent without a well-being anchor. If a zero charge for prescription medicines is kind relative to a $5 charge, it must be unkindly compared to a $5 gift per ‘free’ prescription. By the same logic, a $5 gift is unkind “austerity” relative to a $10 gift.

The kindness cases for public transport subsides and school lunches are just as unanchored. And why would it not be even kinder for the State to give everyone cash along with free groceries?

It is surely largely the relatively well-off who pay the $5 prescription charge in any case.

Largesse with other people’s money is superficial compassion. Politicians must count heads when a general election is looming. They have to be calculating, not kind, when “feeding the chooks” with handouts. That is why so much spending is ill-justified and favours the relatively well-off.

Do not solely blame such politicians; it is voters who reward them for treating us as they do.

Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative, Director of Capital Economics, and former Director of the New Zealand Treasury. His articles can be seen HERE.


Clive Thorp said...

Bryce should at least learn the facts behind his well-founded theory, before making assumptions instead of doing research. He seems, like me originally, to have assumed logically that if visits to the doctor were free for those with a community services card, then of course no payment would be required at the pharmacy for the $5 'part charge'. He was relying on commonsense in the application of the original intention to exempt CSC holders from doctors' prescription charges. There was a serious lack of it, they left out the $5. Had they got that right from the first, the blanket exemption that has just followed for electoral advantage would not have happened I suspect. At least I did the research. Bryce would be more convincing if occasionally he looked out the window to see how people live.

Anonymous said...

A bit hard to fathom, with all this Govt expenditure and largesse, our inflation is purportedly set to go down, along with the OCR?

And, as for NZ Steel, I gather they have previously been given carbon credits, so this latest windfall puts their total support package coming up to $500M! Nice for some, especially if you're annual profit is only in the billions.

Anonymous said...

@ Clive Thorp - Bryce doesn't mention the community services card, and besides $5 is hardly the end of the world, with a maximum payable of $100 in any one year - provided you use the same pharmacy. I gather Bryce's issue is that it could have been targeted rather better. But all that completely pales into insignificance if you're unfortunate enough to have a disease the treatment meds for which aren't Pharmac funded. I know someone who has paid many ten's of thousands in GST ALONE funding their own treatment. See how that one sticks in your craw?