Dr Eric Crampton: Things I'd have hoped we could all agree on

This week's Budget Policy Statement was disappointing.

There are a few things I'd have thought we could all have agreed on. They seem pretty basic.

1. If the Reserve Bank is still using monetary policy to push against inflation, fiscal stimulus is a pretty bad idea;

2. While fiscal stimulus through tax reduction seems more effective than fiscal stimulus through spending increases, it is a mistake to run fiscal stimulus when the Reserve Bank is pushing the other way. Sure, things are slowing down, but leave that to monetary policy.

3. Core Crown Expenditure for 2024 is forecast to be more than five percentage points of GDP higher than it was in 2019. Total Crown is higher too; that includes interest on the debt we took on to deal with Covid (and all the other stuff Robertson spent the Covid money on). Fiscal consolidation requires getting spending down. Tax reductions should not precede the spending reductions that make room for them. Otherwise all you're doing is increasing future taxes.

4. If you think that fiscal consolidation through reductions in government spending and transfers has bad macroeconomic consequences, remember that the Reserve Bank has the next move. Sharp reductions in government expenditure would make it easier for the Bank to ease monetary policy, which would encourage other activity to pick up any slack. If you worry that monetary policy has a lag, that's easily solved. The earlier you signal that spending will be coming down to pre-Covid levels, as % GDP, the more RBNZ can do to work it into their models.

 
I agree that they can't solve it all in a single budget. Ben Thomas points to the core of the problem:

Trading in stories of government incompetence and spending overruns, opposition MPs can easily believe 6.5% of all state expenditure consists of lavish intra-departmental powhiri and expensive dinners for senior management. Government waste, like representations of toxic waste in popular culture, would be obvious: lying on the ground, oozing and glowing, in storage barrels with hazard markings ready to be taken away.

Instead, much of it is hidden. It might be a team of 10 senior people doing routine work that could be performed by half a dozen juniors. It could be a programme that was once highly valuable but has achieved its purpose, but runs on with full funding. This is waste, but it doesn’t show up in the lines of any accounts. It needs to be identified by people who are familiar with the work of that agency and the public service.

This leaves ministers hostage to fortune or, more acutely, to the public service bosses. That’s bad news too, because after six years of pushing on an open door for funding increases, a door which led to a room full of money, and lack of clear direction from inexperienced Labour ministers, it is not clear the public service has the capability, let alone the will, to deliver surgical savings at the micro level or bold changes at the programme level.

Ministers can identify programme-level cuts: that is, drawing a red line through an initiative or service. But, as evidenced by the political optics disaster of disability carer allowance restrictions, ministers are not in the weeds of the detail of most operational matters.

But National has set Core Crown spend of 30% of GDP as a target to which to aspire. That's more than a full percentage point of GDP higher than Ardern's Wellbeing Budget had projected, and more than two percentage points of GDP higher than when Labour took office.

And they're still signaling that debt is going to fund tax reductions. If they can't achieve the necessary spending reductions more quickly, they really ought to be phasing in tax reductions more slowly.

Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE