Budget 2025 should be the austerity budget that Finance Minister Nicola Willis didn't have the guts to deliver in 2024. Instead, her lame first year Budget prolonged New Zealand's economic stagnation (of course, former PM Hipkins and Worst Finance Minister Ever, Grant Robertson, bear most responsibility). The problem is that Willis doesn't want to associated with former National Party Finance Minister Ruth Richardson, who cut government spending by over 5% in her famous 1991 Budget. However, that problem is easily solved.
Here's how. First, we need to go back in time and see what the indomitable Ruth, who I've met a few times, got right, and what she got wrong in the early 1990's. What can we learn from those times? In a line, her cuts were good in the sense of returning the government budget to surplus, and prompting the biggest pay-down in public debt ever in NZ history. However, they were bad because a bunch of the cuts hurt low earners. Macroeconomics has moved on since the 1990s. It recognizes now that cutting benefits in times of recession (and 1991 was such a time) hurts struggling families when they need help the most. After all, it was in the aftermath of the 1929 Great Depression that countries around the world set up welfare states, including unemployment insurance, to help folks who lost their jobs through no fault of their own. Even in the US, benefits are made more generous in times of recession.
So what's the lesson for NZ and Budget 2025? Public debt is currently getting back to 1991 levels, when Ruth did her austerity budget. Instead of cutting benefits for the poor, the New Coalition should slash welfare transfers, but targeting high earners. What are examples? High earners get Kiwi Saver subsidies, totaling $1 billion. They get winter energy subsidies. High earners' children attend University at greatly subsidized rates, whereas low earners whose children leave school to start a business get no such help. The world's 2nd richest man, Jeff Bezos, gets subsidies from Kiwi taxpayers, due to Amazon's movies in NZ. It goes on. How do I know about them? Together with a former Finance Minister, we went through each of them - the total comes to between $10 billion and $20 billion per annum. GDP in NZ is $400 billion, so 5% of that number is $20 billion - a percentage similar to what Ruth cut by in 1991. My preference is for most of the funds to be put in personal savings accounts for all Kiwis, making us less dependent on the government in the future, relieving pressure on public welfare outlays & avoiding the introduction of new (capital) taxes.
Whatever the details, the cuts outlined above would set NZ public debt on a declining path similar to what Ruth kicked off in the early 1990s. Public debt plummeted from 55% in 1993 to 20% of GDP by the end of PM Bolger's government in 2000 (see graph below). Ruth was his first Finance Minister, from 1991 to 1993. Her mistake was targeting low earners for cuts. The New Coalition must, in 2025, target high earners. Or is Nicola Willis so determined that her three children go to University without her paying - each receiving a subsidy of $50,000 per year - which comes to nearly half a million dollars for her family - that she will refuse to yield? For the country, it is either the policy we outlined above, or it is capital gains taxes in a few years time. Take your pick. Will Willis put her own private needs above the country's?
Net core Crown debt
Click to view
Sources:
My famous paper (!) "The Determination of Unemployment Benefits", in The Journal of Labour Economics, which started a large field. It was refereed by Thomas Piketty, who is now a world celebrity on the back of his book "Capital in the 21st Century".
https://www.hbs.edu/ris/Publication%20Files/The%20Determination%20of%20Unemployment%20Benefits_1b1adcf0-73aa-4575-88ca-fb84693759de.pdf
So what's the lesson for NZ and Budget 2025? Public debt is currently getting back to 1991 levels, when Ruth did her austerity budget. Instead of cutting benefits for the poor, the New Coalition should slash welfare transfers, but targeting high earners. What are examples? High earners get Kiwi Saver subsidies, totaling $1 billion. They get winter energy subsidies. High earners' children attend University at greatly subsidized rates, whereas low earners whose children leave school to start a business get no such help. The world's 2nd richest man, Jeff Bezos, gets subsidies from Kiwi taxpayers, due to Amazon's movies in NZ. It goes on. How do I know about them? Together with a former Finance Minister, we went through each of them - the total comes to between $10 billion and $20 billion per annum. GDP in NZ is $400 billion, so 5% of that number is $20 billion - a percentage similar to what Ruth cut by in 1991. My preference is for most of the funds to be put in personal savings accounts for all Kiwis, making us less dependent on the government in the future, relieving pressure on public welfare outlays & avoiding the introduction of new (capital) taxes.
Whatever the details, the cuts outlined above would set NZ public debt on a declining path similar to what Ruth kicked off in the early 1990s. Public debt plummeted from 55% in 1993 to 20% of GDP by the end of PM Bolger's government in 2000 (see graph below). Ruth was his first Finance Minister, from 1991 to 1993. Her mistake was targeting low earners for cuts. The New Coalition must, in 2025, target high earners. Or is Nicola Willis so determined that her three children go to University without her paying - each receiving a subsidy of $50,000 per year - which comes to nearly half a million dollars for her family - that she will refuse to yield? For the country, it is either the policy we outlined above, or it is capital gains taxes in a few years time. Take your pick. Will Willis put her own private needs above the country's?
Net core Crown debt
Click to view
Sources:
My famous paper (!) "The Determination of Unemployment Benefits", in The Journal of Labour Economics, which started a large field. It was refereed by Thomas Piketty, who is now a world celebrity on the back of his book "Capital in the 21st Century".
https://www.hbs.edu/ris/Publication%20Files/The%20Determination%20of%20Unemployment%20Benefits_1b1adcf0-73aa-4575-88ca-fb84693759de.pdf
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
12 comments:
Are you suggesting asset testing.?
Winter energy payments are $700 per family annually. Yes lower income energy payments should remain. Maybe the south island also because of colder temperatures . However the fairest and most obvious for all NZ is STOP, Remove , repudiate , cancel the Ministry of Environment and also Climate Change Ministry . NEITHER would be missed at all and their input for the world is minimal at best , Zero if honest. There does NOT need to be discussion and argument. Just make the needed savings to our NZ fiscal position.
Apart from the northern European countries with, until recently, homogeneous civilised industrious populations, our welfare for the idle and low wage must be among if not the most generous in the world. Many near the bottom spend more extravagantly than a worker into the 1950s. All despite we being a nation of largely low educated low ability persons producing far from markets and in the main just low tech dried milk, logs and sawdust. The so called wealthy are penalised in a myriad ways. They do not qualify for cheap transport and doctor visits. Offspring are excluded from much education and related accommodation assistance. Many wealthy pay for education and most carry health insurance, a huge effective tax. Most attempts to snare them for tax catches disproportionately frugal non artful toilers who saved. Many live more economically than beneficiaries. Estate and related taxes (ie gift) encourage consumerism, much of it offshore, all contrary to world CO2 reduction and contrary to the savings we are forever conned to believe are so vital for local development.
Yep hit the wealthy. Or so called wealthy. Just more ad hoc swipes at people who have worked hard, saved hard and many never starting from a base of privilege.
Why not have a rational review of the system starting with the irrelevant and the ridiculous ( Waitangi Tribunal, Maori 'charitable trusts', Marsden Fund any one?) all the while reviewing and learning about the $$$$ seepage.
Stop inducing fear and flight in those that actually contribute to the economy.
I believe the simplest thing would be to run a survey where the simple question is: name 10 important government departments, agencies etc. The 10 most popular survive. The rest are gone.
In reply Robert Bird - Parliament , Education, Justice, Health, Police , IRD, Defence , Housing, Foreign Affairs, Transport, In no particular order of importance .
Agree with Anon 12.05 PM, the biggest sink hole by far has to be the drain on the public purse via the Waitangi Tribunal Fraud Squad machinations that misdirect funds to iwi and many of the so called charitable trusts. Let us consider all of our fiscal drains in terms of the Pareto Principle, where it posits that for many outcomes, roughly 80% of consequences come from 20% of causes (the "vital few")? It is not a precise ratio simply a typical distribution. However I would wager that the above named entities and their activities account for the vast majority of the funds we could recover that would stop the unwarranted lining of a few elites pockets. Focus on the vital few to give us back our Country and the means to make it great again.
Your view is quite probably correct.... but is there a large
group amongst the general population who is complaining loudly? This is the really worrying aspect.
Yes please. Esp. CCM!
Excellent idea. But very few of our current politicians are rational - instead they are very fearful of disturbing anything Maori. Yesterday in the UK, Reform Party membership became equal with that of the Conservatives. NZ might need to see a similar phenomenon to put National in its place.
If three children go to university and receive $50,000 in subsidies each, that comes to $150,000.
How does that turn into half a million dollars, Prof?
Also, how did you come up with that $50,000 figure? Surely you didn't divide tertiary funding by the number of students, given the obscene salary of Vice Chancellors?
Re: Anon 7.53 PM - There sure is and sadly, the empty vessels make the most sound and 80% of those do not have a clue when it comes to the subject of their complaints - eg: As Sean Plunket found when interviewing people at the CarKoi the majority did not even know what was in the Treaty Principles Bill but they did echo the BS they had been fed by the brain-washers who frankly consider the supporters to be their own pet, useful idiots. So sad as most are lovely people who are simply duped.
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