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I went along to the Budget lock-up today (first time ever), mostly to help out the Taxpayers’ Union with their analysis and commentary.
At least from my (macroeconomist’s) perspective there were two areas to focus on when we were handed the documents at 10:30 this morning:
- productivity and growth-oriented policy measures,
- fiscal deficit etc adjustment
You might remember that back in January the Prime Minister made a big thing of the need to accelerate growth in productivity and real incomes, not just on a cyclical basis. The Minister of Finance in announcing the Budget date in late January went further
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They did not deliver.
There was a single growth-oriented initiative in the Budget; a provision under which firms will be able to write off 20 per cent of the cost of new investments in the first year, on top of the regular tax depreciation allowances. Whatever the substantive merits of the policy, the best Treasury estimate is that it will lift GDP by 1 per cent, but take 20 years to do so (the forecast gains are frontloaded, but even in five years time they reckon the level of GDP will have risen by only 0.5 per cent relative to the counterfactual). If that looks small, bear in mind that Treasury’s number seem to assume that this measure may actually worsen overall productivity as the Minister’s press release says they estimate the capital stock will rise by 1.6 per cent and wages will rise by 1.5 per cent (at her press conference she said this was because more people would be employed).
And that’s it. This in an economy where there has been no multi-factor productivity growth now for almost a decade (chart from Twitter this morning)
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and, where as regular readers know, to catch up to the labour productivity levels of the leading OECD bunch (US and various countries in northern Europe), we’d need something like a 60 per cent increase in productivity.
It is simply unserious.
Things were no better on the fiscal side. Here, for today, I’m largely just going to rerun the notes I wrote for the Taxpayers’ Union and which are already in their newsletter
“This year’s Budget represents another lost opportunity, and probably the last one before next year’s election when there might have been a chance for some serious fiscal consolidation. The government should have been focused on securing progress back towards a balanced budget. Instead, the focus seems to have been on doing just as much spending as they could get away with without markedly further worsening our decade of government deficits.
“OBEGAL – the traditional measure of the operating deficit, and the one preferred by The Treasury – is a bit further away from balance by the end of the forecast period (28/29) than it was the last time we saw numbers in the HYEFU. There will be at least a decade of operating deficits, and even the reduction in the projected deficits over the next few years relies on little more than “lines on a graph” – statements about how small future operating allowances will be – that are quite at odds with this government’s record on overall total spending. Core Crown spending as a share of GDP is projected to be 32.9 per cent of GDP in 25/26, up from 32.7 per cent in 24/25 (and compared with the 31.8 per cent in the last full year Grant Robertson was responsible for). The government has proved quite effective in finding savings in places, but all and more of those savings have been used to fund other initiatives. Neither total spending nor deficits (as a share of GDP) are coming down.
“Fiscal deficits fluctuate with the state of the economic cycle, and one-offs can muddy the waters too. However, Treasury produces regular estimates of what economists call the structural deficit – the bit that won’t go away by itself. For 25/26, Treasury estimates that this structural deficit will be around 2.6 per cent of GDP, worse than the deficit of 1.9 per cent in 24/25 (and also worse than the last full year Grant Robertson was responsible for). There is no evidence at all that deficits are being closed, and the ageing population pressures get closer by the year.
“Some things aren’t under the government’s direct control. The BEFU documents today highlight the extent to which Treasury has revised down again forecasts of the ratio of tax to GDP (which reflects very poorly on Treasury who rashly assumed that far too much of the temporary Covid boost would prove to be permanent). But, on the other hand, the forecasts published today also assume a materially high terms of trade (export prices relative to import prices), which provides a windfall lift in tax revenue. Forecast fluctuations will happen, but the overall stance of fiscal policy is simply a series of government choices. Unfortunate ones on this occasion.
“A few weeks ago the IMF produced its latest set of fiscal forecasts. I highlighted then that on their numbers New Zealand had one the very largest structural fiscal deficits of any advanced economy (and that we were worse on that ranking than we’d been just 18 months ago when the IMF did the numbers just before our election). The IMF methodology will be a bit different from Treasury’s but there is nothing in this Budget suggesting New Zealand’s relative position will have improved. We used to have some of the best fiscal numbers anywhere in the advanced world, but as things have been going – under both governments – in the last few years we are on the sort of path that will, before long, turn us into a fairly highly indebted advanced economy, one unusually vulnerable to things like expensive natural disasters.”
With just a few elaborations/illustrations
First, here is the chart of tax/GDP
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Even allowing for fiscal drag, quite how Treasury thought so much of the lift in tax/GDP was going to be more or less permanent is lost on me. They don’t really say.
Second, here is Treasury’s estimate of the structural (OBEGAL) balance as a per cent of GDP, showing recent years, and the forthcoming (25/26) financial year on the Budget announced today
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The government seems to have become quite adept at rearranging the deckchairs (cutting spending that they consider low priority and increasing other spending) but they are choosing to make no progress at all in reducing the structural deficit. There were big savings found in this Budget, but none were applied to deficit reduction. Sure, the forward forecasts showing the structural deficit shrinking – never closing, even by 28/29 – but that is based on wishful “lines on a graph”, suggesting that the government intends to cut core crown expenses by a full 2 percentage points of GDP over the following three financial years, when on today’s forecasts expenditure as a share of GDP in 25/26 (32.9 per cent), will be a bit higher than in 24/25, and very slightly lower than in 23/24. The Ardern/Robertson government got by on 31.8 per cent in 22/23.
Finally, a reminder from Monday’s post
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Depending on your measure we were (based on HYEFU/BPS numbers) worst or close to worst in the advanced world. Today’s Budget will have done nothing to improve that ranking. It should have.
The Budget is a lost opportunity, both on the fiscal and the productivity front. A couple of journalists at the lock-up asked for a summary label for the Budget. Some people had snappier versions, but mine was simply the “Deeply underwhelming Budget”.
Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.
1 comment:
The Shane Jones budget speech was BRILLIANT. On Facebook.
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