Farmers support a 'tight ship'

By Nick Clark, General policy manager

With this year's Budget looming, it is interesting to note what farmers most want from the Government. Are they asking for tax cuts? Better social services? Slashed red tape?

Like other New Zealanders, they want all these things, but Federated Farmers knows from its successive surveys farmers most want the Government to reduce its spending and debt.

That is why Federated Farmers is pleased with signals this year's Budget will be tight.

While we all have to wait until May 24 for everything to be revealed, this year's Budget Policy Statement, released in February, confirms a major change from the big spending 2000s.

In 2000, the Government's core operating spend was $34.8 billion. After growing only modestly during the 1990s, the spending brakes came off, especially between 2005 and 2009. By 2011 spending had more than doubled to $70.5 billion.

To put this into context, over the period 2000 to 2011 the ConsumerPrice Index increased by 31 per cent and the population increased by 13.5 per cent.

If spending had increased since 2000 by a factor of the rate of inflation and population growth, spending in 2011 would have been around $52 billion, $18 billion less than its actual amount.

If government spending had grown at this lower rate, New Zealand would have had more leeway to respond to unexpected events such as the global financial crisis or the Christchurch earthquakes.

Importantly for farmers and other exporters, lower government spending would have meant less pressure on the Kiwi dollar.

Rapid growth in government spending during the 2000s made it harder for the Reserve Bank to keep inflation under control and higher interest rates were needed for longer.

According to the Treasury, spending growth was a factor in keeping the dollar too high. The tradeable sector was held back, promoting an unbalanced economy.

Constraining government spending would help the Reserve Bank by delaying the need to tighten monetary policy and should take pressure off the dollar.

So, what can we expect from Budget 2012? Spending will continue to be restrained, with future operating allowances for new expense or revenue initiatives capped at $800 million in 2012 and 2013.

Putting this into context, annual operating allowances routinely exceeded $2 billion during the 2000s.

Considering that health, education, superannuation and welfare spending are all Consumer Price Index adjusted, departments will be pressured to find efficiencies while delivering better public services.

Expect more announcements around changes to 'back-office' functions, including more staff cuts.

There will be no net increase in the capital spending allowance for the next five years.

Additional spending on new and improved infrastructure, including the promised $400 million fund for water storage and irrigation projects, will have to come from the proceeds of 'extending the mixed-ownership model', meaning asset sales.

While the Federation does not expect much in the way of new spending initiatives, science and innovation are likely to get the lion's share of what is available.

Deficits are forecast to continue for the next few years and sovereign debt will continue to grow, but the Government still expects to make a small surplus in 2014/15 and debt growth is expected to slow.

This goal is ambitious and relies on improving economic growth to generate more tax revenue, as well as the world economy not falling back into recession and the Christchurch rebuild getting underway in earnest.

These uncertainties provide huge challenges for economic forecasting and Treasury has acknowledged there are downside risks which could make it even tougher to reach surplus.

The only certainty is Budget 2012 won't be a lolly scramble.

The real challenge will be whether the Government can stick to its guns on spending restraint in coming years. Federated Farmers hopes so.

- Hamilton News

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