Budget should be about jobs, not debt

David Cunliffe says that people need to develop their savings habits to help build the economy for the long term. Photo / Mark Mitchell

The coming Budget has to be about jobs, declares David Cunliffe, not debt.

Labour's finance spokesman says that if he was writing the Budget it is likely that the tax cuts Labour promised in sunnier times would have had to be pared back.

And the need for a focus on the value of money in public spending would be just as apparent as it is for the new Government. "But you cannot, must not, be driven simply by government debt as your over-riding concern," he said.

"Of course it's important, but it must be looked at in the context of a sustainable strategy to build and enhance jobs. It's got to be about jobs."

Apart from anything else, fewer jobs mean less tax and less chance of getting the Budget's bottom line back in the black.

Cunliffe is sceptical about talk of economic "green shoots", like the signs of life returning to the housing market.

He notes the Reserve Bank's view that the housing market remains over-valued and has further to fall. The ratio of house prices to incomes remains well above its long-run average.

"It might be that there is some shift in what is sustainable long-term, but it looks like there is downside there," he said. "And there is a hell of a lot of downside in the labour market."

Forecasts have unemployment rising by at least 50,000 over the year ahead.

Cunliffe also points to wider measures of the state of the labour market. The number of jobless, which includes those who want a job but are not actively looking for one and do not therefore count as unemployed for statistical purposes, jumped by 20,000 in the March quarter.

The underemployed - part-timers who would prefer to work longer hours - increased by 10,000.

Unemployment rates for Pacific Islanders and Maori have jumped to 13 and 12 per cent respectively.

"While it is true that at this time there is a limited number of foreclosures going on, if you talk to the banks you find that they have a much larger number of accounts they are managing their way through, but are concerned about," he said.

"And long before you lose your home your family is pinching the pennies. Mum and Dad are arguing, the kids are going without. Heaps of stress."

Even for those who escape such hardship it has a chilling effect.

"So it is way too soon to say [the trough of] the cycle is over, that it is time to pare back and get the Government's books back into the black, because the real economy can take it and New Zealanders can take care of themselves."

The Budget due on May 28, Cunliffe suspects, will be too preoccupied with getting Government debt under control to reassure the credit rating agencies. The projected rise in Government debt was serious and could not be ignored, he said.

"But scary is the wrong word."

A lot of countries with much more Government debt had sovereign credit ratings as high or higher than New Zealand's. Rather the problem is one of twin deficits: the sudden deterioration in the Government's accounts (from a conspicuously provident starting point) sits alongside a large current account deficit and high level of overseas debt.

It is, in short, the country's balance sheet, and not just the Government's, that needs to be strengthened.

"To be fair I don't pretend we had all the answers to the current account when we were in government. It was the one aggregate where we underperformed relative to the previous decade," he said.

"To get the current account anywhere near balance you have to have a credible plan for increasing aggregate savings in the country. The truth is in the past the Government has been saving for New Zealanders.

"New Zealanders need to get further good habits about saving for themselves. It follows that the last thing you do is rip a couple of billion dollars out of KiwiSaver incentives."

There is no quick fix to the problem of pitiful national savings, however.

"You can't go from zero to hero in a day because you will knock hell out of consumption and make the recession worse."

So would a Cunliffe Budget have included tax cuts, targeted perhaps - as the OECD recommends - at those on lower wages? The tax cuts programme approved by the previous Government were passed on the basis that they would not require borrowing, Cunliffe said.

"It therefore follows that we would likely have had to scale them back to maintain a fiscally prudent stance. Especially if we were going to maintain stimulus by some other means," he said.

On the expenditure side Labour, like National, would be going through spending lines looking for "reprioritisation opportunities".

"As Minister of Health I was able to reprioritise over $500 million in the second half of 2008 from within the existing spending lines to meet higher needs programmes like cardiac waiting lists and colorectal cancer. That is an example of the sort of opportunity there is."

So far in this recession almost all of the fiscal stimulus has been from measures in last year's Budget, Cunliffe says. More is needed.

"Where is the fiscal rabbit the Government is going to pull out of the hat to fund further stimulus? Does it involve further privatisations or equity dilutions or raiding Crown financial institutions?"

Selling off the family silver only makes the current account worse for future generations, he said.

"Raiding the piggy bank is not a structural solution. Tax cuts for the rich is not a structural solution. The answer lies in none of these things."

Instead it would look more like this week's Australian Budget. "There would be a mix of infrastructure - not just motorways - a higher priority on skill and human capital, and there would be substantial investment in research, science and technology, tertiary education and innovation."

The income gap with Australia, Cunliffe said, is something that keeps him awake at night. "The scary thing is that if this Government gets it wrong and we fluff the chance [to narrow the gap] we may never get the chance again. Potentially the gap could widen to the point where very few internationally mobile, highly talented New Zealanders want to base themselves here," he said.

"If we are not very strategic with our relationship with Australia it could take on overtones of dependency and servitude."

Freed of the distractions and exigencies of office Cunliffe and his colleagues have more time to think about the economy's structural weaknesses, and opportunities and what can be done about them.

One issue on his mind, he said, is whether there is any possibility of reducing the swings in the exchange rate which make life difficult for exporters.

"In the context of a diminishing reliance on floating rate mortgages we need to think about whether the official cash rate as currently formulated is the be all and end all of monetary policy. I can't answer that question yet."

How to encourage savings - beyond the "huge step" of KiwiSaver - is another area of focus.

As is the scope for fundamental tax reform.

Treasury and a number of private sector tax experts have questioned the long-term sustainability of relying as much as the current tax system does on taxing capital and labour, which are internationally contestable.

"There would seem to be some logic in taxing that which is less mobile and that which is bad.

"There are certainly challenges in the composition of the tax system," Cunliffe said.

But beyond that he is wary. Working groups with the caucus and the wider party are taking a good hard look at issues including issues within the tax system, he said.

"We take crafting good policy extremely seriously. It's not something we do on the fly."