Steven Joyce is a former National Party Minister of Finance and Minister of Transport. He is a director at Joyce Advisory and the author of the recently published book on his time in office, On the Record.
OPINION
The reviews of the first Nicola Willis Budget are steadily coming in, with each side putting their spin on it. Yesterday’s Herald featured columns from the left screaming “austerity” and the right screaming “profligacy”. Both can’t be true and, in this case, neither is.
This Budget was only ever going to be the first step in righting the fiscal and economic ship, and so it proved. The real question is how far does it take us? To work that out, there are four or five other questions we need to answer.
The first relates to Government spending and whether ministers have been able to halt the runaway train that was spending increases under the previous Government. In assessing that, it’s better to talk about spending as a percentage of the economy, as dollar-figure comparisons have become a bit meaningless given high levels of inflation.
Under Grant Robertson, the Government was responsible for a rapidly expanding chunk of the New Zealand economy, which really squeezed the private sector and households. Spending grew from around 28 per cent of GDP to 34.5 per cent in just five years – which has to be some sort of record, even given the challenges of the pandemic. By comparison, Michael Cullen took nine years to do something similar.
This Government is showing spending reducing to 31 per cent of the economy in four years’ time. It’s still too high to allow small businesses and families to flourish, but much better. For a comparison, it took us six years to get it down to under 30 per cent when we were in government, partly because of the Christchurch earthquakes.
The current Government is instead contending with the quite sharp recession it inherited. It will be hoping for the economy to recover more rapidly in the out-years while they keep a lid on spending. We shall see.
Some have pointed out the quite heroically low Budget allowances in the next two years and questioned the likelihood of them being achieved. They are low, particularly in comparison with Robertson’s approach, which was to set sizeable Budget allowances and still blow past them. In each of his last three Budgets, he averaged well north of $20 billion in extra spending over the subsequent four years, while in this Budget the coalition will add just $7b.
Sticking to those future Budget allowances won’t be possible without making more savings from the core public sector. And that’s as it should be. There will still be plenty of waste rattling around. On the strength of the first six months, you’d back ministers to make good on that commitment but they will need to keep driving hard.
The second question is about Government debt. The test of this Budget was never going to be “will you stop borrowing now” as, no matter what you do, it takes time to bend down the debt curve, particularly after the rapid build-up we experienced. This has been made more difficult by the depth of the recession we are now in, and the resulting shrinking of the tax take.
I’m sure Willis will be the first to say the net debt track doesn’t start coming down fast enough on these numbers. The trick to changing that will be to get the economy growing faster.
Which brings us to tax cuts and interest rates.
The good news is that the tax cuts are real and start in a couple of months. After years of fiscal drag lifting people higher up the tax brackets, the Government has started to give some back. The cuts aren’t massive, and there will need to be more in the years ahead, but they do give hard-working New Zealanders a bit of light at the end of the tunnel – and that’s important.
If I have one criticism, it’s that the independent earner tax credit really should be abolished rather than extended, with the savings reinvested in further lifting the bottom tax threshold. As much as possible, tax reductions should relate to people’s actual pay packet, not some esoteric extra credit that applies only to some people. It’s not well understood and often not claimed. It should go.
A salient point is that the tax cuts, alongside the rest of the Budget initiatives, won’t be inflationary, according to Treasury’s calculations. That’s because the overall “fiscal impulse” is negative. That’s important, not least because it puts the ball clearly back in the Reserve Bank governor’s court as to when to start reducing interest rates. He can’t hide behind the Government when making his call, although that doesn’t mean he won’t try. Getting interest rates heading down again is crucial to our economic recovery.
The other big question this Budget partially answers is about the quality of Government spending. Ministers have been at pains to point out their investment in new frontline resources in health, education, law and order and infrastructure. That’s all good, but the shift of resources to those areas will need to be backed up with results. And there are other areas important to our economic future that are experiencing a bit of a freeze in this Budget, notably science and skills. These will need to be addressed in future.
The one significant blemish that may dog the Government is its inexplicable failure to make good on its cancer drugs promise. It seems weird that you can trumpet a massive $17b increase in health spending across three Budgets and yet not dedicate any of it to meeting the most public health pledge of your recent election campaign. Worryingly, it suggests a lack of political savvy in a crucial area of Government policy.
I’d bet this will be fixed in short order, as ministers have clearly missed the significance of this omission.
More generally, they’d be wise to have a close look at both the size and effectiveness of the dual (and duelling) bureaucracies created by Shane Reti’s predecessor Andrew Little. Health New Zealand is starting to sound in its excuses awfully similar to the previous health boards and the Ministry of Health, which is not surprising at all to those of us who predicted no substantive changes with the reforms.
All in all then, a solid first Budget from the new Government. Moving too fast for some and not fast enough for others, but that’s the nature of politics. It won’t change the economy overnight and that will be worrying for many people who are hanging on financially by their fingernails. But it offers positive signposts towards better times.
More than anything else, this Budget highlights how far off-track the country had got and how much work is required to get it back and growing again. If ministers can pull off this turnaround over the next three years, they will have done a good job. Clearly, though, it’s a marathon, not a sprint.
BNZ and Westpac now have the lowest six-month and one-year rates on the market.