Peter Davis: A tale of two budgets, NZ and the US

President Joe Biden delivers the State of the Union address to a joint session of Congress in February. The US government could start to run out of money if Congress fails to raise the debt ceiling by the end of the month. Photo / Patrick Semansky, AP

OPINION:

It is interesting to contrast New Zealand and the United States as the two countries advance into the territory of annual Budget setting.

As Grant Robertson prepares the way for the Budget, he has carefully outlined the cuts needed in Government expenditure (government departments being required to find savings), the re-prioritisation of current patterns, the projects that have been cut (such as the public media initiative), and the areas for enhanced investment (such as defence).

And there are no tax cuts or, as far as one can tell, no new taxes.

Contrast this with the current unedifying drama being played out in the US where Democrats and Republicans are playing a game of bluff over the debt ceiling and whether it can be raised to avoid matching cuts in federal expenditure.

Notionally, only discretionary expenditure is at risk, but there are long-term federal programmes that are close to the stage of being unviable as their funds run out.

We can pat ourselves on the back as a well-run country that, by keeping debt low and drawing sufficient taxes to support our essential services, we do not risk such a spectacle of debt and budgetary default.

A good example of this is health, where New Zealand spends nearly half of what the US does on health (9.5 per cent versus 18 per cent as a proportion of GDP), and yet gets much better value out of it.

Yet, are we so different?

Treasury reminds us that, on current trajectories, New Zealand’s net debt will need to grow from 34 per cent of GDP in 2021 to 196 per cent in 2061 unless taxes rise from our current 30 per cent of GDP to 39 per cent.

A large part of this is the future requirements of pensions and health.

Arguably, the US has simply not faced the issue of raising the necessary revenue for its key functions and essential services, and instead has preferred to increase its debt to unsustainable levels.

Are we on track for that scenario?

Let’s take some examples from the recent history of this Government.

Capital Gains Tax (CGT). Every country in the OECD that we normally compare ourselves with – including the US, Canada, the UK and Australia - has a CGT. And yet we have ruled this out.

Unemployment Insurance. This is being ruled out. Yet, almost every country in the OCED has such a programme, except for Australia and New Zealand, and these two countries have among the lowest income replacement rates for workers losing their jobs.

So, in these two instances, we are forgoing key fiscal instruments that are used everywhere else.

What about homelessness? At least New Zealand does not have many deprived and disadvantaged people camping on the street as can be seen in many major cities in the US.

Yet, we have been housing many people in motels. This was happening under the previous government, and carries on under the current Government.

Until sufficient public housing is built, and more affordable housing becomes available, this will continue to be the case. So, what’s the solution?

For a start, some kind of consensus across the political spectrum on the support for key essential public services would help so that these services are not at risk due to the electoral swings and roundabouts of political change.

It is pretty clear that, for example, taxpayer funding and support for both public housing and healthcare surge when a left-of-centre government is in power, but wane when the pendulum swings the other way.

Would it be too much to ask that an independent body, like a “social RBNZ” with budgetary and policy oversight, could depict the key guardrails so that we minimise homelessness and glaring health need, regardless of who is in office?

The current Government has done something like that with legislative provisions for monitoring child poverty, but perhaps more could be done on other things that matter to our status as a decent society.

Peter Davis. Photo / Supplied

Another approach is to think of ways to fund essential services that do not require major tax increases or raising debt substantially.

For example, an expansion of contributory schemes could do the job.

The late Sir Michael Cullen introduced the Super Fund and KiwiSaver. Between them, there is a good chance that we can bolster our public pension scheme well into the future.

Another example is health.

We already have in place a contributory scheme that was founded a good half-century ago, ACC. It would not take much to extend this beyond injury and accident to other health issues.

While we may count ourselves fortunate in not having to deal with the unseemly debt drama currently being acted out in the US, we should acknowledge the foresight of our past leaders who have considered the fate of future generations rather than just the short-term political requirements of the next election.

Peter Davis is chair of The Helen Clark Foundation, an independent public policy think tank.