OnPoint by Keith Ng

141

Budget 2009: “Aww, shit.” (Final Update)

It’s a simple, simple Budget. It’s only goal was bringing down the debt track. This is the scary-o-graph showing the debt track that the government was heading towards, with the alternative line showing the impact of the policy changes:

The changes are expected to bring down debt by more than 30% of GDP by 2023. That’s about $88b.

There are no magic beans here. To get $88b less debt, you have to squeeze $88b out of the books (well, $88b minus interest). So which $88b got squeezed?

The bulk of it comes from changes to the future spending allocation, which was reduced from $1.75b to $1.1b. $650m doesn’t sound like much, but it doesn’t just add up – it compounds.

This allocation is an addition to the sum the government can spend each year. Which means that every time another $650m is added, that’s another $650m for every year after that. Each $650m stack up on top of the previous one.

So, if it’s a $650m in the first year, it’ll be $1.3b in the second year, $1.95b in the third year, and so on. And if you’re counting the total spent, you’re counting the entire stacks. So, for the three years, it’ll be $650m + $1.3b + $1.95b, and so on.

In 2011/12, the reduction in spending will be worth about as much as stopping contribution to the NZ Super Fund. By 2022/23, it’ll amount to a $9.8b reduction in spending a year.

To put it into perspective, the Super Fund contribution will be worth $2b that year, and the tax cuts that have been deferred would cost $840m.

This graph shows how much of the reduction in debt comes from this "reduction in future operating allowance" line (as a % of GDP):

So, how has National managed to reduce future debt? By cutting a fuckload of future government spending.

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Update 1: So what about the tax cuts, then?

Technically, they’ve been deferred. Deferred till when? The government is not expected to be back in black until 2018. So, here are the hints that we got. When I asked English whether they’ll reconsider the tax cuts while the government is running a deficit, he said that the government will consider them if the growth track gets better (which implies that yes, they will consider them while the government is in deficit, as long as they’re moving out of it). When Bernard Hickey asked if English seriously expects to be able to reinstate tax cuts before the next election, English said no.

So it sounds like it’ll be reconsidered towards the end of the fiscal recovery period, which is a decade away, give or take. With two elections between now and then, the tax cuts as promised in the 2008 election are as good as dead.

Fiscal hawk says: YUSSS! In yo face!

Meanwhile, National are still reaffirming their commitment to aim towards a top rate of 30%. It all sounds a bit silly, given that it’ll take them close to a decade to even glad-eye a top rate of 37%.

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Update 2: Less money for Super Fund = Less money for Super

The other $19.5b elephant in the room is stopping contributions to the NZ Super Fund while the government is in deficit – i.e. the next 11 years.

The argument that they’re running is that it doesn’t make sense to borrow money to save, since you have to pay interest to borrow. That sounds simple enough – except that it’s not, since you get interest on your savings, too.

Rod Oram suggested that the long-term returns on the NZSF will be actually be greater than the cost of borrowing – i.e. that borrowing to invest in the NZSF *is* profitable. One argument in support of that is that the government is a very safe borrower, and thus can borrow at a lower rate than your average investor. So while borrowing to invest is a bad idea for individuals, it can work for a government over the long-term.

When I ventured to the other side of the lunch table, Bernard Hickey presented the opposite case, saying that the return on investment will never match the market interest rates, and that the whole NZSF should be put into debt repayment instead.

Gah! A comparison of the rate of return on the NZSF vs the cost of crown borrowing would be most enlightening, gentlemen.

But regardless of which way is better, there’s no getting around the fact that less money deposited means less money can be withdrawn. Here is where English gets super-shifty:

Contributions to, and the size of, the Fund do not affect future New Zealand Superannuation entitlements or payments. The size of the contributions and the Fund merely affect how much future New Zealand Superannuation payments will be paid by the Fund, instead of from future revenue.”



It’s crazy-talk.

He’s saying that it’s okay that there’s less money, because we can afford Super payments as long as future governments pay for it. Except that the NZSF exists precisely because future governments can’t afford to.

Of course, English can’t bind future governments, so he (and future governments) can go on saying that they’re committed to something that they’re not paying for – and continue to not pay for it – right up until they have to fork out the dough.

There’s no getting around the fact that cutting NZSF contributions cuts the ability of future governments to pay for Super. This means that Super entitlements are more likely to be reduced.

Of course, loading future governments with debt also cuts their ability to pay for Super. One might be slightly better than the other, but both mean less money for the future, and no amount of book-jiggling can change the fact that less money means less money.

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On one hand, the fiscal hawk in me is quite satisfied with the depth of cuts in this Budget. Given the current economic outlook, there’s no way around the fact that very deep cuts are needed. Things like the $2b cuts by the razor gang, and even the “deferral” of the tax cuts are just smokescreens.

All the real work is done by the reduced operating allowance. It’s impact will be felt more and more as time goes on. Each and every subsequent Budget will have to make do with an increasingly inadequate pool. And at the end of it, there’ll be a big-ass shortfall in the NZSF.

This is like the opposite of pulling teeth.

But to be fair, a) it has to be squeezed from somewhere, somehow, and slow is less traumatic than fast; and b) it’s not

the end of the world – government expenditure will go up for a few years because of the recession (and more people are made unemployed, etc.), then it’ll be whittled down as the cuts start to bite, but it will end up at current levels by the end of the projection period.

There’s undoubtedly an ideological element at work here, too. When asked to elaborate on the “structural problems” in the New Zealand economy, English pointed to excessive government and household spending, as if the government, too, has been putting granite bench-tops on the mortgage. The idea that government spending is, in and of itself, a hindrance to the economy whiffs of a pretty strong ideological bent.

But hey, it’s a right-wing government that *had* to make some pretty steep trade-offs, and it chose to cut into medium- and long-term government spending. It's a perfectly valid trade-off to make.

Even cutting the Super Fund is a legitimate choice - but to cover it up with "cutting the money available for super won't affect your super" is just trying to weasel their way out of the consequences.

Bottom line: Things are bad. Making things less bad is possible, but there are consequences. Harden up.

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