OnPoint by Keith Ng


Spending "Cap" is Fiscal Anorexia

So, part of National's coalition agreement with ACT is to put in a "spending cap":

..core Crown operating spending, excluding finance costs, spending on the unemployment benefit, asset impairments and spending on natural disasters, will be subject to a spending limit.

Under this limit expenditure will grow no faster than the annual increase in the rate of population growth multiplied by the rate of inflation.

My friend Chye-Ching Huang points me to her thinktank's (based in the US) paper on Colorado, which between 1992 and 2005 capped revenue to inflation plus change in population. i.e. Exactly what National-ACT have agreed to do. It runs through what a complete and utter clusterfuck the programme was, but I'm especially fond of this turd:

At one point, from April 2001 to October 2002, funding got so low that the state suspended its requirement that school children be fully vaccinated against diphtheria, tetanus, and pertussis (whooping cough) because Colorado, unlike other states, could not afford to buy the vaccine.

This is a state with the same GDP per capita as Sweden, but which could not afford to vaccinate its children. That is perverted.

The formula is essentially fiscal anorexia:

"The [TABOR] formula... has an insidious effect where it shrinks government every year, year after year after year after year; it’s never small enough... That is not the best way to form public policy." - Brad Young, former Colorado state representative (R) and Chair of the Joint Budget Committee

But that's just the formula under normal circumstances. Through omission or ignorance, N-ACT's plan is much worse.

Remember the aging population? Treasury expects NZ Super costs to double in 10 years. The only way to lower this is to raise the retirement age/reduce entitlements very, very soon, or if we got rid of a lot of old people... somehow. Well, Key refuses to do the former, and we probably signed some stupid UN conventions against the latter. So, NZ Super costs are going to double. And if total government spending is capped, then where is the money going to come from?

Oh you know, education, health, stuff.

Putting this spending cap into Treasury's Fiscal Strategy Model, it shows that real per capita Core Crown expenditure (excluding NZ Super, finance costs, unemployment benefit, asset impairments and spending on natural disasters) will fall by 8.9% in 10 years.* To put that into perspective, that's roughly the Law & Order and Defence budgets combined, or a bit more than a third of the Health budget.

Check my numbers by all means, but with a budget that is explicitly fixed and exploding NZ Super costs, there's not much room for ambiguity. This is not a cap. It's not even a slow withering of the state. This is a substantive and perpetual cut.

How is it that Key can casually commit to this? Who the hell would swallow this satan-sandwich just to get John Banks in return?

This is the cynical part. He's doesn't actually have to swallow it. The law change will take place in two years, probably choosing the 2014 budget as the baseline, so there won't be any actual cuts till 2015, after the election. It probably won't be Key's problem by then, and possibly not National's. He even points out that future governments can abolish it if they want to. So, he's basically setting a completely unreasonable promise in place to force future governments to renege on it.

Also, Key is lying if he claims that Treasury supported the cap. Treasury supported *a* cap. The capping system that they recommended:

Consistent with the intent of the PFA, the level of the proposed cap would have been set by the current administration, rather than prescribed in a way that attempts to set the cap for future, yet-to-be-elected governments.

This is the very opposite of endorsing National-ACT's "one arbitrary cap, forever and ever, amen" approach. Governments do not get to dictate what future governments spend, even if it's all just a giant charade.

* Assumptions: Cap comes into force by 2014/15, population and economic growth tracks unchange, inflation at 2%. Before you say "but smaller government will macroeconomagically create growth", keep in mind that the cap is not pegged to growth, whereas NZS payments are, so higher growth will only make this cut deeper.

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