OnPoint: Budget 2009: “Aww, shit.” (Final Update)
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<I>All the real work is done by the reduced operating allowance. It's impact will be felt more and more as time goes on.</I>
Yup. particularly in health and education, which combined need an extra $1.25 billion a year just to stay level.
This will mean the 90's sinking cap all over again, the deferral of maintenance, the underfunding of public services for a decade. But doing it this way means they don't have to announce they're doing it.
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Standard & Poors delivered their verdict at about 4 p.m. What time did Bill English sit down? Fast readers, eh?
Many years ago (pre-internet) I had a temp job as a lowly messenger/clerk in a London financial company, and found that it's the people at the bottom who get to know the secrets (being too low to bother with). I suspect my spiritual successor was photocopying and shredding copies of our Budget well before we heard about it. I hope (s)he made a few bucks.
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simon g: English sat down with S&P just the other day, I imagine they already got the details straight from the horse's mouth, and they just delayed the announcement until he had delivered it to the nation.
All in all, am I allowed to say that I feared worse from this budget? And Keith, compelling and timely commentary as per usual.
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Agreeing with both your paragraphs there, Gio.
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I hope everyone pauses and has a little grateful prayer of thanks to Michael Cullen, whose refusal to feed the bubble with tax cuts is the only thing between us and Iceland.
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I hope everyone pauses and has a little grateful prayer of thanks to Michael Cullen, whose refusal to feed the bubble with tax cuts is the only thing between us and Iceland.
I won't.
After nine years of consistently refusing to implement any kind of capital gains tax. Which would have damped house prices, meaning more money spent in other areas, and encouraged money to flow into the productive sectors of the economy.
He also did nothing or dampen private sector borrowing on housing and imported consumer items (funded largely by paper gains in the housing market), fueling one of the largest current account deficits in the world. Of course, while the people were spending, the people were happy, so it wasn't something he wanted to interfere with.
Things could be a lot worse, but they could be a lot better.
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After nine years of consistently refusing to implement any kind of capital gains tax. Which would have damped house prices, meaning more money spent in other areas, and encouraged money to flow into the productive sectors of the economy.
He did try, but even the mention of it got shouted down by all in sundry.
I hope everyone pauses and has a little grateful prayer of thanks to Michael Cullen, whose refusal to feed the bubble with tax cuts is the only thing between us and Iceland.
Tom you are right, could you imagine how much of an uber hole we would be in if Don Brash et al had got in in 2005?
I also agree with Gio and Russell, it isn't quite as bad as I thought, BUT I think the real paydirt will come next year if things continue to go south. We could be talking one term Government there....
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The counter argument to not borrowing to invest, is that borrowing to invest is the key driver of the private sector. Leverage is entirely where it's at -- ask Graeme Hart or any property investor. Judgement is a thorny thing though.
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Agreeing with both your paragraphs there, Gio.
And you know how much I love giving credit to Tories, right? My teeth were gritted so hard I've since had to be booked in for maxillo-facial surgery.
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He did try, but even the mention of it got shouted down by all in sundry.
My inner Machiavellian thinks that the solution would be to actively encourage subprime lenders to set up shop here, then sit back and watch McMansionville collapse under its own weight.
Seriously though, removing tax benefits on suburban plots above a certain area (~250-300 sq m) would be a good start, as the US Democrats are proposing.
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The counter argument to not borrowing to invest, is that borrowing to invest is the key driver of the private sector. Leverage is entirely where it's at -- ask Graeme Hart or any property investor. Judgement is a thorny thing though.
Well put.
Same applies to PPPs. Govt can borrow at a lower rate than business. If it makes sense for business to borrow and invest in public infrastructure, why not for government?
Or, if business aren't leveraging, then they must be hoping for a better return than the govt debt, in which case govt might as well be the direct investor.
The only winner on PPPs is lawyers and deal brokers. Just look at something like the deal maker sections of Australian Legal Business over the last few years. PPP deals are part of the M&A gravy.
BTW: Maybe Bill has in mind that changing the tax distribution is not tax cuts. So he can bring down the top rate, and bring in/up something else?
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Last I looked, DPF was being the good soldier, and his crazier correspondents were declaring war.
Some erstwhile Actoids on my Facebook are incandescent. Given no tax sweeties, and Garret's wanting to stop them packin' heat, we may see cleavage before the next election. (phnaar, phnaar)
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the fiscal hawk in me is quite satisfied with the depth of cuts in this Budget
I don't buy that fiscal stringency is all about government cashflow. I think it's more about not stoking bubbles and baling us out of recessions.
Right now, we're in a *deep* recession. Inflation isn't going to be a problem however many dollars we print (within reason).
Now, if Cullen had taxed gains from house price inflation over the last 9 years, we'd have a *huge* surplus and would be able to easily switch to spending. But the electors wouldn't accept that unearned dollars should be taxed like earned income.
At the end of the day, unemployment isn't efficient. Having people doing nothing doesn't make (most of) us richer or happier. The indicator of whether fiscal policy is right should be whether jobs are being created or destroyed.
The downside of this, of course, is that if we borrow now, there'll be tax and interest bills later which will probably fall on the wealthy. That's why National won't do it and why Labour should advocate for it.
It's a budget for Omaha (& Hawaii), not Mt Albert.
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Given no tax sweeties, and Garret's wanting to stop them packin' heat, we may see cleavage before the next election. (phnaar, phnaar)
The press release you linked to is from the Libertarianz. It's possibly not the most authoritative source for what ACT and Garrett are doing.
But you're right about the tension between the free-market and libertarian elements of ACT and the law and order ones. ACT caucus meetings must be fun.
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He did try, but even the mention of it got shouted down by all in sundry.
He did not try.
In 2005 he described a capital gains tax on non-family homes as a "potty" idea. He was strongly opposed, and shot it down every time the Greens discussed it with him. He refused to let the Reserve Bank and Treasury even investigate a capital gains tax in their consideration of instruments to damp the housing market.
In any case, those shouters were exactly the ones who needed their arses kicked.
Their desire for a housing and sharemarket bubble-economy meant that the Reserve Bank kept interest rates high to dampen inflation - and as a result we had a high dollar that hurt exporters, and interest rates that hurt capital investment.
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Come on George - don't you remember the near hysterical pitch the calls for tax cuts got to just last year? Any attempt to apply a CGT would only have a mountain of invective for "yet another tax when six pack joe Kiwi's want a tax cut."
Politics is about the possible you know.
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Tom you are right, could you imagine how much of an uber hole we would be in if Don Brash et al had got in in 2005?
The Treasury 2005, started to think huge operating surpluses. Labour and National adopted this thinking going into the election 2005, one promising big spending and the other tax cuts. It's everyone's fault we find ourselves in this mess. The budget is fairly mild compared to what is likely to come in the future, unless the world returns to a rapid recovery.
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Come on George - don't you remember the near hysterical pitch the calls for tax cuts got to just last year?
I wasn't in the country last year. I can only imagine that it was horrible to experience.
Politics is about the possible you know.
Well we will never know if it was possible in 2000, 2001, 2002, 2003, 2004, or 2005. Because he never tried, and never even put the option forward.
After that point I'll give you that it would have been a large electoral liability.
By 2008 it was well and truly too late. The time to put a capital gains tax is not at the tail end of a property boom but at the start. Doing so then would indeed have caused a terrible reaction, and would have been blamed for the inevitable collapse of the market.
But having high interest rates and a stagnating non-productive bubble economy at risk of imminent subsidance is hardly a recipe for good times either. Having houses further out of the reach of the ordinary worker doesn't make for happy voters, who feel that they're being cheated out of ownership and happiness.
So yes, argue that it didn't happen because it was electorally too costly. That's an honest argument. But don't say that it was even put on the table, because it wasn't.
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All the real work is done by the reduced operating allowance. It's impact will be felt more and more as time goes on.
/me climbs onto hobby horse
Which is why, as a country we have to ween ourselves off an unnecessary addiction to Microsoft products. $100s millions being siphoned for for no good reason and yes, that compounds.
I thought this was an excellent interview on the issue:
http://podcast.radionz.co.nz/ntn/ntn-20090527-0908-Government_reliance_on_Microsoft-048.mp3
On a slightly different tack, I heard John Key speak on Tuesday evening and I have to say, I was somewhat reassured. On the budget he talked about the need to keep spending enough but not piss of the credit rating agencies. On foreign policy he was excellent. Now that Obama is da man, we can be anti-nuke and pro-Am at the same time.
This was side a JK I had not seen in public and it was good.
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The press release you linked to is from the Libertarianz.
Ooops, didn't notice.
I feel all dirty now.
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Ooops, didn't notice.
I feel all dirty now.
Thank God. I thought you'd become one of Them.
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Only now do National recognise the wisdom of paying down the govt debt. Far cry from 2005-2007 when they trumpeted the OBERAC surpluses as a sign of government greed.
Am I reading the budget financial statements right? National budget for a $1billion increase in spending on Govt personnel compared with the equivalent period forecast from the 2008 Labour budget? (a $1.5 billion increase over 2008)
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I do agree that capital gains should be taxed, however, with the current government I could see them saying "well we can decrease our income tax now, lets increase GST too". The downside to that being, that if we had a capital gains tax now and income tax was lower, we would be even more in the crap when the housing market dried up. Also as consumer spending drops there is less revenue coming in from there. This is exactly what happened in Ireland. A good example of how increasing indirect taxes are not always the best method
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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.
Fascinating and very useful analysis Keith. I should have listened to what you were saying more closely in the lockup.
My view is that this is the least credible part of the numbers produced today - and for the reasons you give above some of the other numbers are a bit dodgy also.
For the new spending track to be kept to there will be increasing amounts of cuts required to other parts of core Govt expenditure.
Organic growth in health and social welfare will soak up the 1.1 billion allowance next year without it even touching the sides. This year the increase in spending is already $5 billion.
A $1.1 billion increase is only an increase of 1.7% on Govt spending. Health and Education have traditionally grown at 6-8%. Social Welfare will of course grow in the event more people find themselves unemployed.
The simple truth is the only ways out of this mess fiscally speaking will be to restore the country to growth or to change the way we think about fiscality.
Still its amusing that Standard and Poors found it nice and compelling.
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Same applies to PPPs. Govt can borrow at a lower rate than business. If it makes sense for business to borrow and invest in public infrastructure, why not for government?
Because voters might look at only the debt side of the balance sheet, without seeing the productive asset that debt has bought.
And that's all there is to it. PPPs are just an expensive way for the government to pretend its not borrowing.
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