The NZ Initiative's Bryce Wilkinson says Steven Joyce's Budget falls short of what's required, but is vastly better than many other election-year budgets from the last two decades

By Bryce Wilkinson*

Election year budgets are when politicians massage the voters with their own money. 

Massage can ready a ball player, ballerina or boxer for action, or induce blissful passivity. So which is Budget 2017? 

Early this year The New Zealand Initiative published a manifesto for government action. This article assesses the Budget against that yardstick. Our Manifesto 2017 acknowledged the Key Government’s “incremental radicalism”. It acknowledged the political constraints on a faster pace of change. 

It also expressed our frustration there was not faster, bolder action. Too many people are getting a raw deal. Far too many people have low or no incomes. Far too many have inadequate housing and education. 

The further ahead one looks, the greater the fiscal challenge. Our 2014 report, Guarding the Public Purse, took a long, hard look at the fiscal implications of our ageing population. Rising health and superannuation spending is set to turn fiscal surpluses into deficits by the 2030s, if not earlier if nothing much is done. 

Economic growth 

Faster income growth per capita would ease the fiscal pressures. Our report The Case for Economic Growth, also explained this. 

Certainly, Budget 2017 plausibly anticipates solid growth in employment and output. But it is productivity growth that makes things more affordable. It is our Achilles heel. Our Productivity Commission reports that our labour productivity growth was the 4th lowest in the OECD between 1995 and 2014. 

Faster productivity growth can’t be expected if nothing much changes. Back in 2009, the government’s goal was to close the income gap with Australia by 2025. The reports of the 2025 Taskforce explained that there was no silver bullet. A much more disciplined approach to spending and regulation was required across a broad front. All that seems long forgotten. There is no current manifest will to close the gap with Australia, or even to do much better. 

Even under a ‘don’t rock the boat’ approach, materially lower tax rates would help. But this budget does not lower tax rates. Instead it raises tax thresholds. High income earners will pay less tax on the first $22,000 they earn. But they still pay 30% or 33% on the last dollar they earn. That does not increase their incentives to work harder and smarter or reduce tax avoidance. 

Nor are the threshold increases meaningful as a tax cut. On Treasury’s forecasts, tax receipts will increase by 28% between the fiscal years ended 2016 and 2021. The consumer price index is forecast to rise by 10-11% in the same period. That’s not a tax cut.

The spending story is somewhat better news. Treasury forecasts core Crown operating spending to grow more slowly than GDP through to 2021. This is better news for taxpayers because spending is the best measure of today’s tax burden. (If the budget is in deficit, current tax receipts understate the burden on taxpayers of current spending. The opposite applies when the budget is in surplus.) 

It is only ‘somewhat better’ because the storm clouds of the demographic ageing problem ominously dominate the horizon. 

Much more decisive action is needed to lift productivity growth. 

Our Manifesto called for the abolition of the Overseas Investment Act, subjecting foreign and domestic investors to the same (non-discriminatory) rules and better protection for New Zealand’s property rights. It called for real commitment to regulatory reform more generally. Funding and regulatory mechanisms should be used to incentivise and free up local authorities to promote local economic development. This Budget falls well short against this yardstick. 

We also stressed the importance for economic development of quality spending on infrastructure. By ‘quality’, we meant cost-benefit justified. 

Budget 2017 puts all the emphasis on the quantum of infrastructure spending–$32.5 billion in the next four fiscal years. That is a big number. (Total annual core Crown operating spending is running at around $80 billion.) The bulk of this was already in the pipeline.

Of the $32.5 billion, $11.7 billion is on roads and rail transport. The rest is widely spread across health, education, housing, defence, justice, IRD and other sectors.

How defensible all this spending is in cost-benefit terms is an important question. Public debate would be better informed if Ministers insisted on obtaining and publishing good quality cost-benefit assessments of spending proposals.

Tackling the housing crisis

Our Manifesto called for abolishing all rural-urban boundaries and all height and density controls. We advocated amending the Resource Management Act to create a meaningful presumption in favour of development. We advocated the introduction of Community Development Districts. These suggestions were in addition to the ones already mentioned to free up and incentivise local authorities to be more welcoming of development. 

Budget 2017 does not advance policy much in these directions. It does plan to make more Crown land available for housing in Auckland. That should help although the quantum appears to be only enough for 1,500 houses. 

The big emphasis in Budget 2017 is on spending to build new houses and to subsidise accommodation costs for low income families. 

Neither is a free lunch. The increased subsidies should benefit those being subsidised–and landlords. The losers will be those who pay the taxes and those who pay unsubsidised rents. 

Nor is state house building likely to be an effective remedy to the housing crisis. The critical need is to reduce land-inclusive house construction costs so as to make the homes that people want to buy more affordable. State house building can only make houses more affordable if it subsidises the cost. But doing so crowds out private house construction. 

We urge the government to take more vigorous action to reduce land-inclusive house construction costs for private and state developers alike. 

Tackling educational underachievement 

Research shows that teacher quality is critical to educational achievement. It is frustrating to keep seeing media reports of a shortage of teachers competent in basic mathematics. Our Manifesto emphasised the importance of creating an attractive career structure for teachers, tailored professional development, and a much more systematic approach to assessing and rewarding performance. 

We are sure that the government recognises the importance of quality teaching. For example, a pre-budget announcement last week increased funding for a programme to attract outstanding university graduates and career changes into teaching in low decile schools. 

Yet much more needs to be done and Budget 2017’s educational focus is distracted by the need to increase spending on land and buildings and catering for increasing student numbers. But as other countries show, governments could let private providers provide more capital. That would free up government capital and distract it less from the task of getting better outcomes for the kids who need that most. 

More impetus across a broader front on improving teaching quality is needed. No one said this was easy. But it is a worthy task for a young and energetic new Minister of Education. 

Social policy 

We like the thrust of the government initiatives to help those most at risk of enduring unfulfilling lives in and out of welfare and prison. But there is a long way to go. Better education and housing are essentials, but not the only ones.

As the government recognises, better welfare support is needed. The problem of government silos needs to be overcome. Greater use of wider community agencies can help. We support the concept of social bonds. Again faster progress is needed.

Better pathways and access to jobs for those at risk are also important. Providers need to be aware of employer needs. Regulations should make it easier, not harder, for employers to hire those who are only borderline employable. 

Our scorecard 

Scored against our Manifesto, Budget 2017 falls well short of a vigorous, energising massage. To be fair it is not the full picture. In general, the government is heading in many of the right directions. It would likely exhibit more focus, drive and urgency if the electorate was more supportive. Moreover, there are other yardsticks. Budget 2017 is vastly better than too many of the other election-year budgets we have seen in the last two decades.

*Bryce Wilkinson is a Senior Fellow at the NZ Initiative, which provides a fortnightly column for interest.co.nz.