The rocky political economy of the budget
Colin James's column for the Otago Daily Times for 15 May 2012
Budgets do four main things: fund what the government does (focus: the present), set the conditions for investment, particularly this decade to fix imbalances (focus: the future), redistribute income (focus: social cohesion) and massage public opinion (focus: politics). Next week's budget has big challenges on all fronts.
Funding has been top in pre-budget wrangling. The tepid global economy and Australia's lopsided economy plus unemployment and less consumer spending here have gnawed at tax revenue.
Whatever the longer-term outcome, the tax switch in 2010 has so far dug a hole in budget finances for longer than the government predicted. Hence once again near-zero net new spending, which squeezes departments and public services. The February projections for 2014-15 had by March slid by $1 billion, implying a commensurate cut in net new spending through 2013-14 and 2014-15.
Bill English now ties his obsessive drive to full funding of the budget by 2014-15 to the country's external debt, of which government debt is a relatively small part. The irony in this is that country debt was actually higher in 2005 as a proportion of GDP when National, with John Key as finance shadow minister, proposed to splash the surplus on large tax cuts.
National, like Labour, was fooled into believing the pre-2008 budget surpluses were real and not castles in the air, puffed up by a massive household debt binge.
That was the time to invest. Labour did set up the Cullen fund and did expand investment in roads. But it skimped on science and innovation. Mostly it spent the surpluses in redistribution through handouts and public services -- spectacularly so in making student loans interest-free, which, curiously for Labour, favoured better-off families whose offspring are more likely to go into the expensive forms of tertiary education.
English has de-emphasised redistribution and lifted investment in roads and broadband and, he would say, has improved conditions for business investment through tax and regulatory changes (though business's response has been less than stunning). From here on, judged by his rhetoric so far, additional new public investment (irrigation dams, digitising classrooms) will be funded by disinvesting -- in state-owned enterprises. He has continued Labour's skimping on science and innovation for which near-zero net new spending doesn't suggest a Damascene conversion.
English would claim that by constraining public spending his first three budgets contributed to rebalancing the economy from domestic-and-debt-driven to exports-and-earnings-driven. Household dissaving, which reached dangerous levels under Labour, declined. Exports lifted, pushed by a commodity price boom and booming Australia. But through this year the balance has been shifting back: house prices rising, retail up a bit, household debt up, exports slipping.
This may be temporary but if global uncertainties persist the rebalancing may not resume soon. That may drive English to do the rebalancing more on the push side -- cutting public spending -- than the pull side -- sales to foreigners.
English has so far looked to contain public spending less through austerity than through more inventive delivery of public services. That is the "better public services" programme which, if actually backed by ministers, is far broader than their energy-diverting March announcement of an old-fashioned merger of four departments into the Ministry of Business, Innovation and Enterprise (known around Wellington as Moby Dick) and a narrow range of "results" and "goals".
But there is a limit to how much "better" delivery will compensate for anaemic revenue flows. There are plenty of promising ideas in the heads of public servants at many levels if chief executives work out how to make use of them. But that will take time.
If the "better" comes through too slowly and English keeps pushing his sinking lid down on the public service with well-below-inflation new spending, that will cut social services and income maintenance -- that is, will cut redistribution. The welfare reforms announced this month aim to maintain income by promoting work but will take time and need far more public investment than he has allowed.
Add in the government's determination to reduce wage protections which are a form of redistribution, from owners to workers, and were a core element of the 1930s-80s welfare state.
At some point this risks driving a turn to populism or radicalism of the right, as in Greece and France this month and the United States Tea Party, or left, as in Greece, or of a new type of new-generation party, for example, Germany's anti-copyright, pro-transparency, pro-basic-income Pirates, now polling 10-12 per cent and threatening the Greens.
So far those phenomena are muted here. How long they will stay muted will depend to a large extent on the politics and policies of fiscal settings. Which makes next week's budget political economy writ large.