The Government has run out of bureaucratic capacity to undertake any more substantial reforms.
Finance Minister Grant Robertson conceded this yesterday and suggested it would influence the Budget on Thursday.
In other words, the Budget is unlikely to contain any new broad initiatives.
Instead it is likely to be a document which moves sums of money around largely within existing policy areas.
In that case, Robertson will be helped by Inland Revenue’s new computer system which makes it much simpler to adjust benefit or tax levels than previously.
When he held the traditional launch of the Budget cover yesterday he was happy to confirm some new spending.
“As we announced when we did the housing package, there will be an investment in Māori housing, and I do regard it as significant,” Robertson said.
And he said the funding for the Maori Health Authority would be confirmed in the Budget.
“We certainly talk about it,” he said.
“Obviously, that’s been announced and there needs to be funded.
“And so you’ll be able to see the level of funding associated with it.”
And there was a hint in Parliament yesterday that there may be more funding to alleviate childhood poverty.
Green MP Julie-Anne Genter asked Robertson whether the Government’s “so-called balanced fiscal approach” was insufficient to address child poverty?
“I do think the member and I would agree is that there is always more to do in terms of improving the wellbeing of our children,” he replied.
But what is likely to be missing on Thursday will be a big new initiative in any policy area.
And that is because the “big” departments are already flat out on a number of major reforms — the Resource Management Act replacements; the Freshwater reforms; the response to the Climate Change Commission; the Health reforms; the Immigration review; three waters reforms; the local government review and the future of work as well as big changes in education.
“Along with the focus on our three core areas of housing affordability, climate change and child wellbeing, we have a complete overhaul of the health system, a complete overhaul of our planning laws and a complete overhaul of the way we manage water,” said Robertson.
“Each of those projects is a very, very large project.
“If you put it alongside a review of immigration and a review of local government, we are pushing the public service here. “We’re going to work closely with them to make sure we can deliver.
“But there is only so much capacity.”
In Parliament yesterday Robertson was happy to brandish Westpac’s latest “Economic Overview” which is picking a moderate pickup in growth for the erst of the year.
“The bank’s economists note that New Zealand’s recovery is gaining traction, underpinned by continuing increases in household spending, lower than expected unemployment, stronger construction sector, and firmer activity in the manufacturing sector,” Robertson said.
“They expect economic activity will continue to strengthen over the year ahead, with a continued support from fiscal and monetary policy.
“However, Westpac warns that the economy is expected to take time to recover as vaccines are rolled out around the world and conditions are set to remain uneven across sectors. Global activity is on the mend, but the recovery is uneven there too.”
What Robertson didn’t refer to in the document were comments from Acting Chief Economist, Michael Gordon, about the Government’s own role in the economy.
“The Government is taking advantage of its outright majority to expand its role in the economy<” Gordon said.
“We’ve recently detailed the significant moves that it has made on the property market. That’s just one part of an agenda that includes employment relations, climate change, healthcare, resource management and immigration, with no doubt more to come.
“This direction of change won’t always sit easily with private industries that are drawing their own post-Covid lessons.”
Westpac’s economists say that a lesson from Covid-19 is that firms will look for greater flexibility in their workforce.
“Many manufacturers are likely to dip into the ‘gig’ market, which is expected to expand as people embrace digital technologies, and on-demand workforce models and platforms,” the report said.
“The increasing role of government in the economy will both complement and conflict with efforts by the sector to transform itself.
“Government’s commitments on climate change, for example, are likely to provide the certainty needed by manufacturers when investing in emissions friendly technology.
“By contrast, the push for workforce flexibility goes directly against the Government’s desire for greater security for workers and bargaining power, which could undermine the competitiveness of local manufacturing.”
Westpac points to the reality facing Robertson with his Budget on Thursday.
The big forces that will shape the economy over the next 12 months will not be found within its pages. Most are already in place or are being worked on in Government offices in the capital.
Robertson has consistently said that he wants this Budget to be seen as part of a package of three that he will deliver before the next election.
Speaking to an Auckland business audience last week, the Prime Minister, Jacinda Ardern defined those priorities as “keeping New Zealanders safe from COVID, accelerating the recovery and rebuild, and laying the foundations for the future by addressing long term challenges such as housing, climate change and child wellbeing.”
The Westpac report is suggesting that Government may have already started to get some wins on housing.
It says removing the deductibility of interest costs will dramatically lower the yield on rental properties and reduce the prices that investors will be willing to pay for houses.
That downwards pressure will be reinforced by the extension to the Bright-line test.
“Previously, we had expected house prices to rise by a further 10% by the end of 2021, with further moderate gains expected in the following years,” the report said.
“However, we now expect house prices to flatten off over the remainder of 2021.
“Looking further ahead, we expect longer term interest rates will creep higher over time in response to the firming in global activity.
“As that passes through to domestic borrowing rates, we are likely to see modest falls in house prices of around 3% to 4% per annum over 2022 and 2023.”
Robertson is calling this Budget a “recovery budget” but it might be more appropriate to call it the start of the “return to normality” budget.
