Yesterday’s Budget showed that the politics of the coalition are becoming an economic problem.
The artwork and the packaging called it “the Growth Budget”, but perhaps realising that it didn’t quite live up to that claim, Finance Minister Nicola Willis attempted to rename it the “No BS Budget” on Wednesday.
That was a more accurate description.
The big headline was that the Government had saved itself $7.6 billion over the next four years by restricting the criteria for public sector pay equity awards.
Along with the $1.3 billion new spending allowance, that meant Willis had around $ 3.6 billion available to spend over the next 12 months.
The biggest single new policy was “Investment Boost”, which will allow businesses to deduct 20 per cent of the cost of a new asset on top of depreciation in the year the asset is purchased.
The policy is expected to cost an average of $1.7 billion per year in reduced revenue across the forecast period.
Treasury and Inland Revenue estimate it will improve economic growth, lifting New Zealand’s GDP by 1 per cent, wages by 1.5 per cent and capital stock by 1.6 per cent over the next 20 years, with around half of these gains expected in the first five years.
Treasury Secretary Iain Rennie, in a speech in February, argued that New Zealand businesses ‘ spending on R&D was low compared to our peers, and that was one of the reasons for our low productivity.
We could do better at commercialising new inventions, he said.
“Additionally, New Zealand firms on average tend to be slow to adopt new ideas and technologies from overseas.
“The challenge for policy is working out how best to multiply, broaden, and deepen those pockets of innovation.”
It seems that “Investment Boost” was stacked up against cutting the corporate tax rate, which both Willis and Prime Minister Christopher Luxon suggested the Government was looking at back in February.
However, Rennie obviously won the day with the proposal to allow a 20 per cent deduction, and Willis was a convert.
“This is a far more effective growth-enhancing policy than just a reduction in the corporate tax rate,” she said at the Budget media briefing.
“Officials say that this rewards the activity you want to see rather than rewarding past profits; it rewards investment and the assets that will drive growth.”
In his press statement headed “Lifting Economic Growth”, once the Prime Minister had got past “Investment Boost”, hr was left repeating mostly already announced spending moves in infrastructure and attracting foreign investment.
So much for the “Growth Budget”.
Most of the rest of the money saved by the pay equity move, along with the operating allowance, has been spent on health.
Overall spending is forecast to be up by 5.7 per cent or $1.8 billion.
From then on, Willis has been dependent on horse trading within the coalition to fund new initiatives.
The ideological incompatibility of her coalition partners was evident in a number of moves.
New Zealand First got $200 million for a tagged contingency of $200 million over four years for co-investment in new gas fields.
Resources Minister Shane Jones said the structure of investments was still being worked through, but this signalled a willingness, subject to Cabinet consideration, for the Crown to take a commercial stake of up to 10-15 per cent in new gas field developments that fed the domestic market to address sovereign risk.
Jones has been on about this since the beginning of last year; that potential gas drillers have baulked at coming to New Zealand because of a fear that a subsequent Labour-led Government could cancel their licenses, a worse-case scenario fear inspired by the Ardern Government’s 2017 refusal to issue any more offshore drilling licenses. (This has been rewritten to make it clear the Ardern Government did not cancel any existing licences, it only refused to issue any more.)
A Crown ownership stake might provide that assurance, even though at the same time it might have raised (unwelcome) memories of Sir Robert Muldoon, Think Big and Petrocorp.
It was also a surprising addition considering that the Fiscal Strategy Report issued with the Budget said the Government was looking at ways to improve its balance sheet, including “a review of the Crown’s ownership purpose for commercial entities.”
But if the gas-field move was a nod to New Zealand First and its hankering for the days of Muldoon, the right in the form of ACT got a concession on private schools.
Associate Education Minister David Seymour said the Budget would invest $15.7 million over four years to increase the subsidy available for independent schools. This increased the yearly funding for independent schools by 11 per cent, from $41.6 million to $46.2 million.
“Alongside an increase in total funding, I am making changes so that funding for independent school subsidies will automatically be considered annually to accommodate roll growth,” he said.
“This will mean independent school funding increases will work the same way as any other school.”
Willis imposed a tough fiscal framework on this Budget.
The upshot is that she has managed to preserve the prospect of the new deficit measure, OBEGALx, scraping into surplus by $200 million in 2028/29. That is down from the half-yearly forecast from last December, when the surplus in 28/29 was expected to be $1.9 billion.
However, Willis can blame President Trump for the global market uncertainty that has rocked markets since then and played havoc with economic forecasts.
The bigger issue is what the Government does after 2029.
As she promised, Willis produced a series of scenarios showing how various combinations of operational and capital spending might play out until 2039.
Only one scenario culminates with Government debt under its target of 40 per cent of GDP in 2039 and that more or less freezes the operating allowance at $2.4 billion by allowing it to rise by only three per cent a year and a capital allowance of $3.625 billion growing also growing by only three per cent a year.
Superannuation costs are not included in the capital allowance (because they are not discretionary but are part of the ultimate OBEGAL and, therefore, debt.
But Willis’s scenarios assumed no change to super because the Government has not agreed to any change.
It can’t because New Zealand First is ardently opposed to change.
Willis wants change.
“I think what the scenarios show you quite clearly is that a world in which spending continues to increase at the rate it did under the last government is a world in which New Zealand is signing up to perpetual debt and deficits, and it would be a terrible burden for my kids and everyone’s kids,” she said when asked about the lack of any change to super.
In the meantime, the only thing the Government can do is keep cutting costs.
“The reason why we need to be careful about what we’re spending now is because we know costs in other areas for government are going to increase dramatically in the next few years,” she said.
“And so we need to get into the habit of finding areas where we’re not getting maximum bang for buck and redeploying that money to the things that we all want to see.
“More investment in health, more investment in education, more infrastructure. It’s going to require ongoing discipline.”
But it is clear that the Government (and Treasury) will continue to hammer this theme; that the eventual costs of super will suffocate spending in most other areas unless they are addressed.
There was a pattern of spending cuts in this Budget which were able to be portrayed in a sort of positive light.
Default KiwiSaver rates for employers and employees would go to 3.5 per cent next year and four per cent the following, but at the same time, the Government contribution rate would drop from 50 cents for each dollar to 25 cents.
Unemployed teenagers aged under 20 will not automatically be able to go on to a jobseeker benefit, but instead will have to rely on their parents.
“I think parents are going to welcome that policy, because I have met with the parents of young people who say to me, what am I meant to do to get my son off the couch playing PlayStation all day when the Government just gives him a welfare check? How can I motivate him to get a job?” said Willis.
There were also hints of politics in an $18 million cut to Radio New Zealand’s funding over four years headed “Investing in Local Journalism” (because of an allocation of $6.4 million over four years to cover existing court and local democracy reporting.)
POLITIK understands tbhis was driven by ACT Ministers who have little love for RNZ.
It was hardly a king hit to boost growth but it was a careful Budget, paving the way for more fiscal restraint and then a debate on how to go forward and keep debt at around 40 per cent of GDP at the same time.
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