NZ Budget 2015 - A Budget With Poverty At Its Heart
Budget Commentary from Scoop Editor Alastair Thompson
Poverty of imagination. Poverty of opportunity. Poverty of ambition. Nothing has changed, really, since 2014. The fiscal stratagem remains fixed. Surpluses at all costs. Then spending restraints remain and any "fiscal headroom" is to be applied to repaying debt until it is paid down to 20% of GDP.
In a world awash with Government deficits, our NZ Govt's net debt position (reserves less debt) fell in 2014-2015.
Anywhere else in the world that would mean we were already in surplus but not here.
The inflection point in the Crown's net worth occurred in 2012. The Government's Balance Sheet position has more than doubled since 2004 from a touch over $100 billion to well over $200 billion.
In a sense then today's budget is a tribute to economic narrow mindedness. The opportunity exists for the NZ Government to start spending now. And the fact that the Government is headlining this budget on rises in benefits is deeply ironic on multiple levels.
Announced in the second paragraph of his primary press statement (top of the pack in the media press kits) Prime Minister John Key's $25 increase in benefits (ahead of inflation) is a big headline item. The first increase outside inflation adjustments since 1972.
Key does not mention the fact that the previous National Government (of Bolger and Ruth Richardson) cut benefits significantly in 1991 by a far larger margin than they are now being restored.
But more importantly, this rise in benefits does not take place till April 2016.
In summary then:
We the people of NZ are getting richer. Personally and collectively. The economy is growing, we are no longer increasing our indebtedness and since 2004 our collective wealth has more than doubled.
We have weathered a global financial crisis, we have our economic credibility back, but we are not yet willing to trickle down anything to the poorest and most vulnerable in society. And we are talking about a group of people who have been waiting for an improvement in their circumstances since 1972.
That's two generations. Why?
Because by waiting till April next year Bill English and John Key get to deliver on their promise to get NZ back into surplus on the largely artificial OBEGAL (operating balance excluding gains and losses) basis. They are now forecasting a $176 million surplus for the coming financial year to June 30 2016 - which is roughly what it would cost to increase benefits now and not wait till April 2016.
Last year in my 15th budget editorial for Scoop I gave the government a bouquet for managing to get back to surplus. New Zealand's "Austerity Light" prescription to the twin challenges of Global Financial Crisis and Christchurch Earthquake had worked. And that was something worth recognising.
But it's getting silly now.
Jam tomorrow for the wealthy makes sense - and it is included in this budget - the promise of $1 billion in tax-cuts in 2017 which (surprise surprise) also happens to be Election Year.
But is Jam Tomorrow for the 25% of NZ's children who are in poverty still justifiable.
The language being used by Finance Minister Bill English in relation to the first benefits raise in 43 years is telling. The press releases and his speech emphasised the 43 year aspect of the decision.
Explaining it in response to a question from the media, English said they wanted to target the 60-80,000 families who were most vulnerable in society and after looking at various options concluded that raising the benefit levels themselves is the most effective means to achieve this.
This is of course advice which NGOs have been giving the Government for decades.
Asked by Radio New Zealand's Brent Edwards whether he knew how much benefits needed to be increased to restore them to pre-1991 compatibility Bill English didn't know, but observed out that the gap between benefits and both the minimum wage and the average wage is presently at the highest level it has ever been.
Clearly it is something he is very proud of. And justifiably so. Unquestionably this is an important moment in NZ political history and accompanied by the u-turn on the CGT announced on Monday and the Government's version of Kiwi Build seems to be designed to take wind out of opposition sails.
The fact that during the seven years of relative prosperity under the 5th Labour Government (elected in 1999) no benefit increases were funded is something that has created a deep sense of distress for a substantial cohort on the left of NZ Politics.
Therefore the fact the break in this drought has been delivered by a National Party Finance Minister may briefly be a little disruptive.
Whither the Wealth Effect
The background to this budget is an unprecedented Auckland house pricing explosion.
Many Auckland houses have earned substantially more over the past year than their occupants did. Former state houses in Pt Chev are now sitting on sections worth $800,000. The past 18 months have seen the largest wealth growth event in NZ history, and one which even by international standards must be a standout.
Which begs the question what effect will this have on consumption and economic growth? And if it means the economy is set to actually grow faster than projections, does that mean this extended period of "Austerity Light" is unnecessary.
One might expect that the Budget Economic and Fiscal Update would contain a commentary on the "Wealth Effect". With budget documentation for Africa - tracking down the relevant information would be a mission and so instead I took the route of looking for a Treasury boffin to point out the good stuff.
It turns out that while the Reserve Bank has been talking and thinking about the "Wealth Effect" quite a bit lately - i.e. the willingness of people to increase their consumption if they feel wealthier - Treasury hasn't been that focused on the issue.
All of which may explain why the Government's response to the housing crisis - which they spent most of this year so far denying the existence of - has appeared so rushed and ill-disciplined.
It is worth recapping the past few weeks of economic news - which have been unusually eventful and serve as the background to today's events.
Last week the NZ Reserve Bank Governor Graham Wheeler had had enough of the rampant out of control Auckland houe price inflation. Citing bubbles and risks to financial stability he announced 30% LVRs (Loan Value Rations) for loans on investment properties in Auckland.
It would appear that behind the scenes much has been going on.
On Sunday the government announced a change in tax law to create a bright-line test for interpreting capital gain made over a 2 year period on a house. Capital gain will now be interpreted as taxable income regardless of whether a purchaser has an intention to resell the property on purchase.
The two announcements - and their timing on the eve of the budget - is very unusual.
Yesterday the three house price crisis interventions became three when a budget leak occurred as a result of a slip up at MBIE. The Government has now announced details of its plan to use 460 hectares of Auckland Crown Owned land to build houses and finally directly address the supply side housing issue.
The policy - under which the land purchase price will not be paid until the property is sold to its final owner - is different but strikingly similar to Labour's Kiwi Build policy which was dismissed by the National Party during the recent election.
The forecasts in this budget were finalised in April. And looking at a sheet of graphs which one of the Treasury Analysts appeared to have at their finger tips I discerned that the latest house price data used in Treasury's economic model was December 2014 Quotable Value Data.
The Analyst stressed that in the Treasury model income effects - i.e. wage inflation - is much more significant in driving consumption than wealth effects.
Page 14 in the Economic Outlook contains a brief mention of the wealth effect.
"National house price inflation is expected to increase throughout 2015, supported by rapid house price inflation in Auckland. The resultant wealth effect is expected to provide additional support to household expenditure growth."
However this effect is not expected to be large because, (from the Budget Speech) "…employment and income growth slows…" over the forecast period.
On page 18 in the Economic Outlook Treasury forecasts that Private Consumption is forecast to grow by 3.9% in the March 2016 year and then slow as wage rises moderate and interest rates rise. The document states that this will contribute 2.3% or roughly half of all GDP growth over this period.
All of which seemed to me like a rather modest impact of the biggest wealth creation event in NZ history. Which begs the question has the Government under-estimated the impact of the "Wealth Effect"?
From - admittedly a rather cursory - glance inside Treasury's model it has not taken account of the extraordinary events in Auckland Property of the past five months.
And if the "Wealth Effect" on growth has been underestimated then is the continuation of "Austerity Light" for another 9 months - at least so far as beneficiaries are concerned - unnecessary.
In other words. What are we waiting for? Well done Bill English, you fixed the NZ economy. But how about now we alleviate some of the pain.