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Concerns About Control Of Government Spending



The New Zealand Business Roundtable today expressed concern about the provision for $5.9 billion of new spending in the government's Budget Policy Statement and the new long-term target for spending of 35 percent of gross domestic product (GDP).

First, government spending already takes a much larger proportion of national income in New Zealand than in many better-performing economies such as Australia, the United States, Ireland and many of our Asian trading partners.

Second, the quality of much existing spending is poor, as the government is implicitly acknowledging with its criticisms of state- owned entities and the public service.

Third, the quality of the planned new spending is already in doubt. The two major announced changes - to student loans and to New Zealand superannuation - disproportionately benefit students from relatively well-off families and more wealthy superannuitants respectively.

Fourth, it is hard to reconcile big increases in government spending and no efforts to increase operating surpluses with the minister of finance's concern about New Zealand's large current account deficit and the accumulating indebtedness to the rest of the world. The large spending increases will put New Zealand's sovereign credit rating and interest rates further at risk.

Fifth, increases in spending have to be funded largely, if not entirely, from taxation. Taxes have to be higher, sooner or later, than would otherwise be necessary. The ratio of government expenditure to GDP is the best measure of the tax burden. The change in the long-term objective of this ratio from 30 to 35 percent of GDP implies an increase of almost 17 percent in the tax burden. Sharp increases in government spending that raise taxes without providing commensurate value in return are an obvious threat to wealth creation and the need for New Zealand to retain and attract talented people.

This will be third successive parliamentary term in which government spending has sharply increased, yet dissatisfaction with macroeconomic outcomes is widespread. There is no obvious reason why the latest round of spending increases will prove any more beneficial. The adverse impact on the export sector in particular of the last coalition government's $4.5 billion spending package risks being repeated.

While the Budget Policy Statement acknowledges the problem of funding superannuation in future years, it provides no guidance as to how this is to be resolved. Transferring part of the operating surplus to a separate superannuation fund does not address the issue. Unless tax revenues are increased in future or spending on benefits is reduced, the government's financial position is unchanged. The recent commitment to increase the level of superannuation benefits merely makes the problem more difficult.

The New Zealand Business Roundtable concluded that the Budget Policy Statement did little to clear up uncertainty in the business community as to how the government intends to promote economic growth and achieve its goal of 3 percent unemployment - no real improvement in the current 6 percent unemployment rate for the next four years is projected by the government. In preparing the budget and in other forthcoming decisions there is an urgent need for the government to address the inconsistencies between its policies and its stated goals.


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