On Budget 2021’s Successes And Failures

In some realms of the centre-right, Budget 2021 has been portrayed as a “peak Labour” exercise in which the government has veered sharply leftwards in order to satisfy its political base. To the left though, it has seemed more like a wasted opportunity, a Budget that looks a lot like Barack Obama’ response to the Global Financial Crisis. Namely: Something full of the right gestures, but due to politicial timidity, those gestures have been on too small a scale to make a transformational difference. No, it isn’t a left wing bonanza. Finance Minister Grant Robertson has done just enough to prevent left-wing voters from abandoning ship in droves. Two years after the Welfare Expert Advisory Group (WEAG) told him what he should do for people in need, Robertson couldn’t postpone a response any longer

The benefit increases will deliver $20 more in the hand from July 1st and an eventual $32 to $55 a week increase from April 1st next year. This come on top of the $25 a week increase last year. Bizarrely, these pittances seem unduly generous to some people who never have to worry about the rent, or the cost of taking the kids to the doctor, or where the supermarket tally ends up. In reality, the benefit increases only seem generous when seen in the rear view mirror of National’s Mother of All Benefit Cuts in 1991.

Obviously, any benefit increases should be welcomed. But these increases will merely ease the sting of poverty, not remove it. That’s easy to demonstrate. After being fully phased in come April 1st 2022, the base rate of benefit support for a sole parent will be set at $434 a week before tax, and a sole parent on a supported living payment will receive $485. For the unemployed, the jobseeker rate for a couple with children will be $283 a week. For jobseekers without children, the single rate will be $315 a week, the jobseeker couple rate will be $268 and the supported living payment couple rate will be $305.

Compare those figures though, with the market rents in a decidedly non-fancy suburb like say, Newlands in Wellington. Currently, the average weekly rent in Newlands is $530, the median is $600, and the average bond is $843. With Newlands being where it is, there would also be major transport costs on top. Nationally, the median rent is $495 a week. Conclusion: these benefit increases will help, but they’re not a gamechanger.

The target audience

Who was this Budget really aimed at? In the week beforehand, Robertson tried to lower expectations with signals that this Budget would not be “transformational” but would instead be “prudent” and “balanced”. That is an old gambit. Lower the expectations and you increase the political bang for what you pull out of the hat. Except this time, it was also true. In the documents for Budget 2021 the word “balance” is almost a fetish word. It crops up everywhere, in a not-very subliminal play for the centre ground. Sensible non-desperate folk like balance a lot. But should Labour have risked more, and done more? Absolutely. In the two years since the WEAG report, many things – the cost of living, the job market, the rent burden - have gotten worse. There’s been a pandemic.

Could Labour afford to take on more debt and do more ? Absolutely (see below.) So…in reality, this isn’t really a Labour budget. The chosen point of “ balance” is the one held dear by the centre-right voters who voted Labour for the first time last October. Keeping them on side is what has set the boundaries for what Robertson has deemed possible. This Budget has been pitched to a middle class audience. Help the poor, but not excessively.

This same focus has been reflected in the criticisms emanating from National’s Judith Collins. As someone who owns a family home in Auckland, a commercial and residential property in Wellington and a residential property in Nelson, Collins wisely declined to make direct attacks on giving “ handouts” to those in need. Instead, she reminded National’s deserters that their fine new friends hadn’t done anything at all for them, this time. (So come home.) Nothing that is except continue to keep them safe from Covid over the past 14 months, and continue to steer the economy safely back to recovery. Also, doesn’t Collins realise that the beneficiaries will be spending their extra money in the retail firms owned by small business. This used to be a sector that National cared about. Before it sold its soul to the big battalions of Auckland commerce.

Increasing the benefits actually poses very few political risks for Labour. In the last pre-Budget Newshub-Reid Research poll, respondents were asked whether they supported lifting the amount paid to people on the dole. By a margin of nearly 54.8% to 34.5%, the public resoundingly said yes. The public is way out ahead of Labour. It seems to be only Labour’s bloc of neo-National voters that is serving as a handbrake.

The debt excuse

The economic recovery is still fragile. Don’t tell Act, but the economy still needs the stimulus of government spending. Pre-Budget, Robertson invoked a dodgy old rationale for his reluctance to do more. In his view, the government couldn’t afford to take on more debt and increase the burden on future generations. Huh? That line flatly contradicted last year’s messaging that the borrowing and debt are no cause for alarm. Why is this the case? Because the outlook for low interest rates (and for low interest payments on our debt ) is obligingly rosy until at least 2025, and we can reduce Crown debt via our normal rates of economic growth. The credit agencies agree. The notion of a looming debt burden likely to haunt the future generations of Kiwi battlers is a phantom, a centre-right bogey. Robertson invoked it to re-assure new neo-National fans that Labour relates to their fears, however ungrounded they are. Things won’t be going rampantly socialist, not on his watch.

Credit where due, though. Labour has managed the COVID-19 health crisis and the associated economic fall-out with such skill and competence ( so far) that the economic fundamentals look pretty good. (The blood freezes at how badly a National government would have handled the same tasks.) Look at the basics. The economy is being forecast to strengthen from late 2021 onwards, with growth peaking at 4.4 percent in June 2023. Unemployment is forecast to fall to 4.2 percent by 2024.

OK, that unemployment forecast is questionable.There is (a) hidden unemployment among the hordes of self-employed “contractors” (b) many gig economy jobs are precarious and poorly paid (c) the pandemic is still causing job losses disproportionately among women, Maori and Pasifika and (d) significant pockets of under-employment still exist. All that is true. Nine months ago though, the job market lhad ooked likely to be in much worse shape.

What the Budget does usefully reinforce is Labour ‘s escape plan from the lost decades in which the market economy zealots had systematically changed this country into a low wage economy, augmented by even cheaper foreign labour. The increases in the minimum wage have been one plank of the recovery. The immigration reset (which aims to force employers to hire, help train New Zealanders and pay them decent wages) is another plank. The re-centralising of health and education are also steps in the same direction.

While this process unfolds over the next decade, the outlook for the Budget deficit still gives the government room to move in the meantime, if it felt so inclined. The deficit is forecast to hit $15.1billion this year , to peak at $18.4 billion next year and is then expected to start falling sharply, to only $2.3 billion in 2024. Lastly, the crucial dent/borrowing figures also look pretty good. This is central to the government ability ( again, if it felt so inclined) to enact transformational change, at a faster clip. Net core Crown debt is expected to climb to 34% of GDP in 2021, hit a high point of 48% in 2023, and then drop back significantly to the low 40s and head further downwards thereafter.

While this is high for New Zealand – for the past 20 years we’ve been a weird global outlier when it comes to our low ratio of government spending on services- these are still entirely sustainable ratios, especially when compared to other developed countries. Germany (where government debt is almost 60 % of GDP) and Australia (55% of GDP) are already beyond the worst we are likely to face in the foreseeable. But do they care? No. As Australia’s Parliamentary Budget Office confirmed only last week. that country’s debt servicing costs are not particularly troubling “because the existing debt was borrowed at historically low interest rates”. Indeed, the PBO estimated that when the gross debt level hits its peak in Australia in 2030, annual interest repayments will still be lower as a percentage of GDP than they’ve been in 46 of the past 56 years.

Meaning: our own “crushing” debt burden is very much a right wing, ideological fantasy. We could readily borrow more, and do more for those in need, right now. All that seems to be standing in the way is the government’s aversion to political risk.

Health

It is pretty easy to make the case that this Budget is doing the right things, but on too miserly a scale. As always, Health spending is a litmus test. Overall health spending will increase by just over one billion dollars a year during the next four years. Given the levels of unmet need and the pressing need to attract and retain key staff within the public health system, this isn’t generous. Some $2.7 billion of the money will go into DHBs to run the existing system until DHBs are replaced.

To kick start the new Treaty-driven aspects of the health system, $98 million has been set aside to establish the Maori Health Authority, which will be able to hit the ground running. That’s because the MHA will also receive $127 million to enable it to start delivering healthcare and sickness prevention services directly to Maori. Those funds will be increased, over time.

The unnecessary thrift is easy to spot. In a final echo of Labour’s coalition with New Zealand First, the circa $50 million a year subsidy to enable Supergold card holders to get an annual GP visit and eye check has been scrapped. Pharmac will receive only an extra $200m a year. This is well short of the $400 million to one billion dollars extra that health advocates have been calling for to enable New Zealanders to access the new drug treatments readily available to patients in comparable countries. Overall, as the Council of Trade Unions pointed out, the increased in funding for health purchasing (which excludes vaccines and MIQ spending) falls well short of the amounts required to keep up with the estimated $1.3 billion of annual cost pressures.

This may be a minority view, but IMO the $810 million added investment in Kiwirail looks smart, and long-sighted. In the short term it will finance the purchase of new locomotives and wagons. It will also bankroll the rebuilding of skilled manufacturing and maintenance capacity at the Hillside workshops at Dunedin and at Rolleston in Christchurch. The investment will create 445 good, well paid jobs and apprenticeships, deliver some savings in foreign currency, and improve the country’s overall manufacturing and technical skills base. To date,New Zealand has to be one of the few countries still dragging its feet when it comes to recognising the regional development, transport and climate change advantages of rail. On this point as in so many others, it is David Seymour who is stuck in a time warp.

Education

In a maddening example of the readiness to short change the future, the spending on Early Childhood Education will rise by 1.2% but - as the CTU has pointed out – since inflation is forecast to be 2.4% over the relevant period, this amounts to a cut in real terms. Funds have been allocated to create the new unit that will (a) replace the school deciles system and (b) develop the planned curriculum changes, but this looks like it is being done on the cheap. , There is also a totally inadequate amount for special needs education.

What is really happening here? As in the health system, the education system is being (belatedly) rescued from the fragmented and de-centralised model foisted on us by the neo-liberal experiment of the 1980s. Among the first challenges arising from the re-centralisation process in education will be the embedding of the new curriculum changes. Among other things, this exercise aims to deliver a more diverse and more contestable range of narratives about this country’s history – as experienced by Maori and other ethnic communities, women as well as men, trade unionists as well as employers. Our kids will no longer be force-fed the version of history promoted by the white ( and largely male) victors of the colonisation process. That’s exciting. It sounds like it could be a good time to be at school. But again, is the funding for it going to be adequate ? .

Oh, and $5 billion is still being kept in reserve, for as yet unforeseen needs.

Ardern, and Biden

Finally, there is a useful way of evaluating the direction in which Labour is taking this country, and the pace at which it is proceeding. Here - as in the US under Joe Biden – one can ask the question - are these supposedly centre-left governments engaged in structural reform, or are they merely pumping more money through the existing channels, while just tweaking the policy settings? The spending tap can be turned off overnight, by a change of government. Sure, new structural programmes can be scrapped. But – if they’ve had a chance to become popular - there’s a higher political cost involved in doing so. Obamacare proved that point. It survived even Donald Trump.

At home here, the Winter Energy payments are extra spending. So is raising the benefit levels. In contrast, the Savage government carried out structural reform. So did Franklin D Roosevelt with his New Deal and Lyndon Johnson with his Great Society reforms. With less than happy results, Roger Douglas also carried out structural reform in the mid-1980s. Until recently, and with the solitary exception of the health reforms announced a couple of weeks ago, the Ardern government has been about boosting spending, while shying away from anything that looks much like structural reform.

Gradually, this approach is changing. In the 2021 Budget, the health and education reforms involve significant structural changes. So do the Fair Pay agreements which – hopefully – will end up giving employees a bigger role in setting the wages and conditions at their place of work. That’s commonplace elsewhere. Germany and Australia have always felt that on principle, collective bargaining and union participation is a fair and efficient way of boosting productivity. In the light of what automation is doing to the modern workplace, they are essential. Among developed countries, New Zealand is the only place where collective bargaining is quite so demonised.

Another fledgling example of structural change in Budget 2021is the Social Unemployment Insurance Scheme. Like the Fair Pay agreements, it is also modelled along Australian lines. It is intended to cushion the economic impact of a job loss, in much the same way that ACC does for accidents. Hopefully, it will also give those workers who have been deemed surplus to requirements the means to retrain for a new career path. “We’re looking at a scheme,” Robertson said yesterday “ that could provide those who lose their jobs with around 80 percent of their income, with minimum and maximum caps.”

Fine. All up, Budget 2021 makes a lot of the right noises. To repeat: the real risk is that it didn’t spend and innovate enough to fulfil its aims as fully and as quickly, as it plainly could have done. As mentioned above, Barack Obama fatally undershot his response to the GFC. His quantitative easing package was the right response, but the package simply wasn’t big enough. There’s a similar risk- and a similar political timidity - about Budget 2021.

Footnote One: U.S. President Joe Biden has decided to go big. In response to the economic and social crisis of the COVID-19 pandemic, his administration has launched a historical expansion of government spending and of the American state. As Foreign Policy (FP) magazine pointed out in a thoughtful (but paywalled) article last week, Biden’s proposals mark a significant shift in public attitudes, and an embrace of the ides that the state has an essential, positive role to play in a social democracy. In reality, it is only the government that can deal with the scale of problems facing a modern economy caught in the grip of a pandemic. Left to its own devices, the free market will block competition and stifle innovation, for the benefit of shareholders.

Because of his razor-thin Senate margin, Biden has been forced to focus on extra spending, which he can wangle via an arcane process called budget reconciliation. This does not require (and would not survive) a straight up and down vote in the Senate. However, budget reconciliation can only be used to expand existing programmes, and not to create new ones. No doubt, Biden would like to turn many aspects of his Covid recovery plans, his infrastructure plans, and his plans for families into permanent entitlements. At this point, it is doubtful he will be able to do so.

Ardern, by comparison, is living on easy street. Her opposition is inept and devoid of new ideas. With her crushing majority in a single chamber Parliament, she faces nothing like the same legislative logjams as Biden. Most of her restraints are being self- generated, by the political micro-managers she has on her team.

Footnote Two: After decades of market indoctrination, many New Zealanders feel suspicious of government. Historically, external shocks like the pandemic have been important drivers of policy innovation. That’s what we’re seeing, right now. An attitudinal shift is occurring under Ardern, and in the US under Biden. As the FP article says, it goes something like this:

For the past 30 years, the dominant view was the key to inequality was job retraining and “upskilling,” so workers could compete in a new global economy. This contributed to the creation of a “winner-takes-all” economy, where a subset of high-skilled workers could leverage their position to capture some of the gains of new technology and trade. Yet the vast majority of workers were left behind, moving into low-wage service jobs that were also essential to the new economy.

As political philosopher Joshua Preiss argues, this amounted to an abandonment of the American [and New Zealand] dream—the idea that hard work should be sufficient to secure a good job with good wages. Biden’s proposals embody the belated recognition that such good jobs are not going to create themselves—and the government can and should play a central role in ensuring the economy works for everyone.

Unfortunately, political change commonly lags badly behind the debate. Throughout the last half of the 19th century, as FP says, there was a lot of talk about the scourge of rising inequality in the wake of industrialisation. Yet it took the double whammy of the Great Depression and WWII to finally bring the welfare state to fruition. Since the 2008 financial crisis, there have been similar debates about rising inequality, wage stagnation, and the rising cost of living. Yet the politicians haven’t caught up with the debate. In New Zealand, the sense of what is politically possible has been weirdly frozen inside the boundaries forged by the free market reforms of the 1980s.

The pandemic has now provided the shock we’ve needed to bring about a political reset. It has certainly emboldened Grant Robertson to do things he would never otherwise have dared. But has it emboldened him enough? Not really. Not judging by what is in Budget 2021.

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