Dunne's Weekly: Relief Over PREFU Obscures Reality
The relief in some political and economic quarters that the Pre-Election Economic and Fiscal Update (PREFU) released earlier this week is not as bad as many were predicting obscures the reality that the government's books are in the worst state they have been for years.
Whichever parties form the government after the election will have a major task on their hands to introduce more balance into the economy, if there is to be any realistic hope of returning to Budget surplus by 2026/27 as the PREFU predicts.
In virtually every area, the economy is in a worse position than it was when the government last changed in 2017. It is therefore obvious and easy to blame this deterioration on the economic management of the current government, but that is a somewhat lazy response, which may not be all that accurate.
Most, but not all, of the decline and the build-up of debt levels has occurred because of the government’s response to the pandemic. Few would disagree that the government needed to keep essential services operating as economic activity became stifled by the pandemic response. Given our favourable debt to GDP ratio, the decision at the time to borrow around $53 billion looked conservative when compared to the borrowing programmes of other countries. It seemed the right thing to do to cushion to the greatest extent possible the adverse economic impacts the pandemic was likely to have on New Zealand households.
However, a couple of lessons from history were overlooked in the process. In 1974/75, in the wake of the first oil shock, the Rowling government borrowed heavily to protect New Zealanders from its worst impacts. By the time of the 1975 election, that policy was being derided by Robert Muldoon’s National Party as “borrow and hope”, and he was able to win a landslide election victory on the pledge he would “rebuild New Zealand’s shattered economy”. But his subsequent economic management, also based on the worthy premise of shielding New Zealanders from the worst impacts of a deteriorating international economic situation, led to even more borrowing. By the time of the 1984 election, Muldoon’s erratic, protectionist approach had stifled growth and productivity to the extent that New Zealand was literally days away from having to default on major loan repayments.
When the current government began its Covid-recovery borrowing plan in 2020, those few critics who dared raise the spectre of loans having to be repaid, with future economic activity compromised accordingly, were quickly shut down. In the prevailing atmosphere of the time, that any criticism or even questioning of anything the government was doing in response to the pandemic bordered on treason, it was easy to gnore critical opinions. Since then, though, debt has ballooned to around $100 billion, with annual repayment levels now around $9 billion.
Of itself, that may not be so bad, certainly compared to other countries, were it not for the quality of much of the Covid19 recovery spending. A raft of assistance programmes was introduced which were costly, and cumbersome to access, with very little subsequent accountability for how the funding so advanced was being spent.
At the same time, there was little additional investment in critical areas like the health system – the best the government offered was the most comprehensive shake-up of the public health service in more than 20 years, which would take several years to become operational. Today, eighteen months after Te Whata Ora replaced the former district health boards, there has been no discernible improvement in the quality and scope of services provided to patients. Staff shortages remain throughout the system with critical services, like cancer treatment, having to close in some areas as a result. This week’s pledge from the government to train more than 300 additional doctors by 2027 is three years too late – investing in improving medical and nursing capacity should have been a priority for the post-pandemic response, not left to be tossed out as a last-minute election sweetener, to try to appease senior medical professionals currently taking unprecedented industrial action.
This goes to the heart of the country’s current economic problems, as identified by the PREFU. Rather than use the additional post-pandemic borrowing to improve the country’s health and physical infrastructure, the government undertook too much unproductive expenditure that has shown no long-term return to the country, while still incurring debt that must be repaid. As in earlier times, initial relief that people were being spared the immediate impact of the worst of circumstances, quickly evaporated when it was realised that the debt incurred not only lives on long after the crisis has passed, but also limits the scope of future government actions. Belatedly, both the Prime Minister and the Minister of Finance seem to be acknowledging the public frustration their approach has bought about.
This is Labour’s dilemma. The poor quality of much of its additional spending is becoming clear, leading it to announce billions of dollars of spending cuts to reduce the debt it has run up. And proposals, like this week’s announcement to train more doctors, simply invite the criticism of why these were not priorities when the first pandemic recovery borrowing occurred three years ago. Despite the Prime Minister’s lament to the contrary, the public’s yearning for something better is perfectly understandable.
The PREFU’s message is clear: after the last three wasted years, the next government needs to control its spending to enable debt levels to be reduced and the Budget to return to surplus. Implicit in that is a stronger focus on the quality and purpose of government spending. But that is no licence for a widespread slash and burn policy. Rather, the unfocused and poorly prioritised approach of the last few years needs to be replaced by a greater discipline and emphasis on productive physical and social infrastructural investment, ahead of pet projects and other worthy, but essentially “nice to have” ones.
The balance required to achieve this will test the capacity of whoever is in government after the election. To avoid future generations being saddled with the consequences of the debt already incurred, there must be a start to the hard but necessary work of recovery.
In case you missed it, read my latest Newsroom column on www.newsroom.co.nz