[BUDGET 2009] Productivity, vision take back seat as English delivers debt-control budget

Thursday 28th May 2009

Commentary by Pattrick Smellie, BusinessWire.co.nz

I think I need some new pills. Last year's Budget from Labour's Michael Cullen was all about tax cuts. It looked like the Budget Bill English would like to have delivered.

Instead, English's first Budget in the Key Government is all cancelled tax cuts, home insulation funding, new roads, school construction and preserving social welfare entitlements during the harsh recession. It kind of reads like a Labour document. There's even a press statement from the Greens in it, for goodness sake. Far from slash and burn, Government spending continues to increase, just not as fast as before.

There's plenty of scary rhetoric about the potential for Government debt to explode and the Budget documents show 10 years of deficits ahead - we haven't seen anything like that for at least 20 years and this year's will be the first deficit since 1994.

At first glance the forecast Budget deficits for the next two years look particularly scary as they approach $10 billion. Put that in perspective though. Peaking at a bit over 5% of gross domestic product, these forecast deficits are still lower than in the last Muldoon Budget, in 1984, when the projected deficit was peaking at 6.5% of GDP.

In other words, this may be the most crapulent time for any Finance Minister to have to write a Budget since the 1930's, but New Zealand's been in worse shape than this far more recently.

In response to that outlook 25 years ago, the incoming Finance Minister Roger Douglas introduced fundamental economic reforms which eventually tore his Government apart, even as those reforms produced the kinds of productivity gains that the 2009 Budget says it wants to achieve.

That was then, this is now. New Zealand's politics no longer favour crash-through economics, so the question becomes whether Key and English's first Budget really does enough to set New Zealand up for faster, smarter growth once the recession ends.

Some investments are admirable. The $323.3 million home insulation fund is a welcome acknowledgement that there are big health and productivity gains available simply by helping people live in houses that don't make them sick. But it's still an old Labour policy recycled.

Likewise, the Primary Growth Partnership is ultimately Jim Anderton's Fast Forward science investment fund in drag. The creation of a $1 million Prime Minister's Science Prize is a stake in the ground signalling that this Government recognises how important new discoveries will be to the New Zealand economy in the future, and there appears to be some welcome new funding for Crown-backed research. However, there is barely a word in the Budget to acknowledge the vital role of universities in creating wealth-producing knowledge.

Tertiary education will have to wait till next year. For the moment, the only action there is to pull back about $200 million of annual spending which the Government says Labour never set aside money for.

An extra 600 police and 246 more probation officers is no doubt politically attractive, and may make sense since crime and recessions do tend to go together. However, there's something just a bit depressing about this being the single largest source of new job creation in the Budget, accompanied by major new prison funding to house what is already one of the largest prison populations in the OECD, per head of population.

The appearance of an additional $90 million to support the operating expenses of KiwiRail also underlines low quality investments which this Government remains saddled with.

At his Budget press conference, Bill English described the quest for the elusive grail of higher productivity as a matter of "getting 200 things right, not just one or two". In that sense, this Budget is barely a start.

Productivity forecasts assume that fewer people will do the same amount of work over the next two years, creating a short-term jump in productivity on an hours worked basis to around 3% annually.

However in three years' time, that rate drops back to 1.5% a year, and flatlines from there. Given that the Budget disparages New Zealand's average annual productivity growth of 1.8% over the last decade, we have to assume that there is more, better, cleverer policy to come.

To the extent that the Budget lays out a credible path for Government debt control - always assuming there isn't another big jump downwards in the world economy - English's first effort does represent "a plan".

What the Government's economic policy doesn't yet represent is a credible vision for what New Zealand should look like once it comes out the other side of the recession.

Labour's Helen Clark and Jim Bolger before her struggled with "the vision thing" and got away with it because they both governed during periods of generally strong economic growth. The 2010 Budget therefore represents a test of whether this Government, led by the charming and possibly visionary John Key, can paint the big pick seat as English delivers debt-control budgetture any better.

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Commentary by Pattrick Smellie, BusinessWire.co.nz

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