Tough-love budget called for

Wednesday 29th April 2009

The New Zealand Institute isn’t aiming to make friends with its prescription for the economy. In its pre-budget report, the privately funded think-tank suggests scrapping proposed tax cuts, reviewing Working for Families and health spending, and creating new sources of revenue such as from property taxes.

The global recession is a “small window of opportunity” to re-launch itself “as a magnet for business and talent” the institute says in the report.

The budget should focus on growing the revenue, rather than tightening the belt, it says.

“The temptation will be for the government to ignore this need for strong leadership and vision about how New Zealand will position itself to compete, and instead focus the budget exclusively on cost control measures and tightening existing policies,” research director Benedikte Jensen and researcher Chye-Ching Huang wrote in the report.

New Zealand’s economy is forecast to contract 2.8% this year, the Organisation for Economic Cooperation and Development said in its country report.

Global growth may emerge in 2010 and 2011 but the New Zealand economy risks “degenerating over the long run” because of the projected high and ongoing levels of public debt and budget deficits.

“Persistent deficits and high debt levels would stunt growth, reduce the government’s ability to invest in critical social and economic needs, and increase New Zealand’s vulnerability to future economic shocks,” the report says.

The institute bases its assessment on the Treasury’s December Economic and Fiscal Forecasts and Treasury Secretary John Whitehead’s presentation to the 2009 Job Summit in February.

The forecasts have gross public debt soaring from 17.5% of GDP last year to 38.6% by 2013, and reaching 38.6% in 2023.

That’s out of whack with projections for some of New Zealand’s significant trading partners, with the U.K.’s deficit forecast to peak at 5.3% of GDP in 2010 and Australia’s reaching no more than 2.8% of GDP over the next five years.

The institute sheets home much of the blame for the widening deficits to tax cuts eroding government revenue.

New Zealand stands out from other developed nations in delivering so much of its fiscal stimulus in the form of tax cuts rather than spending.

The New Zealand Institute’s Budget Prescription: Radically improve New Zealand’s growth prospects by:

Investing in key services and infrastructure (such as broadband and transportation of exports).
Boosting business innovation.
Managing government assets such as SOEs more aggressively to support domestic growth.

Reduce deficits by addressing both the tax and spending sides of the ledger without creating future social deficits by:

Ensuring existing policies support vulnerable communities and work incentives such as Working for Families are well targeted.
Control cost growth in areas such as health where increased spending hasn’t been matched by higher output or quality.
Cancel planned individual tax cuts, which are poorly designed either to support vulnerable communities or stimulate growth.
Redirect cost-control savings into temporary measures to prevent future costly social deficits, such as work or training programs for unemployed youth during the recession.

Address under-investment in productive areas such as business capital investment, for example:

Retain and enhance savings policies such as KiwiSaver.
Consider re-weighting the tax mix away from investments in productive, mobile assets and towards consumption, and investment in immobile assets such as real property.

By Jonathan Underhill

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