The popular phrase ‘the Emperor has no clothes’ comes from Hans Christian Andersen’s moral tale for children in which, as a crowd of on-lookers deferentially applaud the naïve Emperor in his new invisible clothes, a young child is the only one to call out his true sartorial state.
Strangely, with an election happening in just four months, hardly anyone in the media (and certainly not in government) seems to be calling out last week’s Budget as an ‘Election Budget’. After all, we’re in the midst of a health pandemic and unique economic crisis when surely everyone agrees that a large increase in Budget spending is called for? Indeed, most economists, myself included, have been broadly supportive of the Government’s Covid-19 fiscal responses so far and calling for more in the Budget.
Budget 2020 may not be the proverbial pre-election ‘lolly-scramble’ so often on journalists’ lips at this time in an election year. But pre-election sweetener it surely is. A canny Emperor knows exactly what ‘invisible’ electioneering clothes he’s wearing.
How so?
If this is a recovery Budget, how much extra spending is required? $30 billion? $50 billion? … These are huge numbers: Total core Crown spending in 2019 was only around $90 billion. But no one knows right now how much spending is required to cushion New Zealanders through the coming recession.
And that’s my point – for once, almost any big number can be presented as necessary for recovery at this stage before the recession bites. So why not make sure the Government taps into all the pre-election benefits associated with maximum apparent generosity now?
There are, however, some clues to this excess generosity hidden beyond the Budget headlines.
Here’s one way of looking at it. The Treasury’s Budget forecasts show $62.1 billion of extra Covid-related government spending. They also forecast the loss in gross domestic product (GDP) expected as a result of the Covid downturn with, and without, the extra Covid spending. For the next two years (2020-21), the total GDP loss is $13 billion (with full Covid measures) and $18 billion (without full Covid measures) compared with GDP in 2019. That’s an awful lot of extra spending to save $5 billion in GDP. Plus, by 2022, Treasury predicts GDP much higher (by 12 percent) than in 2019, even with no Covid-related spending.
Or look at it another way – Treasury estimates the $62.1 billion Covid spending will save 140,000 jobs. That’s nearly $450,000 per job saved for two years. Sounds like an expensive trade-off.
Before the Budget, I called for a stimulating, but prudent, Budget. That meant:
- moving away from universal, to more targeted, wage subsidies
- setting up flexible spending programmes now that respond to needs as they arise
- reprioritising spending away from short- and longer-term ‘nice to haves’ to essential recovery support
- presenting a credible future debt track beyond the immediate recovery.
What did the Budget deliver? Arguably none of the four.
Firstly, another two months of universal wage subsidies with slightly stricter conditions (a bigger fall in business revenue) doesn’t make them ‘targeted’. This is despite projections that the economy is already getting back to 80 percent or more of normal working, with a few sectors likely to continue suffering. And when we’re two months closer to that election, the $20+ billions of ‘unallocated’ Recovery Fund can be strategically dropped into the election battle as further subsidy extensions and other vote-targeting sweeteners.
Secondly, there’s ‘flexibility’. Surely a $50 billion Recovery Fund with much of it as yet unallocated is exactly that? Not when there are no ‘quick response’ schemes being put in place now to deliver it. I suspect that, contrary to National leader Simon Bridge’s assertion (“Grant Robertson doesn't even know today how he will spend it all”), the Finance Minister knows very well how he’ll spend it – wherever media-sensitive groups ‘need our support’ between now and September.
Thirdly, what of ‘reprioritising’ spending? There is negligible evidence of the Minster’s pre-Budget promise that some spending would be ‘put on ice’. On the contrary, almost every spending ‘vote’ (or should that be ‘special interest group’?) gets a boost over 2020-24, including making sure future inflationary costs are covered. Sweeteners everywhere, from arts and culture to conservation to $75 million for the Ministry of Social Development’s office refit programme. No fiscal constraints here, no public sector pay restraint or postponing ‘nice to have’ project for a year of two.
Do we really need those new Inter-Islander ferries right now when we have massive, more urgent spending needs? And an extra $1.6 billion for ‘retraining’ and apprenticeships. How many Air New Zealand flight attendants or Queenstown tour guides does he think are up for retraining to move on to farms?
Why are we paying $3 billion (up from $0.4 billion ‘prescribed by formula’) to the New Zealand Super Fund in 2021-22 to pre-fund future pension spending, while we also borrow massively to fund today’s crisis? Answer: Labour in opposition criticised the National government for precisely this after the global financial crisis. It dare not be seen now to be doing the same, even though suspending payment makes more financial sense.
So, there is recovery spending, and there is wasteful spending – I fear there is rather too much of the latter in this Budget. Of course, any funds unallocated from the $50 billion come September 20 provide a convenient nest-egg to buy agreement in coalition negotiations while maintaining the fiction that no ‘extra’ spending commitments have been made.
Fourthly, perhaps the biggest giveaway of this Budget’s imprudence is hidden away in the Fiscal Strategy Report (FSR). This shows projections to 2034 in the Government’s indebtedness and ‘net worth’ (a more comprehensive measure of the financial sustainability of the Crown’s activities: its total assets minus liabilities), based on the fiscal consequences of this years’ budgetary choices.
From a healthy Crown net worth of 43 percent of GDP at the time of last year’s Budget, this FSR forecasts net worth at 34 percent in 2020. Fair enough – we are coping with extra crisis spending and lower revenues. But, following the Budget, Crown net worth is projected to drop to just 9 percent of GDP by 2024 and only get back to 12 percent by 2030. In other words, a decade from now, during which time another serious crisis could easily have hit us, the Government’s plans for net worth are so diminished that we would be woefully unprepared financially for another fiscal bail-out of the economy.
Let’s be clear. New Zealand economists are not calling for future ‘austerity’ to get the Government’s books back into balance within a few years. Instead, there is widespread support for suitable, not profligate, spending to assist faster growth of the economy to reduce the debt burden to previous levels over, say, a decade or more.
But the Crown’s projected financial vulnerability a decade on reflects Robertson’s failure to offer any credible plan to raise net worth through fiscal prudence down the line. This is despite official forecasts of quick economic improvement: real GDP growth is forecast to be massively positive at 8.6 percent in 2022, and 4.6 percent in 2023.
‘Recovery’ is, of course, a much better slogan for a pre-election Budget than ‘sustainable public finances’, and what political opponent is going to fight an election claiming “the Government is helping recovery too much”?
So the Emperor’s clothes may indeed be invisible and it seems the crowd is still applauding. Both he and the Empress will be hoping that continues to September 19. If Robertson wasn’t so nice (not to mention politically savvy), he might be tempted to paraphrase the previous labour finance minister’s arrogant taunt at a National opposition: “We will win, you will lose, eat that!”
Professor Norman Gemmell is Chair in Public Finance in Wellington School of Business and Government at Te Herenga Waka—Victoria University of Wellington.
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