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Since: Nov 2006
Posts: 1654
OnPoint: Budget 2009: “Aww, shit.” (Update 1)
It’s a simple, simple Budget. It’s only goal was bringing down the debt track. This is the scary-o-graph showing the debt track that the government was heading towards, with the alternative line showing the impact of the policy changes:
. So which $88b got squeezed?</p><p>The bulk of it comes from changes to the future spending allocation, which was reduced from $1.75b to $1.1b. $650m doesn’t sound like much, but it doesn’t just add up – it compounds.</p><p>This allocation is an addition to the sum the government can spend each year. Which means that every time another $650m is added, that’s another $650m for every year after that. Each $650m stack up on top of the previous one. </p><p>So, if it’s a $650m in the first year, it’ll be $1.3b in the second year, $1.95b in the third year, and so on. And if you’re counting the total spent, you’re counting the entire stacks. So, for the three years, it’ll be $650m + $1.3b + $1.95b, and so on.</p><p><img src=)
. When Bernard Hickey asked if English seriously expects to be able to reinstate tax cuts before the next election, English said no.</p><p>So it sounds like it’ll be reconsidered towards the end of the fiscal recovery period, which is a decade away, give or take. With two elections between now and then, the tax cuts as promised in the 2008 election are as good as dead.</p><p>Fiscal hawk says: YUSSS! In yo face!</p><p>Meanwhile, National are still reaffirming their commitment to aim towards a top rate of 30%. It all sounds a bit silly, given that it’ll take them close to a decade to even glad-eye a top rate of 37%.</p><p>--</p><p><i>Update 2: Less money for Super Fund = Less money for Super </i></p><p>The other $19.5b elephant in the room is stopping contributions to the NZ Super Fund while the government is in deficit – i.e. the next 11 years.</p><p>The argument that they’re running is that it doesn’t make sense to borrow money to save, since you have to pay interest to borrow. That sounds simple enough – except that it’s not, since you get interest on your savings, too.</p><p>Rod Oram suggested that the long-term returns on the NZSF will be actually be greater than the cost of borrowing – i.e. that borrowing to invest in the NZSF *is* profitable. One argument in support of that is that the government is a very safe borrower, and thus can borrow at a lower rate than your average investor. So while borrowing to invest is a bad idea for individuals, it can work for a government over the long-term.</p><p>When I ventured to the other side of the lunch table, Bernard Hickey presented the opposite case, saying that the return on investment will never match the market interest rates, and that the whole NZSF should be put into debt repayment instead.</p><p>Gah! A comparison of the rate of return on the NZSF vs the cost of crown borrowing would be most enlightening, gentlemen.</p><p>But regardless of which way is better, there’s no getting around the fact that less money deposited means less money can be withdrawn. Here is where English gets super-shifty:</p><blockquote><p>Contributions to, and the size of, the Fund do not affect future New Zealand Superannuation entitlements or payments. The size of the contributions and the Fund merely affect how much future New Zealand Superannuation payments will be paid by the Fund, instead of from future revenue.”</p></blockquote><br /><br />It’s crazy-talk.<br /><br />He’s saying that it’s okay that there’s less money, because we can afford Super payments as long as future governments pay for it. Except that the NZSF exists precisely because future governments can’t afford to.<br /><br />Of course, English can’t bind future governments, so he (and future governments) can go on saying that they’re committed to something that they’re not paying for – and continue to not pay for it – right up until they have to fork out the dough.<br /><br />There’s no getting around the fact that cutting NZSF contributions cuts the ability of future governments to pay for Super. This means that Super entitlements are more likely to be reduced.<br /><br />Of course, loading future governments with debt also cuts their ability to pay for Super. One might be slightly better than the other, but both mean less money for the future, and no amount of book-jiggling can change the fact that less money means less money.<br /><br />--<br /><br />On one hand, the fiscal hawk in me is quite satisfied with the depth of cuts in this Budget. Given the current economic outlook, there’s no way around the fact that very deep cuts are needed. Things like the $2b cuts by the razor gang, and even the “deferral” of the tax cuts are just smokescreens.<br /><br />All the real work is done by the reduced operating allowance. It’s impact will be felt more and more as time goes on. Each and every subsequent Budget will have to make do with an increasingly inadequate pool. And at the end of it, there’ll be a big-ass shortfall in the NZSF.<br /><br />This is like the opposite of pulling teeth.<br /><br />But to be fair, a) it has to be squeezed from somewhere, somehow, and slow is less traumatic than fast; and b) it’s not the end of the world – government expenditure will go up for a few years because of the recession (and more people are made unemployed, etc.), then it’ll be whittled down as the cuts start to bite, but it will end up at current levels by the end of the projection period.<br /><br />There’s undoubtedly an ideological element at work here, too. When asked to elaborate on the “structural problems” in the New Zealand economy, English pointed to excessive government and household spending, as if the government, too, has been putting granite bench-tops on the mortgage. The idea that government spending is, in and of itself, a hindrance to the economy whiffs of a pretty strong ideological bent.<br /><br />But hey, it’s a right-wing government that *had* to make some pretty steep trade-offs, and it chose to cut into medium- and long-term government spending. It's a perfectly valid trade-off to make.<br /><br />Even cutting the Super Fund is a legitimate choice - but to cover it up with )
Juha Saarinen
From: Auckland
Since: Nov 2006
Posts: 461
Shouldn't it be $88 billion plus the interest accruing on that debt? So there may be even bigger spending cuts ahead?
Rich of Observationz
From: Back in Wellington
Since: Nov 2006
Posts: 2005
Two things:
- firstly, that graph assumes no growth forever, right? If we can actually recover from this recession, then we'd expect debt to fall.
- secondly, 60% debt/GDP would only put us where most developed nations are now. Why should we be the only ones with tiny government debt, how does it help us?
The answer of course, is that for most people in NZ, it wouldn't really matter if we had 50% or 60% debt/GDP. We'd have to pay a bit more tax and slightly higher interest rates, but that would be more than outweighed by stable and secure jobs.
It's different for the people who matter to Nationals though. Government borrowing will impact their ability to fund schemes (like building billion dollar hotels in former scenic areas) and higher taxes will get between them and the bach in Hawaii.
So we've got to suck it up. Vote for change, eh?
Gareth Ward
From: Auckland, NZ
Since: Mar 2007
Posts: 1379
So, how has National managed to reduce future debt? By cutting a fuckload of future government spending.
Spending growth will in fact be negative in real terms (and going backwards as a percentage of GDP). So someone in fact got more than their "cap spending at inflation" demand.
Gareth Ward
From: Auckland, NZ
Since: Mar 2007
Posts: 1379
Rich, I believe GDP growth IS factored into that debt curve - but not until 2011.
We are forecast to go even further backwards next year
Paul Litterick
From: Auckland
Since: Nov 2006
Posts: 902
Vernon Small on Stuff: "But the big surprises are in the extent of delays to tax cuts and future contributions to the Cullen superannuation fund."
Even I could have predicted those two. Equally surprising are more cops on the street and more prison beds. Laura Norder is the winner on the day.
Steve Barnes
From: The City of Ales
Since: Dec 2006
Posts: 1958
We all knew there would be nothing for R&D but there should have been. R&D would lead to more jobs, more productive jobs that is as opposed to the non productive 600 extra cops and more probation officers to control the disenfranchised unemployed.
Tom Semmens
From: Auckland
Since: Nov 2006
Posts: 1094
A typical Tory budget.
Long on bean counting, short on vision and driven by the Treasury. I don't know why people bother voting for National, all they do is elect a bunch of pin stripes from the Terrace.
simon g
From: Auckland
Since: Nov 2006
Posts: 536
I hope the media see through the "delay/defer" spin on tax cuts.
I have delayed producing my great novel, but ... you know, it's all there, it just may have to be written posthumously.
George Darroch
From: Te Ao Nui
Since: Nov 2006
Posts: 1022
They've cut a lot of things, but one thing they're spending large on is roads.
$10.7 billion of roading projects.
Nathaniel Wilson
From: Auckland
Since: May 2009
Posts: 9
"- secondly, 60% debt/GDP would only put us where most developed nations are now. Why should we be the only ones with tiny government debt, how does it help us?"
Maybe I've completely missed the point, but I thought the lesson of the worldwide recession was having massive amounts of debt might be a bad thing? That and maybe aiming to be just like Iceland or Ireland isn't so smart either.
Ben McNicoll
From: Auckland
Since: May 2007
Posts: 43
I hope the media see through the "delay/defer" spin on tax cuts.
Yep, these were the "fully costed and funded" tax cuts that absolutely could and would happen.
In the words of a Tui billboard....
Rich of Observationz
From: Back in Wellington
Since: Nov 2006
Posts: 2005
aiming to be just like Iceland or Ireland isn't so smart either.
How about Germany, France or Switzerland then? They all have ratios in the over 40% range, and are doing better than we are.
Kyle Matthews
From: Dunedin
Since: Nov 2006
Posts: 4401
Rod Oram suggested that the long-term returns on the NZSF will be actually be greater than the cost of borrowing – i.e. that borrowing to invest in the NZSF *is* profitable.
On this basis the government should just borrow a trillion dollars, invest it, and keep the one billion profit that it makes after a year.
Is suspect the truth is that the margin between the cost of borrowing and the income of investing for something as safe as our government is very small. You'd make a small loss. But you're right Keith, it'd be good to see actual figures. They would quickly tell us if National has made a good decision here or not.
Angus Robertson
From: Auckland
Since: May 2007
Posts: 610
The answer of course, is that for most people in NZ, it wouldn't really matter if we had 50% or 60% debt/GDP. We'd have to pay a bit more tax and slightly higher interest rates, but that would be more than outweighed by stable and secure jobs.
You mean we would be able to get French (8.8%) or British (7.1%) or American (8.9%) levels of unemployment, as opposed to our current 5%.
Gareth Ward
From: Auckland, NZ
Since: Mar 2007
Posts: 1379
Remember when it comes to Super that right now our super cost is 3.5% of GDP and would rise to 5.6% within 20 years. The point is that by spending at total (including Cullen Fund contribution) of, say 4.5% now we bring down that 5.6% later on.
It's less about "borrow vs invest" as it is about "holy shit it will be tough to do either in 20 years if we have to spend THAT much on super, but we can afford to do it now"
George Darroch
From: Te Ao Nui
Since: Nov 2006
Posts: 1022
Those over 65 increased by 2.5% in New Zealand last year, according to Stats NZ. That scale of increase is going to continue for a while.
Grant McDougall
From: Dunedin
Since: Dec 2006
Posts: 305
So, how are DPF, C.Slater, etc spinning this ? Are they wetting their pants with excitement ?
I had a look at the Herald's "Your Views" response to the fudge-it and it was a mixture of "what a meanie" and "a strong response to years of wasteful spending by Labour", etc.
Grant McDougall
From: Dunedin
Since: Dec 2006
Posts: 305
Oops, I mean Herald ''s
Blake Monkley
From: Auckland
Since: Jul 2008
Posts: 191
You mean we would be able to get French (8.8%) or British (7.1%) or American (8.9%) levels of unemployment, as opposed to our current 5%.
It's only a matter of time according to Bill English treasury executive summary (page 13). The next twelve months look really bad. Let's hope the herald and real estate agents will get honest about the housing market having bottomed out.
Russell Brown
From: Auckland
Since: Nov 2006
Posts: 9060
Moderator
So, how are DPF, C.Slater, etc spinning this ? Are they wetting their pants with excitement ?
Last I looked, DPF was being the good soldier, and his crazier correspondents were declaring war.
Excellent analysis, btw, Keith. It puts most of the newspaper commentators to shame.
Jake Pollock
From: N4
Since: Nov 2006
Posts: 378
It puts most of the newspaper commentators to shame.
No mean feat, seeing as, as far as I can tell, they have no shame.
George Darroch
From: Te Ao Nui
Since: Nov 2006
Posts: 1022
Harden up.
Yeah.
Back when I was a kid, we lived in uninsulated houses, ran up huge deficits, spent big on 'essential' infrastructure projects, and made promises about superannuation that locked in future Governments for decades to come.
DeepRed
From: The southernmost capital city in the world
Since: Nov 2006
Posts: 877
You mean we would be able to get French (8.8%) or British (7.1%) or American (8.9%) levels of unemployment, as opposed to our current 5%.
Paradoxically, the bolshie nature of French trade unions has led to high productivity through machines replacing humans. Here in NZ, companies are still content to use people to dig with shovels and rotate road signs.
Am I not the only one to feel that only a major sub-priming of the mortgage and credit card sectors will jolt NZers into genuinely productive investment?
Russell Brown
From: Auckland
Since: Nov 2006
Posts: 9060
Moderator
International credit rating agency Standard and Poor's has given a favourable verdict on the budget, upgrading New Zealand's outlook from negative to stable.
In both political and economic terms, that's a result.
Russell Brown
From: Auckland
Since: Nov 2006
Posts: 9060
Moderator
Back when I was a kid, we lived in uninsulated houses, ran up huge deficits, spent big on 'essential' infrastructure projects, and made promises about superannuation that locked in future Governments for decades to come.
And it never hurt me.
Oh, hang on ...
Idiot Savant
From: Palmerston North
Since: Nov 2006
Posts: 1210
<I>All the real work is done by the reduced operating allowance. It's impact will be felt more and more as time goes on.</I>
Yup. particularly in health and education, which combined need an extra $1.25 billion a year just to stay level.
This will mean the 90's sinking cap all over again, the deferral of maintenance, the underfunding of public services for a decade. But doing it this way means they don't have to announce they're doing it.
simon g
From: Auckland
Since: Nov 2006
Posts: 536
Standard & Poors delivered their verdict at about 4 p.m. What time did Bill English sit down? Fast readers, eh?
Many years ago (pre-internet) I had a temp job as a lowly messenger/clerk in a London financial company, and found that it's the people at the bottom who get to know the secrets (being too low to bother with). I suspect my spiritual successor was photocopying and shredding copies of our Budget well before we heard about it. I hope (s)he made a few bucks.
giovanni tiso
From: Wellington
Since: Jun 2007
Posts: 4371
simon g: English sat down with S&P just the other day, I imagine they already got the details straight from the horse's mouth, and they just delayed the announcement until he had delivered it to the nation.
All in all, am I allowed to say that I feared worse from this budget? And Keith, compelling and timely commentary as per usual.
Russell Brown
From: Auckland
Since: Nov 2006
Posts: 9060
Moderator
Agreeing with both your paragraphs there, Gio.
Tom Semmens
From: Auckland
Since: Nov 2006
Posts: 1094
I hope everyone pauses and has a little grateful prayer of thanks to Michael Cullen, whose refusal to feed the bubble with tax cuts is the only thing between us and Iceland.
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