OnPoint by Keith Ng


Budget 2011: A Credible Path to a Point in Time

Commentators over at the Herald (Hickey & Young) have both questioned this Budget's "heroic" growth forecasts. It's a good concern - why is it that, whenever Key's around, a whole lot of nothing happens and then suddenly we don't need to worry? How is it that we have "A Credible Path Back to Surplus" when we are sitting on a godawful deficit?

With the heroic growth forecasts, it's Christchurch. While its impact on revenue is a short-term kick in the nads and the reconstruction costs is another kick in the nads, the money being pumped into the reconstruction effort will boost growth and revenue in a few years' time. This is why Treasury predicts such strong growth: Because we've already paid for it.

But the growth forecasts isn't what's driving our Path Back to Surplus. Despite the growth effects of the reconstruction effort, the total impact on revenue is still going to be negative. The main reason why we're on "A Credible Path Back to Surplus" is the cuts to spending. The total effects of the spending cuts add up to $1.2b over the next four years. Not coincidentally, our operating balance is around $1.4b higher over the next 4 years.

So... what? $1.4b is neither here nor there. In the last Budget, when English cut the future operating allowance, it had a similar impact. So this is kinda like that. It's kinda boring. But English is focusing on this "A Credible Path" line because he wants us to look at a single point in time in four years' time, not at the $16b deficit hole we are in the moment, nor at the long-term fiscal abyss that we're trundling towards.

Yes, if Treasury is right (and they might be), we'll be back in surplus in a few years, but none of the fundamentals have changed. Moreover, the biggest cut - $2.6b's worth - in this Budget is coming out of Kiwisaver. The argument is that money the government pumps into private savings isn't real saving, since the government has to pay for it. But the reverse is true too. We've stopped borrowing to save: that doesn't give us MORE money. It only looks like savings on the book because Kiwisaver subsidies count as a spending.

They are in the sense that it's going from government funds into private investment accounts. But in terms of how much money the country will have in ten, twenty year's time, we haven't suddenly become $2.6b better off. This is a mirage.
It also rests on the assumption that people won't abandon KiwiSaver because of the changes. This is actually quite reasonable. $20-a-week government contribution (which is getting cut in half) exists purely as incentive to get people to save. It's not the amount that matters, but the fact that it's free money, and all you need to do to get it is to not quit KiwiSaver, which is a hassle anyway. KiwiSaver was conceived around the notion that people will do whatever as long as it's too much trouble to not do it - this doesn't change that.

The sneaky part is removing tax credits for employers' contributions. Together with the increase in minimum contribution, the bottom line is that employers will have to pay more, and this will flow through to lower wages in the next few years. Don't forget, this is the argument National ran against Kiwisaver when it first began, that employer contributions ultimately came out of employee's pockets.

(ALSO: If you haven't seen my Budget visualisation Radioactive Donut in Friggin' Space, check it out. And if you have a crappy browser, you can see my other, less psychedelic Budget visualisation over on Stuff.

Sigh. I've been learning to code and design for the past year. Prose is hard now.)

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