A tale of two budgets

Growth versus austerity is a political conflict playing out around the world, pitting the ambitious against the timid.

Last week we saw this up close here, pitting Auckland Council against the National-led Government.

On Wednesday the council, led by mayor Len Brown approved its 10-year budget, an historic first for the unified city. Within its prudent rates rise are planted many seeds for stronger, better growth in the Auckland economy.

On Thursday, the Government delivered its fourth Budget, a rehash of its political agenda. Within its zero increase in new spending lay an array of tiny sums to help scientists, student teachers, patients, beneficiaries and prisoners.

The difference between the two budgets was stark. Auckland's laid out the city's investment plan for the first decade of its 30-year strategy to revitalise itself. The Government's over-arching goal remains simply a budget surplus by 2014/15 with no targets for how its investments might improve the economy.

But even by the Government's forecasts the odds on reaching its nirvana are slim indeed. The surplus - a mere $197 million on spending of $74.9 billion - would evaporate if tax revenues slipped by just 0.7 per cent.

To ensure the surplus, an awful lot would have to go right. The economy would have to grow by 2.6 per cent, 3.4 per cent and 3.1 per cent over the next three years, according to Treasury's forecasts.

Some of its key assumptions are: the rebuild of Christchurch will contribute one percentage point a year of growth; our trading partners will grow by 3.8 per cent, 3.8 per cent and 3.9 per cent over the three years compared with their 3.6 per cent average of the past 10 years; the net outflow of 4000 migrants in the year to March 2012 will become a net inflow of 19,000 in 2014; and unemployment will fall from 6.7 per cent currently to 5 per cent by 2015.

Treasury does have a downside scenario: growth eases to 2.5 per cent, 2.6 per cent and 2.1 per cent over the next three years; tax revenues fall; government spending rises because of higher unemployment benefits and other factors; and government borrowing rises. Consequently, the Budget would still be in deficit in 2016, the end of the forecast period.

But this downside scenario is based only on weaker growth in our Asian markets. Treasury has made no attempt to second-guess Europe's politics and thus its economies. Finance Minister Bill English said the risks were clear but the outcome unknowable.

Mindful of the downside, though, the prime minister said last week the Government would borrow more rather than cut spending further if the economy at home or abroad weakened.

Superficially, it's reassuring that the Government says it won't slash and burn. But hope is not a plan.

Never articulating about how it will help grow the economy, the Government is getting less convincing the longer the economy bumps along in its low-growth rut, battered by external forces.

Its latest economic development strategy, its third in less than four years, has no goals or sector focus. Billed as the Business Growth Agenda, it's easy to chart. At its centre is a box marked "What businesses want". To it flow six arms identifying big things the Government will help deliver to business: infrastructure; natural resources; capital markets; export markets; innovation and ideas; skills and safe workplaces.

The Budget held one sizeable new initiative to progress that agenda - $166m of new money over four years to turn IRL, the industrial research CRI, into the Advanced Technology Institute. The aim is to help companies accelerate their uptake of high technology and to commercialise research more rapidly.

But no major new initiatives in any of the other areas were announced, just a smattering of money for those we already know about. In some it has reneged, for example, in capital markets it has parked auto-enrolment of KiwiSaver.

Worse, some areas critical to the Government's economic agenda such as the primary sector and natural resources didn't merit a single word in Budget press releases or English's speech.

The Government's excuse is its zero budget. It says it has had to confine itself to only adding new spending funded by modest savings and tax changes.

It is being economical with the truth, though. The zero covers only those areas in which the Government reckons it has spending discretion. Thanks to areas in which it has chosen to have no control, most obviously superannuation, its total spending rises by 5.9 per cent in the next financial year and 11 per cent by 2016.

Having failed to tackle looming funding crises in superannuation, health care, welfare and tertiary education, it is hoping the economy will grow enough so it can keep eking out a bit more money for them.

But because it hasn't had the political courage to make the big changes, it hasn't saved enough to invest more heavily and more strategically in the economy. As a result, it won't get the economic growth it and the nation needs urgently. We remain stuck in our long-running, low growth rut.

Failure of commonsense and leadership can happen anywhere across the political spectrum. Yet the two chronic expressions last week both came from the right. The National-led Government Budget was bad enough. But even worse were the budget proposals by its Citizen and Ratepayers colleagues in the Auckland Council.

Led by Christine Fletcher, Cameron Brewer and George Wood, the CitRats tried to overturn the proposed 10-year budget crafted long, hard and carefully by all the council members, including themselves.

Even though the budget includes investment in a number of key infrastructure, economic and other initiatives, the rates will only rise 3.6 per cent this year and about 4.9 per cent annually in subsequent years.

But even this modest rise would force some people to flee the city or face "death by strangulation", Fletcher said. The CitRats proposed instead a rise of 2.6 per cent, based on axing or deferring many of the investments essential to Auckland's development.

Yet, having attempted to deny the city its opportunity to grow, they were very happy to pander to their constituents by adding a slew of petty sums such as $100,000 for the Howick Historical Village. Thankfully the CitRats and their supporters were outvoted eight to 15.

Auckland chose growth, while the Government chose austerity.

Sunday Star Times