Opinion & Analysis
OPINION: Building momentum is the title the Government has given its latest budget.
There's only one problem: after 2015 there isn't any. Our economy will slow to a crawl even as our trading partners are accelerating.
But, of course, the Government is thinking only about next year, when it has to fight another election.
Thus, it's a pre-election budget - and a meagre one at that. The Government's continuing austerity is leavened by only a few crumbs of new spending; a cut in ACC levels which could come back to haunt business and the Government; and a sprinkling of other people's ideas it had rejected, but is now adopting half-heartedly as its own.
Forecasts from Treasury, however, starkly expose the false hope the Government is peddling. Yes, real GDP growth in the year to March this year and next will be 2.5 per cent and 2.4 per cent, then rise to 3 per cent in 2015. But it then slows to 2.6 per cent in 2016 and 2.2 per cent in 2017.
Meanwhile, over the same period, our trading partners' growth rises from 3.5 per cent to 4 per cent, according to consensus forecasts, and to 4.4 per cent in the IMF's forecasts.
The reason we slow while our export markets boom is very obvious from the forecasts. Exports continue to bump along with very modest growth. The Government's Business Growth Agenda fails to shift the trajectory at all.
So once the stimulus of the Christchurch rebuild begins to wind down, there is little dynamism elsewhere in the economy - apart from our two traditional sugar highs of household consumption and a booming housing market.
As a result, the current account deficit deepens rapidly from 4.4 per cent last year to 6.5 per cent in 2017 (or 7.3 per cent in the upside scenario). This largely reflected the reduction in Christchurch-related reinsurance payments from overseas, Finance Minister Bill English said in his budget lock-up press conference. Treasury, however, gave a very different explanation in its budget forecast. The deficit is growing for three fundamental reasons: the deficit on the service account is growing as we import more activities such as banking and insurance; the trade surplus is falling because exports are weak and imports are rising; and our deficit on the investment account is increasing because the private sector continues to borrow heavily overseas.
A worsening current account deficit means our net international liabilities continue to pile up - from 70.7 per cent of GDP in 2012 to a forecast 80.9 per cent in 2017. We are entrenching our position as one of the most indebted developed countries in the world.
So, while the Government claims its economic strategy is rebalancing the economy away from borrowing and spending to investment and earning, the facts say it isn't.
The Government's self-delusion makes it complacent. It happily tinkers with a few small ideas rather than grasping the bold ones needed to transform the economy to a more sophisticated, higher value, more international, faster growing one that would reward New Zealanders better. For example, in the face of another housing bubble, it has finally agreed to the Reserve Bank deploying macro-prudential tools to try to curb property lending.
This is a welcome concession given its previous position that there was nothing wrong with monetary policy, and nothing the Reserve Bank could do about housing.
But such tools will at best only slightly mitigate the next housing bubble. The Government won't do what the IMF strenuously says it should - sign up to a capital gains tax like every other OECD country, bar a couple of anomalies such as Turkey.
In the same vein, the budget has a sprinkling of actions in crucial areas such as social housing. But the Jackson Report delivered the excellent blueprint for this in August 2010. The current Government commissioned the report so clearly its dilatory response suggests it doesn't really rate this as an urgent issue.
Likewise, the Government has suddenly declared it will provide food in schools for needy children so they can learn better. Up to now it has steadfastly said it was the parents' responsibility.
Similarly, it has suddenly latched on to government-backed microfinance for poor families, an excellent tool promoted by the Children's Commissioner's report on child poverty.
The Government is also quick to claim credit for other people's hard work. For example, earlier this week English said Auckland Council had understood what needed to be done to increase housing supply in the city, to hopefully moderate prices a little.
But this implies the Government had pushed the council into that. In fact, the complete reverse is the case, with the accord between the two announced last week. It was the Government that moved significantly from its extreme and simplistic position, articulated by Housing Minister Nick Smith, for massive new building in the countryside.
The accord was shaped by and includes many of the key components of the far more thoughtful and effective strategy in the council's unitary plan.
Businesses should feel equally disappointed in the budget, even though there was a bit more money for R&D and to promote tourism and foreign students. The only new idea, however, was a u-turn by the Government. Having castigated the previous government for its tax credit on R&D spending, it is now proposing to go a big stage further. It will reimburse a portion of R&D spending for qualifying companies, even if they are loss-making.
Business got one big present in the budget, a 40 per cent cut in ACC levies over the next few years. English said this was possible because ACC's performance had improved markedly under this Government's management.
But again, that's very misleading. While there have been some modest operational improvements, the big turn round is in its investment position, thanks to the recovery of financial markets. Rather than its unnecessarily large levy hike when it came into office, the Government should have ridden out the investment cycle and kept levies moderate during the recession. The danger is the Government will hike levies again during the next investment slump.
Thus, at heart, this is a deeply cynical budget by the Key Government. It peddles false hope; it sells to the public SOE assets at the top of their valuations; it dabbles in small ideas; it shuns big ideas; and it claims to have a social conscience.
It might get away with all that at the next election. But forecasts for a weakening economy thereafter suggest reality will eventually trip it up.
- Sunday Star Times