Igniting potential, but where are the matches?

BY COLIN JAMES
Last updated 08:45 17/05/2010

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John Key plausibly excuses the lack of strategic impetus in Bill English's first Budget last year on the grounds he had to fight the recession. Now Mr Key claims to be plugging the huge hole Mr English left in that Budget - innovation. He has discovered the economic commonplace it is innovation, not bulk, that durably drives up real incomes.

OPINION: Had he taken as his prime ministerial portfolio not tourism but research, science and technology or RST, as he originally intended, he might have reached this understanding sooner. Sir Peter Gluckman would have got in his ear faster. Since Sir Peter signed on as Mr Key's chief science adviser last July, Wayne Mapp has discovered the RST part of his duties and has, with outside help, been restructuring administration and delivery.

The next step in Mr Key's journey to the future is to squeeze money out of Mr English. That was the nub of his pre-Budget pronouncement last week. But will he turn rhetoric into a step-change? Or is he actually more at home irrigating more of the Canterbury plains and digging up minerals - that is, mining the landscape on which New Zealanders perch rather than mining New Zealanders' intellects, insights and inventiveness?

New Zealand's economic history since about 1810 has essentially been that of an extractive economy: forests, soil, aquatic and underground resources. That it built one of the world's richest economies by 1950 reflects both the bounty the settlers found here and their ingenuity, plus, critically, some good science.

For 25 years governments have starved the last bit. Under the Clark ministry, state spending on RST slid as a percentage of GDP, except for a last-gasp business tax credit and primary industry fund in 2008.

Not only does the private sector underinvest in RST by comparison with countries that have gone past us since 1950, the Government underinvests too.

In last year's Budget Mr English cut RST funding. Since then Sir Peter has been blunt-speaking round the Beehive traps. Even Mr English has softened. In February Mr Key said RST would get some of the little new spending Mr English was letting him have.

Last week he said new spending on RST is third biggest after health and education. The new RST spending is $56 million a year, focused (with some reason) on business. Another $24m a year is being siphoned off some existing research and channelled to businesses.

So, roughly $80m out of $1.55 billion additional spending in Thursday's budget goes to RST. (That total is $1.1b of new spending plus $450m reallocated from "low priority" spending such as getting tax forms out to taxpayers on time.)

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You get Mr Key's picture? RST is really big. It is gobbling up one-twentieth of the additional spending.

Can you expect your children to live in one of the world's most sophisticated economies? Not exactly. Whether Mr Key's munificence takes spending back past, or even to, the level Labour left, plus inflation, cannot be known until we have all the Budget numbers. But we do know it is not a step-change.

Mr Key talked in his RST pre- budget speech of "igniting potential". But he used a small match, well clear of all but a little flammable material.

But let's be fair to Mr Key, who has seen Kevin Rudd's poll ratings plunge, a discomforting experience for a poll-watcher. Selling science to a complacent, gimme populace is tough. How many hip operations could you get for a boffin's annual salary? Who cares that Weta Digital thinks up world-leading imaging technology?

It is easier to promote staples - aquaculture, dairying, tourists and (with a half-pie skilful sales pitch) minerals. But factor in the recent slippage in former rhetoric that Thursday's tax changes are supposed to be revenue-neutral. If they are not, then cuts in income tax will be part-funded by borrowing.

If some of that borrowing goes into savings and investment (an English Budget objective), that will raise future incomes. Likewise with borrowing to swell the Cullen fund, which Mr English blocked last year, thereby passing up a global sharemarket windfall which could have funded some development here.

The point - borrowing to pay for flat-screens or to move into an overpriced house does not increase incomes; borrowing for investment does, far more often than not.

RST is (mostly) investment. A younger, adventurous Mr Key might have increased the $11m a year for the Global Research Alliance on agriculture greenhouse gases he added post-Budget last year to $111m a year - still modest beside this Budget's additional spending.

That might have made the AgResearch-based Centre for Agriculture Greenhouse Gas Research a world centre, attracted cutting-edge scientists from round the world, done some bold new science and generated unpredictable spinoffs that lift incomes in New Zealand.

A risk, of course. And so far, unlike young trader John Key, middle- aged political John Key is a play-it- safe man.

ColinJames@synapsis.co.nz

- The Dominion Post

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