No easty option to balance Goverment's books

OPINION: This year will be an extremely tough for the public service. Public sector and welfare reforms were going to be demanding enough. Now, filling a bigger than anticipated fiscal hole will provide a far tougher challenge.

It now seems very unlikely that the Government is going to get back to surplus by 2015, despite keeping tight reins on spending.

The global economic outlook weakened considerably in the latter part of 2011. In the euro area, politicians have not been able to find credible and lasting solutions to avoid the public debt crises in Greece and Italy of spreading to other countries. The lack of political agreement on fixing the United States public sector deficit is weighing on the US economy. The risk is that things could get much worse.

The New Zealand economy is lacklustre too, as households are paying back mortgages, rather than adding to them, and businesses are holding back on investment. New Zealand's export outlook has lost its gloss because of the European crisis and slowing Asian growth. The situation will not change any time soon.

The net result is that tax revenues in the years ahead will be lower than was expected in the pre-election fiscal update.

Consensus forecasts indicate a $1 billion budget deficit in June 2015, rather than a surplus. At NZIER we see reasons to be far more pessimistic about economic growth. If we are right, tax revenues could be $5b less than forecast in 2015, while spending on income support and interest payments would be higher. Regardless, the prospect is a fiscal deficit, not a surplus, and the hole will be large enough to eat up most, if not all, of the $800 million to $1.2b earmarked for new public spending each year.

One option would be to cut spending. Reducing the number of Wellington bureaucrats won't be enough. The magnitude of the shortfall implies shelving the $5.2b of earmarked new money, a zero budget for the next three years. This would be a very tough ask: a large share of the new money goes to the health sector just to stand still, covering rising costs from population growth, ageing, and inflation.

Under NZIER's growth forecast, shelving only the earmarked money would not be enough: twice or three times as much would be needed. At those levels cutting public spending may be counterproductive, undermining already weak economic activity and tax revenues, at least in the short run.

The areas where savings that size could be made are either off-limits (for example, the poorly conceived interest free student loans or the breadth of Working for Families), or need timeframes that extend beyond 2015.

The second option is to raise taxes. The election showed there is not much political appetite for this. And raising taxes can supress activity and so be counterproductive for tax revenue in the short term, and for economic growth in the long term.

The third, and painless, option would be to grow the economy. But there is no instant fix. The Government can create an environment that supports medium term economic growth: regulations and taxes that encourage work, enterprise and innovation; and investment in public infrastructure and skills to support economic activity. However, any initiative is unlikely to have meaningful results in the next three years.

There is an alternative - push out the target to return to surplus, as 2015 is no longer credible without drastic action. That should not come at the cost of abandoning tight fiscal management. A new, credible target to return to surplus would need to be set to appease financial markets.

As public servants come back from holiday,they will again be asked to identify theprogrammes they think could be stopped or scaled back, and to achieve more with less. But this time around the low hanging fruits have gone. None of the available options will be easy or palatable.

Jean-Pierre de Raad is chief executive of the New Zealand Institute of Economic Research, an independent economic research and consultancy group. For more, see nzier.org.nz.

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Ceejay   #3   10:19 pm Jan 30 2012

I find it interesting that one of the biggest savings that could be made is always tip-toed around. Yes, I am talking about means testing superannuation. This would bring NZ in to line with a policy already in place in most other OECD countries including Australia. The effect of retirement age people occupying employment positions is stark - Each employed retiree contributes directly to another person down the line being unemployed and paid for by the government. When this person is supporting a family the required benefit payment is likely to be more than the total amount of tax paid by the retiree. Saving the superannuation amount that would otherwise be paid allows some redistribution of the imbalance.

SPC   #2   12:44 am Jan 28 2012

A signal of a move to a CGT to improve long term tax revenues would reassure foreign lenders about the future of the government's accounts, as would would some common sense on super.

1. We end the borrowing a $B to put into peoples Kiwi Saver accounts each year.

2. As we cannot deliver a surplus from the budget to provide money for the NZSF, we take contributions, at 2% for the employee and 2% for the employer - so that it grows sufficiently to allow us to afford tax paid super after 2030.

v   #1   08:24 am Jan 27 2012

Doesn't really help when some Govt council CEO's get $48,000 and $66,000 pay rises does it. Wasn't getting back into suplus by 2015 an election pledge from National? So much for that one then.

We could cut back on the excess salaries that some CEO's get, yes a pay cut in tough economic times. I bet most of the public would vote for that, but the CEO's and those in power won't.

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