Blue sky Budget or hard calls?

18:41, May 14 2014

A budget can be a lot of things.

A spending plan for the next 12 months, a medium-term fiscal framework, an ideological burp (or smirk) or even a naked bribe.

Most years, and notably in election years, it is a cash-based manifesto for re-election.

But a long term vision for the country that makes unpopular hard calls? Hmm, less so.

Tucked in behind Treasury's four-year forecast horizon there are blue-sky projections, and politicians will always tell you their short term taxing and spending plans are part of an enduring plan for the long term good of the country and its people.

So if that is true, what would today's Budget have in it? Which seeds would it plant for the future growth of the nation and its wellbeing?


The first would be a recognition that the cost of the ageing population is not served by a fingers-in-the-ear refusal to discuss raising the pension age.

Australian Treasurer Joe Hockey took a stick to the problem in his Budget on Tuesday, signalling a rise to 70 by 2035.

In a contribution to Treasury's long-term fiscal thinking, former National minister and fully-paid-up policy wonk Simon Upton pointed out that, according to the United Nations, life expectancy beyond the age of 65 was expected to increase to 23.7 years for women and 20.1 years for men by 2050.

It seems to be a no-brainer that policy settings are needed to address pension ages, private savings levels and an expectation of longer periods in paid work - and as soon as possible.

As former finance minister Sir Michael Cullen told the same Treasury seminar, "gradual adjustment over time is preferable to big bang pyrotechnics however much that may appeal to the odd pyrotechnician". The vulnerable in particular can best cope with change if it is gradual.

No prizes for John Key and his ministers on that one. The Budget could also pay down debt to get us back to where we were before the Global Financial Crisis and ready the country for the next deluge.

On this one the Government deserves a qualified tick. It inherited net debt of about $11 billion and increased borrowing to more than $60b, in part to shield those who rely on state transfer payments but also to cut taxes.

It is now moving to reverse that debt binge.

On the December update numbers net core Crown debt was tipped to decline from 26.3 per cent of GDP to 22.3 by 2018 but in nominal terms that was actually a small beer increase - from $59.8b to $60.4b. That's essentially debt repayment by standing still and letting growth in the economy do its work.

In the same vein it could also signal more for the Earthquake Commission and the Cullen superannuation fund - another qualified tick as these are both expected to be addressed in the Budget.

In the case of the EQC, though, it is not a simple issue because the risk - unlike the ageing population - is so unpredictable.

When the quake struck in Christchurch, EQC's fund was quickly overwhelmed. The Government guarantee that stands behind it makes it debatable whether the Crown should instead take all the risk onto its core balance sheet.

Hand in hand with the cost of pensions is the rising healthcare bill. Health is always a big ticket item in the Budget, but the long term issues are harder to wrestle with.

However, there are ways the Government could move, especially in areas such as preventative public health, a big tax increase (advocated by the Maori Party) to cut smoking or even the "nanny state" option of fighting obesity through the tax system.

If an "investment approach" is appropriate to ACC or social welfare - to spend more now to save long term - then why not in health, education or even assistance with affordable housing?

There are other options out of left field. In transport, for instance, there is growing evidence that the young are changing their habits, with fewer getting their driving licences and fewer buying cars. The amount of "driving" is falling or likely to fall with implications for the use of public transport.

That "peak car" phenomenon will have a profound impact on land transport funding and the cost-benefit ratio of road building. Here Labour and the Greens are streets ahead of the Government.

When it comes to the roads themselves, again the "investment approach" could be applied. Why not build roads out of more expensive materials - concrete for instance - that last longer and have lower maintenance costs?

On the tax front there is a growing need to address the "bleeding" of revenue through international corporate structures and the internationalisation of retailing, with the loss of GST revenue that follows.

And that's before you get on to a broader tax base or climate change measures.

But in the meantime there is a Budget to deliver and an election to win. As former Luxembourg prime minister Jean-Claude Juncker said: "We all know what to do, we just don't know how to get re-elected after we've done it."

The Dominion Post