Eco-Economy: The Budget Hoax 2004

This report is based on the Fiscal Strategy Report and the Executive summary of the 2004 Budget documents.

The budget proves the Labour government is a right wing government whose spending is almost static in real terms.

The fancy programs announced with so much media hype will leave most New Zealanders no better off than they have been for the past twenty years.

Lower income families will benefit from the "working for families" package. There is also some relief for students and some useful previously announced primary health care initiatives.

Despite this the main elements of the budget are:

(a) The Government has decreased spending in GDP terms from the June 2003 level and plans to keep it that way

(b) Much of the vast tax surplus is being used:
- to repay Government debt, which tends to contract the economy;
- to build up the "Cullen" superannuation fund which is mostly invested offshore;
- and to increase foreign currency reserves to "subsidise" New Zealand's shocking current account deficit.

1. BUDGET SURPLUSES

Budget surpluses are to continue with the objectives of

(a) paying NZS Fund (the Cullen Fund) installments
(b) paying for capital spending out of revenue
(c) repaying debt

The Cullen Fund is at best a high risk venture heavily dependent on fickle international financial markets.

Paying for capital spending out of current operating revenue can be contractionary, forcing consumers into greater debt. Money used for capital projects becomes less available for household consumption.

Repaying public debt as a % of GDP is contractionary unless it is replaced by corresponding new private debt. Debt repayment reduces the total deposits in the financial system . New private debt is issued at higher rates of interest than the government pays and is thus economically inefficient.

"the debt objective remains a key element of the Government's fiscal management approach" (Italics and emphasis in the text p21).

The strategy is to push Government debt below 20% of GDP while increasing the Cullen Fund and boosting NZ foreign reserve funds.

2. ECONOMIC GROWTH

The Government's statements about economic growth are only true in the highly distorted world of GDP (gross domestic product)

GDP does not take into account the excessive current account deficit which has to be borrowed offshore. Nor does it take into account consumption of fixed capital. Including these and net transfers from the rest of the world gives what the country really has to spend. It is called the national disposable income.

There has been practically no growth in the country's national disposable income for the past 15 years. Through the current account deficit New Zealand has borrowed all its recorded GDP growth and most of the funding it has used to cover inflation. New Zealand has, in aggregate, produced nothing extra for decades. It has become a nation of takers instead of makers.

The GDP figures mask the ghastly truth that most New Zealanders have gone steadily backwards over the years. The truth most people have long known but not been able to put their finger on. The truth many people have had to go further into debt to buy the consumer goods they need.

3. THE BUDGET HOAX

The strategy is to keep core expenses around 32% of GDP by 2007/08 (B2&B3 p21) to maintain "structural operating surpluses of around 3% of GDP".

This means there can be very little increase in government core spending in real terms over the immediate time horizon. Even if real productive growth reaches 3% per year, the tax on that growth is just 1% of GDP , which is not enough to keep pace with population growth.

MANY PEOPLE WILL CONTINUE TO GET POORER.

Figure 5 p24 and Table A1.2 (B2 &B.3) both show a decrease in core spending from 32.4% of GDP in the June 03 year to 30.6% in June year 04 and 30.8% in June year 05, rising to 31.5% in 2006 and 31.6% from 2007 on.

THE GOVERNMENT HAS DECREASED SPENDING IN GDP TERMS FROM THE JUNE 2003 LEVEL.

3. THE CURRENT ACCOUNT DEFICIT

The strategy paper and executive summary are dishonest in failing to disclose the achilles heel of the New Zealand economy. By 2007, New Zealand's accumulated current account deficit will exceed $100b. In March 2003 the accumulated deficit was already 64% of GDP making New Zealand one of the most indebted countries in the world.

The budget does nothing to address the foreign debt which has masked the country's failure to produce more goods and sevices. The current account deficit will continue to expand, leaving the nation exposed to the vagaries and risks of exchange rates and burdening the next generation with ever increasing FOREIGN debt and more and more debt servicing.

4. GOVERNMENT DEBT

The government's claim on p22 (B2 & B3) that reduced government debt will reduce debt-servicing costs is untrue in the wider sense. What's important is the total debt (public and private) not just the public debt. Under the present privatised money system total debt MUST expand to avoid deflation. If the Government reduces its debt, then private debt has to increase. Private borrowing is much more expensive than Government borrowing. That makes Government debt more appropriate for the Government to use than private debt obtained indirectly through taxes.

The strategy paper claims reducing government debt now will enable it to increase debt again later to pay for Superannuation. The Government's bizarre strategy is to squeeze the economy, preventing growth, so there is LESS income to distribute later. Then, having destroyed the growth that could help pay for Superannuation it will resort to borrowing again.

5. LABOUR PRODUCTIVITY

Table A2.1 of the fiscal strategy report shows growth in Labour productivity of more than 1.5% per year on average through to 2020. There is little or no evidence of productivity growth in the economy as a whole in the recent past.

6. INFLATION

The budget figures assume a CPI inflation of 2.5% in 2005 declining to 2.0% in 2008, and nominal average hourly wage growth of 4.2% in 2005, 3.8% in 2006 and 3.6% in 2007.

This is not likely to be possible unless working hours are reduced. In practice inflation IS very nearly the change in the average weekly wage x number of people employed x 52. Anyone who disbelieves this can check it for themselves on the back of an envelope. Increasing wages by 4% will usually increase inflation by about 2.5%.

Historically, wage and salary earners do not become better off through wage and salary increases. That's why most people are no further ahead than they were years ago. The only way to fairly distribute wealth is through tax redistribution or better still, by way of an unconditional national dividend that does NOT appear in wages and salaries.

7. THE NEW BUDGET SPENDING

Most of the proposed new expenditure in 2005 comes out of the existing fiscal surplus. Extra tax from growth is absorbed by population growth.

That's why the budget seems so mean.

Over half the "capital" "spending" is not spending at all. Instead, it represents tax revenue shifted to foreign exchange reserves, presumably to be "used up" in an effort to keep a cap on the TWI (the NZ dollar exchange rate) in the face of the increasing current account deficit. That's a direct subsidy of the rich by the poor because the rich contribute much more to the current account deficit than the poor do.

Assistance to business is miniscule. Half the capital input is euphemistically allocated to "rail decisions".

Much has been made of the "Supporting Working Families" package. The package, though minimal, does represent a start towards compensating all those New Zealand families whose wellbeing and real disposable income have suffered in recent decades. The package totals some $2.9b/year by June 2008, of which nearly10% will have been consumed by inflation before it is distributed.

The health vote rises from $8.64b in the 2004 year to $9.34b in the 2005 year. Allowing 2.5% inflation and 1% population increase, the real increase is more like $360m or about 0.25% of GDP. Most of this is usefully allocated to the primary health care package.

Half the new education funding is to cover increased education demand, and is not for new programs. One third of the remaining $1b or so over four years goes to the pre-school sector and most of the rest to ease the impact of tertiary fees and eligibility for student allowances. These programs will also be useful though they do little to resolve the issue of student debt that now exceeds $7 billion.

The justice budget includes some $750m over the next four years. $250m of that is for the four new prisons already underway. $200m is to operate the new prisons. None of this is "new". Only about $100m of the residual is mentioned in the executive summary, mostly for extra policing.

8. SPENDING PRIORITIES

Aside from the "working families" package and some extra spending on health, education and justice, other sectors of government have been hacked to the bone with very little extra spending over the June 2008 budget horizon. The Government can only keep within the self-imposed fiscal envelop contained in the strategy paper if Peter is robbed to pay Paul. Spending elsewhere in Government will have to remain static or fall in real terms.

By far the biggest allocation after "working families", health and education is the slush pot for "in-year" decisions totaling $1.6 billion through June 2008.

As usual with these things, the budget numbers include substantial amounts for programs already announced and underway, so it's not all strictly new spending despite the polished press releases and political spin.

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