Opening the Government’s books to the public was supposed to take the politics out of Budget time. That goal has clearly failed. It seems like every budget descends into bickering between the Right and Left, leaving any member of the public who isn’t part of either tribe confused. With the furore over the Treasury “leak” this year has probably been worse than any.
This bickering is all heat and no light. The fact is that both Labour and National have shown themselves fully capable of balancing the books in the short term, and both are completely useless in the long term.
Who is better at managing the books?
Since the Fiscal Responsibility Act was passed in 1994, both National and Labour have proven completely capable of managing the books… at least in the short term.
Sure, there have been bumps along the way, including most recently the Global Financial Crisis. But over time, surpluses have prevailed and debt has been reduced. And now debt is so low that the debt target has rightly come under scrutiny, as it is preventing us making long-term investments that would benefit the country.
The relaxed debt target and the fiscal black hole
Given our creaking infrastructure, booming population, and low debt (by international standards), relaxing the debt target was a pragmatic move by the Government. The net debt target of 20% of GDP was completely arbitrary and made no difference to our international credit rating.
What about National’s claim that it vindicates their claim of a “fiscal black hole”? The crucial point here is how the extra money the Government borrows gets spent.
The risk that National is pointing to is that Labour might spend the extra cash they borrow on operational spending pressures, such as teacher salaries. Generally speaking, running deficits and pushing up debt for operational spending is not a great idea outside of a recession. If Labour did that it could vindicate National’s claims of a fiscal black hole. However, given Labour’s past record it is unlikely they would do that.
On the other hand the Government should be investing more in things that will make our country run better in the future. Our infrastructure is groaning loudly and needs urgent attention. Running up debt in order to invest in infrastructure is an obvious thing to do, especially when interest rates are so low. That is basic business sense that National should understand.
The key thing with infrastructure spending is that we must avoid falling into the trap of allowing politicians to fund their pet projects. Instead the Government should create a transparent list of the country’s infrastructure priorities so we know the money is being well spent.
Neither Labour nor National is Facing the Long Term Issues
However, this short term success of both parties masks a glaring omission. The Crown Accounts have never included our biggest liability by far: New Zealand Superannuation. If they did, it would show that the country is actually bankrupt, and neither Labour or National have done anything about it.
Treasury doesn’t include this liability in the books because it argues we can reform NZ Super to make it affordable. In reality, we haven’t managed to do this in decades, despite full knowledge of the long shadow it casts over the Government’s books.
NZ Super currently takes up 16% of government revenue, and climbing. This year the bill increased by $1b. By 2030, it will tick over 20% and by 2060, it will swallow one quarter of every tax dollar. We can’t grow our way out of this – despite what the NZ First leader claims – because NZ Super is tied to wages.
With more and more baby boomers retiring, the costs of NZ Super will continue to rise, as they have done since 2008. So far, we have absorbed that cost by cutting every other aspect of public spending. That will eventually become too difficult and we will have to dip into the Cullen Fund. And when that runs out? We can’t borrow money to pay this ever-rising bill. We must either raise taxes or reform NZ Super.
The picture gets worse when you add in our growing Health bill. Again this year the country's Health bill jumped by $900m, and apart from the mental health changes there won't be new services to show for that. On current estimates by 2045 Health and Super will make up half of Government spending. Both need urgent reform, but neither National nor Labour have the guts to do what is needed.
Pre-funding NZ Super is bailing the Titanic out with a spoon
Instead of facing the unaffordability of NZ Super and reforming it, we are pre-funding it with the Cullen Fund. The purpose of the fund is to convince us that NZ Super is affordable, when it is clearly not. The Coalition Government has restarted payments to the Cullen Fund, instead of paying down debt or investing in sorely needed infrastructure.
It gets even nuttier. The Government is also talking to the NZ Super Fund about setting up an incredibly complex contract for the Fund to invest in infrastructure through a public-private (but actually 100% public) partnership. The Government will end up paying the NZ Super Fund a higher return than if it had simply borrowed the money itself.
This magical merry-go-round of money is designed to fool voters that the Government’s books are solid, NZ Super is affordable, and we can still get the infrastructure we need.
It is all a sham.
Better to end the whole sham now. We should reform NZ Super (and our health system) to make it affordable, and start taxing equity (wealth) instead of incomes. This would put the government books on a truly solid footing long term, and we could start investing in the infrastructure programmes our country sorely needs.