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Dear Friend, As I write this, Grant Robertson is unveiling Budget 2020 in Parliament. Two members of our team have just emerged from the pre-Budget briefing. Below, our Consulting Economist Joe Ascroft summarises the contents of the Budget and what it will mean for you, the taxpayer. We've also had Neil Miller – a former Treasury Analyst and Director of Research for the Leader of the Opposition – in the room. He's written for David's Kiwiblog and well as a separate piece on the political ramifications of today's announcements (see below). Overall impression: The Blank Cheque Budget – big set up for election announcements to comeThe economic landscape in New Zealand has fundamentally changed in recent months and if anyone had forgotten that fact, Budget 2020 is a wake-up call. Debt is expected to skyrocket, economic growth is projected to collapse, and unemployment is forecast to climb higher than during the GFC. The total size of the Government’s fiscal response is simply enormous. The Budget centre-piece is a $50 billion ($27,332 per household) ‘Covid-19 Recovery Fund’ to be spent over five years, which includes a (more focused) extension of the wage subsidy schemes among other policies. The Budget was clearly rushed and it showed. Much of the announcements are simply big numbers with no actual allocation. Think Shane Jones's Provincial Growth Fund on steroids. All of the "Wellbeing" focus from last year has been unceremoniously canned. Unlike in recent years, none of the Associate Finance Ministers were anywhere to be seen and the Secretary of the Treasury did not speak to the room or make herself available to take questions. About half of the recovery fund has still been left available to be spent across the forecast period as required. More spending announcements should be expected in the coming months to be funded from this allocated balance. And yet despite the severe recession we now find ourselves in, the Government has still wasted plenty of taxpayers’ money. KiwiRail, our foreign aid budget, and NZ Post all receive big cheques. The economic view (Joe Ascroft – Consulting Economist)Skyrocketing debt Unsurprisingly, the Government’s Budget Responsibility Rules (which capped Government spending and debt in coming years) are dead. Net debt is forecast to climb from $57.7 billion ($31,500 per household or 19% of GDP) to $200.8 billion ($109,700 per household or 53.6% of GDP) by 2024. Deficits are expected to average $28 billion ($15,300 per household) per year across 2020 to 2022. It’s easy to get lost in the numbers – but these are truly eye-watering figures. More than one in every four dollars spent by the taxpayers will be borrowed over the next three years. Luckily for the Government (and taxpayers) borrowing costs are expected to remain low – in no small part due to the Reserve Bank’s quantitative easing (freshly-printed cash used to purchase Government debt) programme, which yesterday was doubled from $30 billion to $60 billion. If the Reserve Bank hadn’t embarked on this programme, financial markets might have struggled to digest forecast debt in coming years. To put that in context, $60 billion amounts to more than half what the Government plans to spend in the next year. To say the least, the Reserve Bank is doing a lot of heavy lifting to enable the Government's spending programme. The big risk? If there is any inflationary pressure in the coming years, the Reserve Bank will have to pull back on printing money and push up interest rates. In that world, Government debt would become a problem very quickly. Unemployment climbs Treasury predicts unemployment to climb to 8.3% in 2020 and – with the aid of the Government’s $50 billion recovery fund – fall to 4.2% by 2022. However, if the fund fails in its goal to stimulate the economy (perhaps because the spending is poorly targeted, politically manipulated, or poorly managed) then unemployment will remain higher for longer. The main forecast (excluding the recovery fund) assumes unemployment will remain at 5.7% in 2022. The $50 billion fund The Budget centre-piece is a $50 billion ($27,332 per household) ‘Covid-19 Recovery Fund’ to be spent over five years. Today the Government has announced $15.9 billion ($8688 per household) of new initiatives to be packaged under the ‘Recovery Fund’ including:
$10.7 billion ($5,847 per household) of this fund has already been allocated through to April. The Rest?
The Politics (Neil Miller – Analyst)The Minister of Finance Grant Robertson describes Budget 2020 as a “once in a generation” budget to combat “a 1-in-100-year threat” of the global COVID-19 pandemic. It certainly contains high level of additional spending, headlined by the $50 billion COVID-19 Response and Recovery Fund (of which only about $20 billion is still actually available today). To put $50 billion in context – the amount of new spending in a normal year’s budget is usually about one to three billion. This spending will be funded by significant increases in debt as tax revenue will remain steady. There are no new taxes or tax increases announced which will be something of a relief to taxpayers. However, it is also a “blank cheque” budget. Under the large headline figures, there is often a lack of detail about the spending which makes the quality of many proposals hard to assess. During questions, the Minister indicated that some of the $20 billion will go to Health (including laboratories and contact tracing) but the decisions were yet to be made. We have the bill, but do not know what we are going to be served. In Defence, over half the new spending – the purchase of Super Hercules planes – is contingent because Cabinet has not considered a business case, far less approved it. That is a $900 million ($491/household) “maybe” even though Defence Minister Ron Mark says it remains his number one priority in Defence. Yes, the Budget was put together quickly under tremendous pressure but COVID-19 can not be blamed for over two years of delays on the planes. Treasury is publishing a summary of initiatives not in the Estimates on the week ending 22 May 2020. Most of this is information that would usually be in the Budget itself. In any case, how buying more planes resolves a pandemic is unclear. The Government has locked in high spending, but many of the hard decisions have been deferred until after the election. It is only after the election that New Zealanders will have to face the realities of paying back debt, and new policies from a new Government. Budget 2020 has one eye firmly on the election, hoping the economy can continue a slow recovery, hoping there is no second wave of infections, and hoping the current Government can be returned with a mandate. If it is, expect a change in policy direction. Questioned about the lack of significant tax reform in the Budget, the Finance Minister confirmed there was none, and none would happen this term. That carefully leaves open the possibility of significant tax reform (including new taxes and tax increases) in the next term if Labour retains the Treasury benches. In short, buy now, pay later. There are other worrying trends. There is evidence of interest group capture resulting in high levels of spending which are hard to justify. This includes funding boosts for certain industries (racing, fishing, arts, sports and more coming soon for media), certain voting blocks (including the $911m Maori COVID-19 package and the Pasifika funding parcel), and certain failing industries (KiwiRail gets a projected boost and NZ Post gets Government support despite being “no longer financially viable”). The Government is also centralising decision making into new bureaucracies. "Workforce Development Councils" will "strategically plan" for the recovery of industries and jobs, and "Regional Skills Leadership Groups" will "improve information gathering". This is not a small investment – $276 million ($150/household) for a lot of officials, boards, reference groups, and consultation meetings. The Government is also planning to run a bulk food distribution operation called the "New Zealand Food Network" despite a number of companies and organisation already working in this space. A "Infrastructure Industry Reference Group" is considering 1924 applications for $136 billion of projects. Clearly not all of these will be of high quality or quick to start. A new road in starting in 2023 is little use to the unemployed in 2020 and 2021. The increased Government control of the economy mirrors increased Government control of freedoms. Budget 2020 confirms that this is a hands-on Government, even if the details of what it might have its hands on remain sketchy. The Taxpayers’ Union will continue to provide expert additional analysis as our team has time to consider the details further. One early concern is that the Government’s projections on unemployment remaining under 10% and economic growth returning next year seem very optimistic. It appropriate to finish by acknowledging the hard work of Treasury officials and Ministerial staff preparing this document. This Budget was not what they planned six months ago or even six weeks ago. The key decisions were signed off on 6 April, very late in the normal Budget cycle. Minister Robertson even mentioned that some of the decisions in today’s papers were made on Monday. However, it is an important Budget and needs to be scrutinised closely to ensure taxpayers are receiving value for their money. Also: Kiwiblog: Budget Lockup 2020 – A report from the inside As you can see , this Budget (and the election campaign to come) is going to need a lot of scrutiny if we are to avoid a 1970s-style 'big government' economic paralysis. We'll be burning the midnight oil over the next few days as we wade through the detail and pick out what the politicians don't want you to know... Thank you for your support,
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New Zealand Taxpayers' Union Inc. · 117 Lambton Quay, Level 4,
Wellington 6011, New Zealand
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Authorised by The New Zealand Taxpayers’ Union Inc. Level 4, 117 Lambton Quay, Wellington. |
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