NZ Herald on Spending Cap

December 9th, 2011 at 12:00 pm by David Farrar

An excellent editorial in the NZ Herald:

Sir Roger Douglas has departed the political stage again but he may have left another enduring monument in Act’s agreement with National this week. A law to cap increases in could prove to be as effective as one of his great legacies of the 1980s, the Reserve Bank’s inflation target.

Like the monetary target, the will sometimes be honoured in the breach but the target is no less effective for that. When it is breached, there needs to be a good reason, and a credible path set to bring inflation back into line. So it will be for the fiscal cap.

I think many have under-estimated the political power the cap will have.

It is too easy, as the previous government proved, to take on ever larger commitments when business is booming, the workforce is fully employed and tax revenue is providing budget surpluses. The country hardly noticed that state spending was steadily becoming a greater proportion of the economy in the years that surpluses also enabled continuing reductions of public debt.

More generous medical subsidies, paid maternity leave, early education, interest-free student loans, higher public service pay rates, a “super goldcard” are not the kind of expenses that can be wound back when the business cycle turns down and revenue drops. They instantly become entitlements that a future government fears to threaten.

Exactly. And the sad reality may be that the days of debt fuelled 3%+ growth could be in the past for-ever. In a new debt-averse world, with Europe taking a decade or more to get its debt under control, we may never get growth again like we have had in the 1990s and 2000s.  We may need to get used to 2% growth being the norm. This is why we need to stop Governments from imposing costs on New Zealand we can’t pay for.

Ultimately, of course, a parliamentary majority can do whatever it wants in this country and no Parliament can bind the next. A statutory spending restriction can be breached and even repealed as readily as the Bill of Rights Act. That act requires the Attorney-General to alert Parliament to proposed legislation that would breach the rights enshrined. The public takes note, the government needs a convincing case to proceed in political safety.

Laws of such limited power should not be under-rated. The lack of any stronger sanction is a strength, it makes it harder for a future government to repeal a statute that can do more than keep governments honest.

And hopefully it will increase the financial literacy of the public. We will know how much more a Government is planning to spend over the baseline amount per capita.

National has been not much keener than Labour on a legislated spending limit but it is already living within the limit agreed with Act. The cap is a credit not only to Sir Roger who has long argued for it, but to the recently deceased director of the Business Roundtable, Roger Kerr, who maintained a lonely watch against rising public expenditure, and Don Brash whose brief leadership of Act restored its focus on economic fundamentals.

Fiscal responsibility is a prosaic, thankless contribution to public welfare but if government spending rises no faster than population growth and low inflation from here on, we should all be better off.

Absolutely. If you look at all OECD countries over the last fifty years, those who manage to have the state consume a lower proportion of GDP have on average much much higher economic growth than those with a higher proportion.

Now it is a balancing act of course. If the state only consumed 5% of GDP, then we’d probably have no publicly funded schools or hospitals. But the current level of state spending is the highest in our history, so I don’t think drawing a line at today’s spending level and saying real spending per capita should not increase beyond today’s level is if anything a little on the generous side.

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15 Responses to “NZ Herald on Spending Cap”

  1. unaha-closp (1,033 comments) says:

    Unlikely to survive beyond the first session of the next government.

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  2. JayMal (29 comments) says:

    Is state spending really the highest in history? It may be in $$ terms but if you take into account inflation and relative to GDP I am not so sure. I seem to recall it boomed in the war years (obviously) and hit a peak back in the 80s and early 90s. Again from memory it was in decline for a while after that before levelling out to around the current level.

    [DPF: Sadly in the last financial year total crown expenses were 49.9% of GDP. Around 1990 it was 41% and and was under 20% in WWII]

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  3. YesWeDid (1,002 comments) says:

    ‘We may need to get used to 2% growth being the norm’

    You mentioned this to Bill English? The National ‘plan’ to get us back to surplus requires growth of 4% otherwise we just keep racking up the debt.

    And what is the point of a spending cap without also addressing the revenue side? How about Labour (in a coalition agreement with Mana – so they can blame Mana) impose minimum tax levels?

    [DPF: Increases in tax rates needs a law change. This is simply doing the same on the spending side]

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  4. Cactus Kate (538 comments) says:

    What hogwash of an Editorial, even Douglas himself hasn’t taken such emblazoned credit for this in ACT and has made a correction.
    As for Brash. He mentioned “Maori” far more times than the two words “spending cap” during his time as leader.

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  5. Adolf Fiinkensein (2,668 comments) says:

    Has the oleaginous Herald already consigned Rodney Hide to the black hole of history?

    I seem to recall he had more to say about this issue than just about anything else and yet he is ignored.

    A disgraceful opinion piece.

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  6. Graeme Edgeler (3,220 comments) says:

    The Herald confuses Roger Douglas and Rodney Hide in first sentence. Why read the rest?

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  7. V (660 comments) says:

    “Now it is a balancing act of course. If the state only consumed 5% of GDP, then we’d probably have no publicly funded schools or hospitals”

    Rubbish, we would have hospitals and schools provided by private, not for profit or charity providers or a combination of these three.

    It’s the old story, the public will always be able to be seduced by the idea of obtaining something for nothing via taxation.

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  8. simonway (356 comments) says:

    And the sad reality may be that the days of debt fuelled 3%+ growth could be in the past for-ever. In a new debt-averse world, with Europe taking a decade or more to get its debt under control, we may never get growth again like we have had in the 1990s and 2000s

    From the mid-’90s onwards until the GFC, New Zealand had a budget surplus, no? Assuming you’re referring to public debt, how exactly can a surplus be “debt-fuelled”?

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  9. V (660 comments) says:

    @simonway
    Money is borrowed into existence at a faster rate (as debt is created) and simultaneously provides more dollars that are taxable. If debt growth stops, so does your tax revenue.

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  10. JamesS (352 comments) says:

    “debt fuelled 3%+ growth” and ” We may need to get used to 2% growth being the norm”

    Am I the only person who has twigged to the concept of 5% economic growth per year based on ummmmmm productive exporting activity? god forbid that should become a reality!

    God forbid Mr Key would point out to businessmen there are 10 million customers in London and New York and Moscow just waiting to give you their money if only you would get off your a*** and bloody well export to them.

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  11. V (660 comments) says:

    @JamesS
    Nice in theory, but if everybody tries the “lets increase exports” strategy and the “minimise our imports” strategy what happens?
    Of the three countries you mention, two are arguably living beyond their means as it is.

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  12. JamesS (352 comments) says:

    What happens is – we export more (duh!) I would rather we tried to export 5 times as much and it fails than not at all.

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  13. The Scorned (719 comments) says:

    The reason we produce is to consume…period. Why would we want to import LESS….?

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  14. Mark (1,301 comments) says:

    Is this not an absolute s charade of a policy and totally meaningless. The next labour government will simply change the legislation if it is voted in with such a mandate. That is democracy. In respect of the National government they do not need a law change to run a fiscally disciplined approach.

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  15. Clint Heine (1,560 comments) says:

    At least to Sir Rogers credit, he did say on Facebook that it was Rodneys policy that he pushed very hard to get.

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