English on spending

Bill English said last week:

Without slashing and burning, we have managed to rein in the runaway government expenditure that was a feature of the Labour Government in the early 2000s, when spending increased by 50 per cent in five years.

And we’ve done that while significantly improving public services.

The total annual cost of new initiatives in the Government’s last six Budgets is less than $2.9 billion. By comparison, this extra cost in the last six Budgets of the previous Government totalled $20 billion.

That is a massive difference. And it is impossible to imagine that a Labour-led Government could have restrained extra spending like that.

The Treasury now expects nominal GDP over the next four years through to 2019 to be around 1.5 per cent lower than forecast in Budget 2014 – mainly because of lower inflation.

That is about $15 billion less and, to put that in context that is more than half of the impact of the global financial crisis.

So these conditions are presenting some real challenges for the Government’s books because it’s the nominal economy that drives PAYE, company tax and GST receipts.

In addition, although we’re seeing more bank deposits which would ordinarily lead to us collect more tax, these are being more than offset by lower interest rates.

Consequently, the Government is collecting less tax.

In which case we should spend less, to match.

In total, Treasury now expects the Government will collect $4.5 billion less tax revenue over the next four years than it expected at the last Budget.

The lower-than-expected revenue, as well as some quite significant non-cash items in the Government accounts, means getting back to OBEGAL surplus is more challenging.

In the Half-Year Update in December, the Treasury forecast an OBEGAL of around $570 million for the 2014/15 year, which is just 0.2 per cent of GDP.

And it forecast a similar OBEGAL surplus for 2015/16.

The Treasury is still finalising its forecasts for this year’s Budget.

But it’s fair to say that both of those forecasts have deteriorated a little since the Half-Year Update.

So we expect the Budget to forecast a slightly bigger deficit for 2014/15 and to forecast a slightly smaller surplus for 2015/16.

This is not the end of the world, but it does mean the Government has failed to achieve the target it had. And we need the Government to not only achieve surplus, but to have large enough surpluses to pay off debt. This means even more spending restraint.

So despite the downturn in revenue, we will stick with the $1 billion annual operating allowances for Budgets 2015 and 2016.

We have a track record that I think the public understands.

We’ve maintained welfare support, we’ve maintained and improved health and education, and we’re thinking ahead to the requirements of a growing economy and a better community through to 2020.

We won’t change that approach just to turn a small forecast deficit into a small forecast surplus. Other things matter more.

It is worth remembering though that the smaller the state’s portion of the economy is, the faster the economy tends to grow. That’s not an argument for a minimal state which can’t provide any social services. But it is an argument for greater fiscal discipline and the aim shouldn’t just be to get expenditure to under 30% of GDP, but around 25% over time. The more money families and businesses have, the better it is for the economy.

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