The 2009 Budget

First of all kudos to Bill English and Treasury for getting rid of the old rolling embargo that was in place for previous budgets. This meant you could not blog a specific item until the Minister of Finance read it out in his speech. It made blogging and reporting very hard as it was not always clear whether the part you wanted to cover was even in the budget speech, let alone when.

So now it just a simple 2 pm embargo which means I can just hit publish at 2 pm, which I have done.

Deficits and Debt

The fiscal parameters inherited by Labour meant gross debt was tracking to reach 48% of GDP by 2013, and 70% of GDP, or $227 billion by 2023 – equal to $180,000 of debt for every household of four. There was a very significant structural deficit. This is because the economy will have $50 billion less output over next three years than forecast in the 2008 budget.

The status quo would have meant future generations would face either massively higher taxes, or cuts in health and welfare spending as more and more money would be spent on debt servicing. Debt servicing would have increased to $14 billion a year – more than current Vote Health.

The measures outlined in the 2009 budget are forecast to have gross debt peak at 43% of GDP in 2016/17 and then decline to 37% by 2023 – almost half the 70% on existing parameters.

The projected deficit for this upcoming year is still a very large $7.7 billion and next year looks to be $9.3 billion, before gradually reducing. So the Government is borrowing a lot of money to help keep people’s incomes and jobs steady.

Labour budgeted for $1.75 billion a year of new spending initiatives. National is reducing this to $1.45 billion for this year and $1.1 billion in out years. This is pretty reasonable – in the late 1990s it was only $600 million a year. However it will pose some real challenges in around 2011/12. For the next two years expectations will be lowered due to the global recession. People are accepting zero wage increases etc, and lobby groups know now is not the time to ask for lots more money.

But in two to three years, with the recession behind us, there may be a lot of pressure for new spending beyond the $1.1 billion. Inflation and population growth alone can take up a fair bit of that. We will still be running large deficits, but the economy will be growing and the Government will come under real pressure.

Spending Initiatives (generally all over four years)

  • $323 million for home insulation – grants of up to $1,800 for most households and up to $3,000 for community service card holders
  • $3 billion for Vote Health, being $2.1b for DHB services, $70 million for 800 more health professionals, $130 million for maternity services and $245 million for 20 new elective surgery theatres
  • $1 billion in new spending including $523 million on new schools and school upgrades
  • $900 million for Justice including 600 more police for $183 million, 246 more probation officers at $256 million and 1,000 more prison beds at $385 million

There is lots of little stuff also, but the Government has targeted most of the extra spending in a few key areas.


Unemployment is forecast to peak at 8% in September 2010. I hope so, but suspect it may push 10% as I think the US and Europe are more stuffed than people realise.

The Government has committed $7.5 billion of infrastructure investment over the next five years through toad building, state house building and refurbishments, new and improved schools and broadband rollout. On top of that 600 more police, 246 more probation workers and 800 new training placing for health professionals.

Labour’s planned infrastructure/capital spend was $900 million a year – it has increased to $1.5 billion a year. Labour will claim more should be done for jobs, but in reality National is spending more on infrastructure projects than Labour would have. And the long term solution to jobs is having a competitive robust economy.


The line by line reviews have identified $2 billion of savings (around $500 million a year) that is being reinvested in frontline services. This means that that the $1.45 billion increase in operating spending will fund $1.9 billion of new initiatives.

As an example the Government has cut funding for adult community education hobby courses by $54 million, and increased special education funding by $51 million. Sounds like a good reprioritisation to me.

Also reducing support function expenditure at the Ministry of Education by $18 million to help fund a $36 million literacy and numeracy initiative.

Tax Cuts

Yes they are gone. The official Government line is deferred, but to no particular date, so I say they are cancelled. When tax cuts are budgeted again in the future, it will be a new package I suspect, not just reinstate the planned 2010 and 2011 tax cuts.

English said that it is highly unlikely tax cuts would be reinstated before the next election. He was asked if he would deliver tax cuts before the books were back into surplus (which is not until 2017), and he said the main thing they would look at is if the economy was growing strongly enough.

The deficits for the next two years, even without the tax cuts, is a combined $17 billion. They are a victim of timing partly. I did ask the Minister what their rationale was for deciding to break a tax cut promise rather than a spending promise such as interest free student loans, especially as he originally opposed interest free student loans but always campaigned for tax cuts. English responded that people feel insecure in a recession, and they made a decision not to cut any current entitlements to help confidence and security.

Several from the “right” congratulated me on my question, as no one else really pushed back much on the tax cuts vs spending issue. I was however amused to be berated by Miss Ten, who was attending as an analyst, for trying to get interest put back on her rather large student loan.

The $900 annual cost of the future tax cuts is around 20% of the total tax cut package. The Oct 2008 and April 2009 tax cuts are worth around $4 billion a year of foregone revenue and were very well timed in terms of fiscal stimulus. So at least we got $4 billion of the $5 billion!

In my words the main reason why they are gone is that they had not yet occurred. It is far less painful to cancel future spending or tax cuts, than to cancel existing spending or hike existing tax rates. Yes people get annoyed when they don’t get something promised, but they get more annoyed if you actually take away something they already have.

National did “pay” for the 2010 and 2011 tax cuts by reducing KiwiSaver subsidies by over $1 billion to compensate. The problem is that the fiscal position has changed so much since PREFU that anything not yet nailed down had to be sacrificed.

The problem for the Government is that while fiscally cancelling the tax cuts was the right thing to do, it makes their long-term closing the gap with Australia objective much harder. A low tax economy (with less tax churn) will generally grow faster than a higher tax economy (there is 40 years of OECD data to back this up).

The Government says it has a medium-term goal of a top company, trust and personal tax rate of 30%. I asked the Minister if he could define the medium-term and he said they were having problem even defining the short-term!

NZ Super Fund

As everyone expected, and as Dr Cullen himself said would be sensible when he set the Fund up, the automatic contributions are being suspended until there are surpluses again. The fund was explicitly set up to be funded out of surpluses. It was never intended to borrow for the contributions. So when you hear Goff and Cunliffe squeal about this, remember they are wrong.

The automatic contributions are likely to be suspended for 11 years, and this will prevent $19.5 billion of extra debt (plus interest). Once automatic contributions resume, they will be higher due to the Fund’s formula – $2.5 billion instead of $2.2 billion.

The Government is still going to make a voluntary contribution of $250 million this year. They seem to be tagging it for investment within NZ and to supplement the supply of capital to local businesses. This is very smart politically, but very dumb in an economic sense. However it was an election policy so no surprise.


There’s not much one can argue should be done differently. I would almost say the budget wrote itself, as the structural deficit and debt projections had to be dealt to. This budget knocks $100 billion off the long-term debt projection.

It is quite a canny mixture of ingredients:

  • An increase in infrastructure spending
  • Focusing new spending on core areas of health, education & law & order
  • Plowing savings back into new frontline spending, so one is not cutting overall spending in a recession.
  • Reducing future spending and future tax cuts to bring the deficit into surplus and cap debt.
  • Suspending Super Fund contributions so you don’t borrow $20 billion to “save”

It is pretty orthodox, and as I said probably almost wrote itself. It isn’t a budget for closing the gap with Australia, or seriously rejigging the economy. It’s the budget you have to have first, before you can get to grips with some of the other stuff. I can over-state how much of a disaster it would be I financing costs on debt were allowed to grow to greater than current Vote Health.

The politics around the Budget will be interesting. You could almost see the Greens abstain on it – after all it cancels tax cuts and gives a huge amount to home insulations etc. Labour will not be able to propose a constructive alternative (they will of course scare monger). The consensus amongst most media in the lockup seems to be that there wasn’t much else the Government could have done.

It also sets up an interesting election in 2011. The books will still be significantly in deficit, and National will not be offering tax cuts in all probability. So what will Labour promise to do differently? If they promise extra spending, then they can be branded as irresponsible and increasing debt. If they promise tax increases, then that won’t be very popular either.

Labour’s entire 2008 election campaign was based on how you can’t trust John Key, that he is not a centrist – but secretly a hard line right winger (like me 🙂 who wants to sell everything and slash spending and taxes. Their worst nightmare continues to play out – that John Key is exactly what he campaigned on – a centrist.

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