Debt under a Labour-led Government

As readers will know there has been a lot of scrutiny about how much extra debt there would be under a Labour Goverment over the next four years. Labour says it would be around $4b, says around $16b and my calculation has it at around $12b (of which half is the Goofynomics borrow to save strategy for the Super Fund).

Let’s go with my figure of $12b for now (which is in fact only $2b different from Labour’s $4b as they acknowledge that excludes borrowing for the Super Fund). Now that is what the extra debt would be for a Labour majority Government. If Labour got 50%, then they could implement their policies without compromise.

But if Labour does manage to put together a government, they will comprise (based on current polls) only around 55% of the Government. On the Roy Morgan poll they would in fact be just 50%.

This means that the parties they need to negotiate with to form a will have massive power, much more power than any other minority partner under MMP. Because the larger your proportion of the votes the Government needs, the more say you get. This is an issue that as far as I know, no media has seriously looked at – what would be the policy mix of a Government that had Labour on 25%, Greens on 15%, NZ First on 5% and the Maori and Mana parties on say 5% between them.

That $12b of debt would be just a start. Let look at the policies NZ First will want included in a budget:

  • universal student allowances
  • match student loan repayments $1 for $1
  • Cut tax rate for new exporters to 20%
  • lower company tax rate to 27%
  • lower GST to 12.5%
  • tax free threshold of $100/week
  • turn TV One non-commercial
  • Increase Govt R&D spending from 0.3% of GDP to 2% – a 600% increase
  • Accelerated for specified industries
  • 10% off for pensioners
  • Increased funding to decile 3- 10 schools
  • reduce class sizes for lower decile schools
  • increase health expenditure to 10% of GDP
  • Increase defence spending to 2% of GDP
  • abolish GST on rates
  • abolish income tax on secondary jobs
  • abolish tax on savings
  • cap tuition fees, eventually reducing them to zero

There’s probably even more than this but I can spend only so long reading their manifesto. I can’t even begin to add them up but I’d say we are talking ten billions dollars a year in lost revenue and extra spending. Now let’s say he even gets 20% of his wishlist, and that is probably an extra $8 of borrowing over four years.

And bear in mind also that Winston is saying he would refuse any agreement in advance for how much extra spending will be needed to have him vote for the for three years. So every year Labour would have to feed him as much money as he can get, to keep their Government in office. This is not scare-mongering – this is exactly what Winston is promising to do, and there is no way Labour could govern without him.

But Winston is only the entree. Let look at what the Greens want. At 15% they would have over half of Labour’s support, and be around one third of the Government. So they may get up to one third of their wishlist. That includes:

  • tax-free income threshold of $10,000/year
  • Write off all student debt, even for those not in paid employment
  • tax-deductible study costs for those with no allowance
  • A full universal student allowance for those aged 16+
  • Increased accommodation allowance for students
  • Reduce then abolish tertiary fees
  • Increase school operations grant by 10%
  • Maximum class size of 20 for schools
  • Increase benefit levels to “sufficient for all basic needs”
  • Increase public health spending to 10% of total health budget

There are again many more beyond that. And again the bill will run into the billions, and even the Greens can only come up with so many extra eco-taxes to plug the hole.

The two major parties are normally the ones who get the most intense scrutiny over the costings of their policies, and that is because they form the bulk of the Government. For example even if reaches out again to ACT, United Future and Maori parties, National will be probably 90% of the Government. Hence, highly likely their debt track will hold up (especially as ACT ask for less spending not more).

But Labour is looking to be 50% to 55% of a Labour-led Government. This is vastly different to when they were last in power and they were over 80% of the Government. At 50% to 55% they will be comparatively weak, and the parties they will need to vote for their budget will have much more power and say than in the past – hence why it is important to also scrutinise their tax and spending plans.

I haven’t even looked at what spending one might have to agree to for the Mana and Maori parties, but it will not be nothing, and a Labour-led is only possible if Labour, Greens, Maori NZ First and Mana parties all vote for their budget.

So forget about $12b of extra debt. That is just the starting position. It is inevitable it would be significantly more than that.

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