Hooray for Labour/Green Budget Responsibility Rules

I’m delighted that and have signed up some Budget Responsibility Rules. This represents a huge shift for the middle ground of NZ politics.

For the last 20 years or so the parties of the left have campaigned on tax increases and massively increased spending. Now Labour and Greens have said that will keep government spending to under 30% of GDP.

In 2008/09 Labour left office with core crown expenditure at 35.5% of GDP.  It took a massive effort by National to get it down to under 30% by 2015. Labour and Greens opposed pretty much every one of those spending cuts or restraints yet now they are saying they will stick to a similar expenditure level. Again, this is a huge shift, and a massive victory for the forces of fiscal conservatism.

What is the difference between spending 30% and 35% of GDP? Around $12 billion a year.

No wonder the CTU is pissed.

Now it isn’t a bulletproof pledge, and I’ll go through the details. And NZ First has not signed up, and there is no way Labour and Greens can form a Government without them, so they may use that to escape their pledge. But even with those caveats, this is a welcome step for them, after nine years of calling for nothing but extra spending, they have pledged to keep the share of the economy the state spends to the same level as National has got it after eight years.

So let’s take their pledges in turn:

1. The Government will deliver a sustainable operating across an economic cycle.

An OBEGAL surplus indicates the Government is financially disciplined and building resilience to withstand and adapt to unforeseen events. We expect to be in surplus every year unless there is a significant natural event or a major economic shock or crisis. Our surpluses will exist once our policy objectives have been met, and we will not artificially generate surpluses by underfunding key public services.

Of course it is National’s hard work that has allowed this pledge, but still good to have it.

However note the wriggle room – our surpluses will exist once our policy objectives have been met. That could be used as an excuse to never have a surplus, as no Government ever ever says all their policy objectives have been met.

2. The Government will reduce the level of Net Core Crown Debt to 20% of GDP within five years of taking office.

To give future generations more options, reducing government debt has to be a priority. By setting a target, provided that economic conditions allow, we will be able to make responsible debt reductions and invest in housing and infrastructure that strengthen our country and prepare us for future challenges.

Good. Only two more years than National. Again some wriggle room around economic conditions allowing.

3. The Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand.

The Government will prioritise responsible investments that enhance the long term wellbeing of New Zealanders – such as restarting contributions to the Super Fund. In addition we will invest in infrastructure to support our growing population, and reduce the long term fiscal and economic risks of climate change.

A bit meaningless as National has said contributions will restart also and is investing massively in infrastructure. This target has no measure against it, like the others.

4. The Government will take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio.

During the global financial crisis Core Crown spending rose to 34% of GDP. However, for the last 20 years, Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.

Actually it started to exceed 30% in 2005/06 when Cullen started to go on a massive spending binge. This is the key pledge. This means spending will not increase faster than the economy as a whole.

5. The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

Again no hard numbers for this one. We already have a highly progressive tax system. Labour have promised separately no tax increases in their first term – another huge change from decades of arguing for tax increases.

  • The credibility of our Budget Responsibility Rules requires a mechanism that makes the government accountable. Independent oversight will provide the public with confidence that the government is sticking to the rules.
  • We will establish a body independent of Ministers of the Crown who will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public, and will cost policies of opposition parties.

Excellent – a great idea.

But now comes the challenge for Labour and Greens. Over the last two years they have called for billions of dollars of extra spending that would breach these they have just agreed to.  So which of these policies will they drop:

  • $161 million to eliminate school fees
  • $1.9 billion for health
  • $1.2 billion million for Kiwisaver subsidies
  • $163 million for rural roads
  • $92 million for paid parental leave extension
  • $50 million for more refugees
  • $1.2 billion to eliminate tertiary fees
  • $200 million for Housing NZ
  • $500 million for child policy
  • $60 million for youth unemployment
  • $480 million for special needs students

Just those few promises or pledges total around $6 billion a year. They can’t do half of them under their fiscal rules. They need to be up front with New Zealanders about which policies they are going to fund.

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