Budget 2013 – slow and steady wins the race

Published in Insights, The New Zealand Initiative’s newsletter, 17 May 2013

Budget 2013 confirms the government’s determination to achieve fiscal surpluses by 2014/15 by stopping the growth in government spending. Adjusted for inflation and population growth, projected government spending in 2014/15 will be 6% lower than in 2008/9, the year in which John Key’s government took office.

Given that in 2008/9 core crown operating spending was 34.5% of GDP, up from 28.6% in 2004, there was clearly need for tight control of government finances.

It would be hard to find any economist supporting the view that it was sound for governments to spend fiscal surpluses in good times and then raise spending further in order to ‘cushion’ any subsequent recession.

Even so, these projections represent a very commendable achievement given the pressures to further increase government spending and borrowing in the aftermath of the global financial crisis and the Christchurch earthquake. We only have to look at Australia, Europe, and the United States to see how different things could have been for New Zealand.

The Budget shows the government remains determined to continue its programme of significant welfare reform, increased accountability for outcomes in education, partial privatisation, reform of the Resource Management Act, and achieving cost savings and productivity gains from the public sector. The thrust to ease up the supply of land for housing is a more recent, but also welcomed, focus.

Even so, there is a big gap between what the government is doing and what might be done to allow New Zealanders to better achieve their potential. The outlook for economic growth, export growth and the unemployment rate leave much to be desired.

Taxes are too high because wasteful and unnecessary spending is too high, for example, on interest free student loans and on New Zealand superannuation. High tax rates hold back income growth.

Unemployment remains too high in part because labour laws discourage job creation and high effective marginal tax rates deter job search. The waste of human capability is bad socially and economically.

International competitiveness would be improved by more vigorous action to raise public sector productivity and reduce tax and regulatory burdens.

Predictably, but regrettably, the Budget does little to defuse the fiscal time bomb that an ageing population poses for future spending on health care and retirement incomes. There is much still to be done after this still-laudable budget.

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