Prudence in the years of plenty

Published in Insights, The New Zealand Initiative’s newsletter, 16 May 2014

Finance Minister Bill English can be pleased that his 6th budget is the first in which he is able to deliver a (modest) surplus. That in itself is no small achievement. By exercising spending restraint in difficult times, combined with reforms on social policy against the backdrop of global economic difficulty and domestic disaster recovery, English’s prudence has prevented the kind of spiralling debt we can observe on the other side of the Tasman.

Australia, with initially more favourable circumstances, did the opposite in the Rudd/Gillard/Rudd years. The Abbott government now has to deal with the resulting structural deficits by a mixture of tough budget cuts and tax increases. It is precisely such a situation that English’s stewardship of the public purse has prevented in New Zealand. He deserves full credit for that.

Having turned the budget into the black, the question is where to go from here. Even with deficits accumulating, it was certainly not easy to keep spending demands under control in the past. But it will be all the harder in the future when surpluses are projected to rise to more than $3 billion by 2017/18.

For the coming years, there are three basic options available to government. Projected surpluses could be used to cut taxes, pay down debt or increase spending. The budget just delivered signals that we might be getting a combination of all three.

Though the only tax cut actually delivered was the abolition of cheque duty, worth a whopping $4 million, ministers have been talking more about the possibility of modest future tax cuts. It seems likely we will hear more about that in the election campaign.

Debt reduction might also be on the cards, with net debt projected to fall below 20 percent of GDP by 2020 from a peak of 26.5 percent. However, the debt reduction is mainly driven by a denominator effect, i.e. the growing economy will reduce the relative size of government debt.

The main temptation for any government is always to use extra cash in order to win more votes. Indeed, this budget already shows the beginnings of this with extended parental leave, free GP visits and prescriptions for children under 13 years and other spending pledges.

For the coming years, it is vital to keep such new spending initiatives under control. Not only because government spending will put an upwards pressure on interest rates. But mainly to prevent ending up with the kinds of problems Australia is facing now.

Bill English’s achievements of the past six years of adversity are remarkable. He now has to defend them in the coming years of plenty.

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