Published in the National Business Review (Auckland), 10 February 2017
It is more likely for a dog to compile an inventory of sausages than for a politician to build up financial reserves. At least that is how one former German finance minister, the late Franz Josef Strauss, once described the constant temptations for fiscal policy.
It is an apt analogy. The moment fiscal opportunities open, the more difficult it becomes to restrain spending wishes. It is an almost Pavlovian reflex and it does not even require a bell.
As New Zealand is looking ahead to a series of budget surpluses, it becomes imperative for the government to have an answer to those reflexes. And it has to be an attractive answer to stop the fiscal dogs from salivating.
As finance minister, Bill English had a straightforward task. For most of his tenure, he could just point to the budget deficit and tell off his cabinet colleagues when they asked for more money. There just was none. He could also sketch the goal of a return to surplus and defer any fiscal desires to a later day.
Now that this later day has come, Mr English’s successor has a much tougher challenge. It will be up to Steven Joyce to defend the public purse.
The Treasury’s latest figures look promising. Tax revenues are stronger than anyone expected. For the first five months of the fiscal year, core Crown tax revenue is 1.6% higher than forecast and 9.4% higher than for the corresponding period last year.
For the full year, the Treasury now expects an operating balance before gains and losses of $473 million. The future looks even rosier with a forecast surplus of $8.5 billion in the year to June 2021. That is a lot of sausages to guard, so to speak.
Of course, one could debate from a purely economic perspective what should be done with the surplus. But a purely economic perspective is not what Mr Joyce needs. What he must have is a political narrative that will put the projected surplus in the much wider perspective of where the National-led government wants to lead New Zealand.
As always, there will be those who call for tax cuts, others who demand spending for their particular pet projects, and a few fiscal conservatives who want to repay debt.
Seen another way, the battlelines are drawn between the present and the future: Both tax cuts and consumptive expenditure are mainly favouring the present (though tax cuts also create some additional growth); both investments and paying down debt are for the benefit of future generations.
No finance minister will ever manage to keep everyone happy with their decisions. But Mr Joyce should aim to present his decisions as a package to balance the present and the future as well as measures on the expenditure and the revenue side.
The best way to sell this approach politically is to establish a narrative of “Sharing New Zealand’s Progress.” This is what it would sound like.
We should acknowledge the past years have been challenging for New Zealand because of the combined effects of the global financial crisis and the natural disasters that have occurred domestically. Against these odds, New Zealand has done much better than most of the developed world. It has produced solid economic growth, created jobs and thereby established a much better fiscal position than, say, Australia.
As a nation, we have worked hard to get to where we are. Now is the time to share our progress. We have to share it with those who have contributed to it. We also want to share it with our children to whom we want to leave a bright future.
To do so, we want to help those who need it most. For high income earners, the top income tax rate is modest and internationally competitive. But that top rate of income tax is reached relatively early, so we should focus tax cuts in the lower bands and look as much to the effective marginal tax schedules as to the income tax rates. These tax cuts would make a difference to middle New Zealand, particularly at a time when people on ordinary incomes are stretched by high rents and property prices.
Acknowledging this housing crisis, we should use a second tranche of the surplus to help councils deliver more infrastructure quickly. For example, the government could pass on the GST revenue from new housing construction to councils. This would be an investment into the infrastructure that New Zealand needs for the future, and it would address one of the main reasons for the housing crisis.
Finally, we should use the surplus to pay down debt. Circumstances beyond our control have increased the Crown’s indebtedness over the past years. We should not leave it to our children and grandchildren to pay for it. Instead, let’s sort out our books now and reduce government debt to where it was before the global financial crisis.
Bringing down the Crown debt ensures the government has fiscal room if another natural disaster strikes.
This would be my narrative, to share New Zealand’s progress in equal measure between lower income-band tax cuts, investment in local infrastructure and leaving a better fiscal future for future generations.
If that became the government’s mantra, it would become much easier to avert the left, right and centre demands for extra funding. It would give Mr Joyce a narrative akin to his predecessor’s “There is no money.”
Above all, it would be good for ordinary New Zealand, address the housing crisis and build a positive future.