Written By:
lprent - Date published:
5:24 pm, July 5th, 2014 - 15 comments
Categories: budget 2014, Economy, labour, same old national -
Tags: fiscal plan, ring fencing
I have spent a large chunk of the this week digging my way into Labour’s fiscal plan after the Liu smear collapsed. I think that the fiscal plan is a work of art, and very classy art at that. Of course you have to read it closely and look at what it is intended to do.
Brian Fallow, economics editor at the Herald seems to like it as well. His analysis is a lot better than mine, so read that first. I’ll quote some interesting bits and add some commentary.
But first the boring bit. Labour and National are going to do roughly the same surplus and debt levels via different mechanisms. Labour will wind up with more debt, but also more assets than National would.
The plan balances between doing the things that have to be done for the long-term good of society with the need to not make the business community to go apeshit with shock the way that they did in 2000. Not that they needed to then, and definitely not now.
Fallow on Labour and National budgets
There are important differences, of course, but the similarities are striking.
Both are committed to running surpluses and paying down debt. Over the three years 2015/16 to 2017/18 inclusive they both forecast operating surpluses which are almost identical.
The debt target Labour focuses on is net debt including the assets of the New Zealand Superannuation Fund, to which it would resume contributions four years earlier than National.
So it borrows more but has a corresponding increase on the asset side of the Crown’s balance sheet.
This measure of net debt would fall from 15 per cent of gross domestic product now to 12.1 per cent in 2017/18 and 3 per cent three years later, compared with 11.8 per cent and 3.7 per cent projected in Budget 2014.
And in a welcome exercise in transparency Labour commits two-thirds of that allowance, an extra $1 billion a year, to health and education in order to preserve the real value of spending in those areas.
What is actually said about it was
Labour is putting aside $1 billion (rising with inflation) each year to meet these cost pressures in health, education, and other public services. This is a commitment of a billion dollars of additional funding each year so that the public services families will rely on won’t be squeezed by inflation and demographic change.
This is the first time that any government has allocated money in future Budgets, guaranteeing to maintain the real level of spending in vital services.
It also means that when we announce new policies in these areas it will genuinely be an additional investment, not a cost adjustment in disguise.
So why is this ring-fencing needed? To me it appears that much of what National will waste money on is unproductive “Roads of National Significance”. That appears to be mostly concerned with National’s donors.
In the meantime we have a rapidly aging population as pretty apparent from this chart (from wiki NZ).
Essentially the need of people for health care goes up exponentially over the age of 50 (something I can testify to). We currently have and will have more people over the age of 50. So why is the real budget for health falling? Tony Ryall would probably argue that it is due to productivity gains. However people that I talk to in the health sector mostly say (privately) that it is reduced productivity in terms of patient outcomes as they scratch around trying to keep people healthy and productive despite the real cuts to the health budgets.
So why is education in the ring-fenced area as well? Well if you have more elderly people using more healthcare, then you have to pay for it somehow. We will have less taxpayers in the future, so for the sake of our elderly, our future taxpayers will need to be more productive if we want to be able to maintain the healthcare levels similar to we have at present.
So how do you get them more productive? You train them how to think, learn, and be more adaptable than their parents and grandparents. Nice when you see all those bits of the plan locking together.
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The necessity of reducing debt seems to need clarification. For public works and infrastructure, borrowing, in order to spread the costs (repayments and interest) over the many generations of taxpayer who will benefit from that infrastructure, seems reasonable.
Similarly, the focus of both parties on reducing deficits seems misplaced as they don’t have to borrow in order to run deficits. Thjey can simply create the money they need and, if necessary, use the tax system to avoid inflation.
Hey mikesh,
There has to be a bit of caution IMO in that past assumptions of regular and significant real economic growth (3% + p.a.) which does allow interest bearing debt to be reliably paid back are probably over.
Yes. Or compulsory savings as another vehicle – which is a good concept by Labour. (Shame its directing money to Wall St gamblers and private financiers though).
You don’t have to raise interest rates on debt and increase unemployment to avoid excess inflation.
I think a time is coming when the main political divide will be between those who want growth and those who want sustainability. Herman Daly, eco-economist and former World Bank economist, believes that the reason the 1933 Chicago plan was not adopted was because it insisted on getting rid of fractional reserve banking, and it was thought that this would hamper growth. National and Labour both seem to be pro-growth, which seems to explain the similarity between the budget and Labour’s alternative.
But happens to be physically impossible and is thus totally unreasonable.
Correct. So why don’t they? Why do so many people say that they can’t do what can actually be done?
The answer comes down to one reason: The rich won’t like it as it will remove the power that they have at the moment that their wealth gives them.
“But happens to be physically impossible and is thus totally unreasonable.”
Maybe. But National seems to have chalked up 50 billion doallars worth of debt in any case.
Yes. It’s part of the delusion that is our monetary system. A delusion that is used to take our wealth from us.
the need to not make the business community to go apeshit with shock the way that they did in 2000.
That’s not a need, it’s a nice to have.
Good policy though. Spending in education and health is not simply nice to have.
All this long term budget planning takes into account the end of affordable fossil fuels in 25 years or so, right? Right? 😯
Johnny and his tight five,will for sure leave debt of $70 billion,if lost this time round.God help the other billions given another round.More care says,no more of this debts freinds usury,more care says enought.Socialist says,care can be managed.
Not much difference between Labour and National, IMHO. They are both committed to appeasing global capitalism and making the poorest and most vulnerable people pay the cost. There are alternatives, which a “real” Labour Party would adopt, defend through the campaign, and implement once elected.
+1 where is this party.
Hi, labours fiscal plan outlines 1 billion + in annual capital gains tax revenue in 5 years time. It says this is from berl modelling. What does this imply for house price growth under labour? I’ve emailed David parker but no reponse has come. Anyone know here?
Thanks for this Lynn.
Numbers are not my gig, not helped by numerical dyslexia so I appreciate the efforts of those who try to dig deeper.