National’s Spending Cap Bill

National will pass a Spending Cap Bill, under the cover of its Confidence and Supply deal with John Banks. The question isn’t if this Bill is a farcical idea that would hurt NZ if ever enforced (which it wouldn’t be) – even the arch-neoliberals in Treasury oppose it. The question is why National has no better ideas for Parliament’s precious time.

This guest post by Bright Red a few months back spells how a spending cap law that works would spell huge spending cuts. Basically, many major costs to the government (health and super in particular) rise faster than inflation+population growth because of the way pensions are set, how demographic pressures, and high health sector inflation. Which means that, under a spending cap, either those services would have to be slashed or other ones would be. And that’s the fevered dream of the Right, of course – to shrink the services the government provides so that they can have more tax cuts.

any spending rule that is not perceived as serving the interest of the Government and Parliament will inevitably be circumvented, and that “in the absence of this widespread political support, it is doubtful that the legislative status of a spending rule will have any impact on actual policy formulation”. Without widespread political support a government could overturn the rule by amending the legislation – potentially raising the prospect of ongoing changes to what has been a stable and enduring the fiscal framework with a high degree of cross party support.

The spending cap and the results of any referenda will bind the government only to the extent that Parliament continues to agree to remain within these constraints. A future Parliament has the ability to amend the level and/or operation of the expenditure cap or to repeal it outright.

Empirical analysis of the Taxpayer Bill of Rights (TABOR) in Colorado suggests that the combination of a cap on expenses and revenue and a referendum mechanism was successful in reducing the size and scope of Colorado’s state government relative to its economy. However, that analysis also suggests that the reductions in tax and spending generated by the TABOR did not have a positive effect on Colorado’s economy, in part because Colorado reduced relatively high value areas of spending, including education and infrastructure.

However, lower levels of expenses and revenue may also force reductions in the direct delivery of public services and will create incentives for governments to find other ways to deliver their objectives. This could result in greater use of tax concessions, regulation, activities funded by fees or levies, local government, state-owned enterprises, and/or public private partnerships or other forms of contracts to achieve these objectives. All of these approaches can impose relatively higher compliance burdens on individuals and businesses to achieve similar outcomes, relative to expenditure programmes.

The Treasury does not support imposing constraints on the ability of the government to set fiscal strategy via hard parameters in legislation. A legislated spending rule, which a government did not wish to be bound by, could lead to efforts to circumvent the rule – potentially favouring certain types of decisions (e.g. tax expenditures or regulatory changes) and raising the risk of unintended or perverse outcomes.

To be effective, the fiscal framework needs to be reasonably stable over time. This criterion would not be met if a legislated spending rule was likely to be overturned, shortly after its introduction, because it lacked widespread and enduring political support.

In other words, “this is a silly idea – an expensive waste of time – that will be ignored, circumvented, or repealed by the first government – Left or Right – that needs to”. Apparently, Japan has a spending limit written into its post-WW2 constitution, and Parliament has passed an exemption to it as part of the Budget every single year.

So, the real question isn’t why National is seeking to pass a spending cap law. It may as well be seeking to pass a The Moon is Made of Blue Cheese Bill for all the practical effect it will have. It is really just a red herring designed to get the Left all up in arms and let National paint itself as a responsible, restrained government.

The question is, why, in the midst of high unemployment, rising poverty, and ongoing economic and environmental crisis, does National have no better ideas for Parliament’s time than a petty political play?