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Hope, a new Government and making room to fund its programme

It’s refreshing to start a new year with the hope that the change of Government has brought.  Many of its initiatives take additional government spending so one of the Government’s big challenges is to ensure it has the revenue to carry out its programme, and the willingness to spend it. Do the new Government’s policies allow that?

This is not about the shockingly dishonest “fiscal hole” that Bill English and Steven Joyce were trying to scare voters with during the election campaign. There was no such fiscal hole. The funding difficulties I discuss here are ones National would have faced even more intensely, but would have continued to deal with by ignoring growing problems which need funding.

Not only does the new Government have to fill those funding holes handed on to it, but it wants to do more in important areas which the previous Government largely left to fester. But it is faced with a problem in its self-imposed policy to limit its operational spending to roughly 30 percent of GDP. An arbitrary spending cap is poor policy.

There are a number of large areas of Government spending that are likely to rise relentlessly, not just in dollar terms but as a proportion of GDP. These notably include health and New Zealand Superannuation. Education, especially if life-long education becomes a reality, and Working for Families, if better wage increases don’t eventuate, could also be in that category.

If it fixes its total spend as a proportion of GDP, year after year they take an increasing proportion of expenses, leaving less and less for other important areas. It is like a slowly rising floor in a horror movie, where the hero sees the ceiling approaching, threatening to crush him.

The Budget Policy Statement the Government published in December showed spending already over $4 billion below its self-imposed limit at 28.6 percent of GDP in 2019. It could buy time by paying debt off even more slowly than it plans, it is looking for savings (there are likely to be few left) and programmes it can cancel. But these don’t solve the structural problem.

Wriggle space within a room whose floor is steadily rising only buys time. The Government needs more revenue and it needs the fiscal policy space to spend it in. Otherwise it will find it cannot finance its worthy programme.

Download the full bulletin: CTU Economic Bulletin 196 January 2018