Reckless spending puts the nation at risk

Last month the government released its Budget Policy Statement (BPS) for 2010, along with its 2009 Half Year Economic and Fiscal Update.

The Finance and Expenditure Committee of Parliament will consider submissions on the BPS and the process of putting together the budget will be in full swing.

The first BPS was produced as required by the Fiscal Responsibility Act 1994 (which is now part of the Public Finance Act) in February 1995.

Along with the requirement to publish pre-election fiscal updates, the revised budget process has brought more discipline and transparency into the budget process.

There are still weaknesses, however.

The original concept had proposed that the Select Committee’s consideration of BPS submissions be a meaningful two-way dialogue with the Government with appropriate influence over budget decisions.

This has never happened. It has become progressively a pro-forma exercise, and the Committee’s report is of little consequence.

One by one, business organisations have stopped making submissions. For the first time, the Business Roundtable would not be making any submission this year.

Another weakness relates to the substance of fiscal policy.

The fiscal responsibility legislation has made governments and the public more conscious of budget deficits and public debt after the excesses of the (Robert) Muldoon years.

However, it has done little to cut wasteful government spending, and thereby the overall tax burden.

A glance at the first BPS in 1995 illustrates this point.

The legislation requires the Government to set out its long-term and short-term fiscal intentions. In the document, then Finance Minister Bill Birch stated that the Government’s long-term objective was “to reduce expenses as a percentage of the Gross Domestic Product (GDP) from current levels of around 36% to below 30%.”

Its short-term intention was to hold expenses stable in nominal terms from 1995-1996 to 1997-1998 so that their share of GDP would fall to 30.2% in 1997-1998.

Those goals were not achieved. Only in the mid-2000s, at a time of relatively strong growth, did the ratio briefly dip below 30% (some changes in accounting treatment make the figures not precisely comparable).

The latest BPS shows core Crown expenses running at 35.5% of GDP and falling only to 34% by 2014.

Most budget commentaries focus on the operating balance and Crown debt.

These are important: the current BPS forecasts an operating deficit of $6.7 billion for 2010-2011 and net debt is forecast to treble by 2014 to $65 billion.

The costs of servicing this debt are rising fast, to a projected $4.6 billion by 2014, more than the amount spent on law and order and on core services.

However, Government spending should be the focus of budget scrutiny. It drives the Government’s tax and borrowing requirements, and the quality and size of spending have pervasive impact on the economy and the well-being of citizens.

In its 2009 Report on New Zealand, the OECD noted, “econometric evidence for OECD countries indicates that large government size may be detrimental to growth in living standards. This evidence shows that each percentage point in total government spending as a share of GDP reduces the growth rate of real GDP per capita by 0.13 percentage points per year.”

The report added, “The recent rise in government expenditure is thus a disquieting development for an economy already suffering from sluggish per capita GDP growth”.

It is therefore not surprising that the first recommendation of the 2025 Taskforce on a strategy for catching up to per capita income levels in Australia was to return the  government spending ratio to the level of the mid-2000s.

It also advocated a legislated cap on future spending growth.

The 2010 BPS foreshadows greater spending discipline. Smaller allowances (of $1.1 billion) are made for additional spending this year and next, and the Government is committed to exploring a spending limit.

The Business Roundtable has advocated a rule that limits spending growth to population growth plus inflation, unless the government obtains taxpayers’ agreement to higher increases through a referendum.

Tax changes in the budget should be funded by spending reductions, not new taxes. The Government should also consider how to make the BPS process more meaningful.

Fiscal crisis is impacting many governments around the world, on the heels of the global financial crisis. Even in Australia, one of the least affected countries, the government has announced a 2% per annum cap on the growth of new spending.

The forthcoming British election may be dominated by a debate on reductions in public spending.

To date, our Government has not made hard spending decisions, partly out of a concern to support activity during the recession.

However, the 2010 BPS signals the need to take firmer action in the context of its 2025 goal.

In this year’s budget, we will have an indication of whether its resolve is consistent with its self-assigned goal.

Roger Kerr is the executive director of the Wellington based New Zealand Business Roundtable. Email: rkerr@nzbr.org.nz. His views are not necessarily those of Indian Newslink.