Brian Fallow: Was the Budget transformative? Maybe, but we're not there yet

It will take several more Budgets to decide if changes are more than just presentation. Photo / File

COMMENT:

Does the wellbeing approach to setting budget priorities represent the profound and progressive change the Government makes it out to be? Only time will tell.

It is normal, after all, for a Budget to include initiatives the Government of the day believes will benefit people in some way, so whether this will prove to be a substantive, rather than a merely presentational, shift will take several Budgets to really tell.

That said, indexing the main benefits to wage growth, as New Zealand Superannuation has long been, will see that income support slowly but steadily rise in real terms. It is expected to add between $10 and $17 a week to beneficiary incomes by 2023 over and above what would have occurred under the traditional indexation to the consumers price index.

"It is a predictable series of increases rather than the traditional approach of occasional large adjustments when rates had got significantly out of whack," Finance Minister Grant Robertson said.

Meanwhile, turning from the words to the numbers, what we got from him yesterday is a pretty conventional — and fiscally conservative — Budget.

And that should be no surprise given that he was constrained by two things: a slowing economy and the Government's own self-imposed budget responsibility rules.

The extent of the slowdown should not be exaggerated, however.

Finance Minister Grant Robertson reading his Wellbeing Budget. Photo / File

Economic growth has slowed from a rate somewhat above "potential" — determined by supply-side factors like growth in the labour force and in labour productivity — to something a little below it. From an overtaking speed back to a bit below the speed limit, if you like.

The Treasury's forecasts have economic growth picking up from here and averaging 2.6 per cent over the forecast period, assisted by the assumption than interest rates will remain in stimulatory territory.

While weaker than the past five years, it is in line with Treasury and Reserve Bank estimates of the potential growth rate.

The Treasury has revised down its estimate of labour productivity growth to 0.9 per cent, more in line with its average since the last recession.

Forecasts of the operating balance before valuation gains and losses are lower than in the half-year update six months ago, reflecting an increase in spending, relative to those forecasts, of a cumulative 11 per cent by 2023.

Surpluses are still forecast — economic fingers crossed — for the next couple of years but they are thin at 0.4 and 0.6 per cent of GDP.

The biggest line item in any Budget, social security and welfare, which is the transfers to beneficiaries and superannuitants, will increase by a compound annual growth rate of 4.8 per cent over the next four years.

The Government has also given itself another $600 million of unallocated operating allowance for next (election year) Budget, and has added $1.7 billion to the capital allowance over the next four years.

The tax take will be boosted by bracket creep, inflation-indexing the "sin"' taxes on alcohol and tobacco and by moves to ring-fence tax losses of heavily geared property investors.

As for the budget responsibility rules, the Finance Minister announced last week a shift from a point target of 20 per cent of GDP for net debt, to a target band of 15 to 25 per cent.

But that does not apply to the year ahead and after that it is of course contingent on Labour being returned to power in the next election.

It might yet represent a loosening of fiscal policy, but it might also be seen as giving the debt rule a similar cyclical flexibility or wiggle room already in the rules governing operating balance ("The Government will deliver a sustainable operating surplus across an economic cycle") and operating spending ("The Government will maintain its expenditure within the recent historical ratio of spending as a ratio to GDP").

International comparisons hardly warrant Amy Adams' description of this as abandoning any pretence of fiscal responsibility.

Among advanced economies, the average net government debt to GDP ratio is 77 per cent.

Gross debt is forecast to track down from 28 per cent of GDP now to 25 per cent by 2023. That compares with around 100 per of GDP for rich countries as a group.

But equally, the Government could hardly claim the target band would provide all the flexibility it might need to respond to future negative shocks, unless they were relatively low-voltage shocks.

The double whammy of the global financial crisis and the Canterbury earthquakes saw the Government's debt to GDP levels rise by about 20 per cent of GDP.

And the odds of New Zealand being sideswiped by another major shock from the other 99.8 per cent of the world economy are growing.

A certain air of dark foreboding surrounds the Budget's discussion of the international outlook. It notes downgrades to forecasts of trading partner growth, and warnings of mounting risks from the trade/technology war between the United States and China. Not to mention the increasing risk that Britain will crash out of the European Union without a deal, or of a shooting war in the Gulf.

In Budget-speak, "as trade tensions escalate or financial conditions deteriorate the risk of significant adverse impacts on the real economy from uncertainty, reduced investment and lower exports increases."

A scenario in which trading partner growth is weaker than forecasts assume would cut a cumulative 0.6 per cent from NZ GDP over the next couple of years.

But even then, Treasury still reckons we could just about keep the fiscal bottom line in the black.

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