Andrew Gawith: Budget a chance for radical rethinking

Bill English viewing a copy of the 2010 Budget. Photo / Mark Mitchell

The Government has been talking tough over the forthcoming Budget. Despite the export commodity boom, the economic crisis lingers like a niggling cough, and now there's the Christchurch earthquake migraine.

All in all the economy is still looking pretty sick, and as a result the Government is planning some bitter medicine for us. The question is will a "Black Budget" really restore the economy to good health or does the Government need to get more radical and inspiring?

There is no doubt the Government faces a huge challenge in dealing with the aftermath of the earthquake as well as balancing the Budget in the timeframe originally promised and which the IMF recently encouraged us to stick to.

Prime Minister John Key and Finance Minister Bill English will be typically pragmatic - a mix of cutting public spending and stretching the timeframe for balancing the books. The main candidates for spending haircuts appear to be student loans, KiwiSaver and Working for Families.

There is certainly some scope for trimming expenditure at the margin of all these policies. Making student loans interest free was a political stunt pulled by Labour to help it win the 2005 election.

The fact that National tried to match the bribe was a clear indication of the slackening in fiscal discipline that took place running into the 2007-2009 financial crisis.

A radical step would be to limit the Government's commitment to first-year students and leave commercial banks to pick up the risks and benefits of providing loans to students.

First-year results should give banks a reasonable basis for determining the bankability of individual students. Tertiary educated people generally end up with relatively high lifetime incomes and are therefore attractive customers for banks; why continue to let the banks get these valuable customers for very little risk?

Furthermore, the sooner students face the normal disciplines associated with taking on debt the quicker they will become financially educated.

The original version of KiwiSaver was a much less generous scheme than the one Michael Cullen eventually launched. Member tax credits and compulsory matching employer contributions were late enhancements to the scheme to ensure it was a raging success.

While National dispensed with fee subsidies and reduced the maximum compulsory employer contribution from 4 per cent to 2 per cent of the employees' pay, they left in place the relatively expensive member tax credit.

Now given the Government says we have a debt problem it would seem silly to undermine incentives to save. But there are some areas where the Government could make minor savings including not allowing over-65s to claim member tax credits (a form of double dipping given these people receive NZ Super) and not handing out the $1000 kickstart grants until people reach at least 16.

KiwiSaver incentives are fixed in nominal terms and therefore inflation will slowly erode their cost to the Government assuming that membership will reach a steady state, more or less, within the next three years.

Reducing the income threshold at which families are eligible to receive Working for Families support payments is a relatively easy step to cutting spending, and given the Welfare Working Group's recommendations it would be no surprise to see the Government tighten some of the criteria for other welfare payments.

But as I argued a month ago this piecemeal approach to curbing welfare spending lacks vision - it should be part of a much wider overhaul of the tax and benefit system.

The latest IMF report on the economy suggested broadening the tax base and as part of that the possibility of a land tax. Now that's getting a bit more radical.

A land tax would be part of a comprehensive capital tax, which could help the Government to meet its fiscal targets and could also be part of streamlining the tax and welfare systems - again, more like fiscal re-engineering than fiscal fiddling.

The Government has also raised the possibility of partial asset sales. This looks much more likely in the face of the earthquake.

While asset sales may be a legitimate way of raising some much-needed cash to fund the rebuilding of Christchurch without expanding debt, they do have consequences for future Budgets.

Dividend payments from the assets would be redirected from the Government's books to the new owners of the assets.

Whatever approach the Government takes to balance the books will create political tensions as affected groups protest against the loss of income and services.

You only need to follow what's been happening in Europe and the UK to understand how difficult it is to convince voters that spending cuts are a necessary part of any solution to our predicament.

Furthermore, most developed economies were facing fundamental fiscal challenges even before the carnage created by the financial crisis and in the case of New Zealand and Japan, the unexpected cost of devastating earthquakes.

The Government has been dealt a tough hand and voters will wear some unpleasant calls. But they are likely to be more forgiving of some genuinely innovative fiscal policy that involves both real improvements to taxation and spending policies.

Andrew Gawith is a director of Gareth Morgan Investments, an investment manager, KiwiSaver and superannuation provider.