Maybe the Government is growing some testicles

Finance Minister Bill English presented two fascinating charts to Parliament's Finance and Expenditure Committee last week. They show the government is finally coming to grips with the scale of the structural imbalances facing the economy and may just be about to hunt for some real structural reform to fix them for the long term.

The first chart showing a divergence between the tradeable and non-tradeable sectors and was pounced on by Brian Fallow in his NZ Herald article here.

The full chart on that imbalance is available here and shows the government and non-competitive sectors such as electricity, education and health dominated after 2004 at the expense of the tradeable or productive sectors. Essentially, government ate the economy and consumers spent more than they earned. This is unsustainable in the long run.

The second chart presented to the Committee was even more explosive. It is reproduced above and shows that the structural budget deficit facing Bill English is twice as big as the one that faced Ruth Richardson when she prepared her "Mother of All Budgets" in 1991 that slashed benefits. This 'Primary balance' measure extracts the costs and incomes from assets to find out what the government actually spends on services and benefits minus what it receives in taxes. It's the best measure of the structural position.

It is also not sustainable.

The most interesting thing from these two charts is that Bill English chose to present them to Parliament and to step back after the hasty fix-it job of Budget 2009 and ask some fundamental questions.

Can our economy grow fast enough to catch up with Australia with the current economic structures? Do we need to reform the way government and the private sector interact? Do we need to change the structure of the tax system? How could we do it to encourage productive investment in wealth generating assets that reduce our current account deficit rather than encourage more building of townhouses and baches by the beach that increase our foreign debts?

How do we avoid taxing our youngest and brightest to death to pay for the gold-plated pension and health schemes for the baby-boomers? How do we avoid becoming a retirement village in the South Pacific with some boiling mud and green paddocks for scenic effect?

I sense Bill English is now starting to ask these questions. We can only hope that a gifted politician like John Key uses some of those gifts and some of the National-ACT-Maori-Green party's legislative power and political capital to enact some wide ranging and long-lasting reforms.

Bill English's own charts show that something has got to change.

Here's my prescription for that change in an earlier blog.

 

 

Bernard Hickey