Slash-and-burn Budget 'not the way'

Benedikte Jensen

The Government needs to act to prevent its debt from exploding, but a slash-and-burn Budget is not the way to do it, the New Zealand Institute says.

"The days of just being able to spend more and more are over," said Benedikte Jensen, research director of the Auckland think tank.

"We have got to make some hard choices that both put us back on a sustainable fiscal path and address structural imbalances."

Those imbalances had led to chronic underinvestment in productive assets, while investment in the housing market boomed, and New Zealand's dependence on foreign funding had grown.

In a paper framing the issues for the coming Budget, she argues that the sudden and dramatic deterioration in the fiscal outlook means that "unless New Zealand radically improves its growth prospects, basic amenities such as quality free education, health services, environmental protection and security in retirement may be at risk".

The Government is already under pressure from the credit ratings agencies to show in the Budget on May 28 a path back to fiscal surpluses in the medium term.

"The temptation will be to introduce austerity measures - a slash-and-burn approach to Government expenses."

The better approach, while not ignoring cost control, would be to focus on clearing a path to sustained productivity improvement and economic growth.

In addition to investing in infrastructure and a Government role in assisting firms to build their international connectivity, that would include signalling a willingness to look at the tax mix - a shift towards taxing the internationally contestable factors, capital and labour, less and consumption and property more.

That would provide a more positive environment for business investment and for growth down the track as low levels of capital per worker are a key factor behind the country's poor productivity performance.

But here and now Jensen recommends scrapping the income tax cuts planned for next year and the year after as representing poor value for money as a fiscal stimulus.

Government spending also needs to be on the table, especially those areas which have seen it increase as a share of gross domestic product by 1.6 percentage points over the past five years. These areas included Working for Families and health expenditure, Jensen said.

"Deep cuts in spending and tax increases would be unwise while the economy is still in recovery in the short run. Exercise is not the right prescription for a patient in intensive care."

It was encouraging the Government was sending messages about being determined to get on top of the fiscal problem, she said.

"My concern is that the way they do that may just be to constrain costs and across the board without any clear strategy." The global recession presented a window of opportunity, Jensen said, but a narrow one.

"When the world economy starts to recover businesses and skilled talent will be reassessing the old ways of doing things and will be aggressively seeking new opportunities and engines of growth."

Jensen said the film industry provided an example of the kinds of new business models which might become more important.

"You have international partnerships which come together for a production, and you have development done in one country and production in another."