OPINION
The Government had a choice this election between jumping on spending, even at the expense of some services but saving asset owners the pain of higher interest rates and declining values, or spending and borrowing more at the expense of those asset owners’ worth and wellbeing - taking a gamble on higher interest rates in order to fund a larger state.
Grant Robertson and Chris Hipkins have chosen the latter.
At the 2020 election, Labour said it would spend $2.625 billion in new operating spending in each of its three Budgets. It increased each one of those Budgets to $3.8b in 2021, $5.9b in 2022 and $4.8b in 2023.
The effect on Crown spending has been dramatic. Before the election, Treasury’s Covid-addled forecasts were expecting this Budget to spend about $116.1b in total. This year’s spend will instead come in at $137b.
Be calm! The Government can afford this. A high tax take means New Zealand will return to surplus at a creditable 2026. Debt is low. Affordability is not the issue.
People arguing that the multi-billion infrastructure investment, targeted at resilience and decarbonisation, is unnecessary and profligate will need to stand by their fairweather viewpoint when we are delivered yet more biblical rain in the future.
What is interesting about this Budget is that it was put together in an incredibly inflationary environment and the Government - a majority Labour Government with a fair bit of support from New Zealand’s homeowning majority - has been incredibly cavalier with the risk of higher interest rates.
Instead of putting a lid on spending, at least for this Budget, Labour eked out even more spending than it had signalled in December.
The spending, leading to higher interest rates, will have a major effect on the housing market, leading to a peak-to-trough decline in house prices of 21 per cent - prices that will not recover during the forecast period to 2027.
Forecasts like that would be kryptonite to earlier Governments. This one seems not to mind.
The Government is also quite happily rolling out a higher trust rate (up from 33 per cent to 39 per cent) and linking that decision to its report on the level of tax paid by wealthy individuals.
Revenue Minister David Parker said only a small portion of the thousands of trusts in New Zealand would pay the most additional tax.
“The top 5 per cent of trusts with some taxable income in the 2021 tax year accounted for 78 per cent of all trustee income [$13.3b out of $17.1b],” he said.
To show such a cavalier approach to the mortgage belt, cashed-up retirees and assorted other homeowners is quite something.
Early childhood education and cheaper prescriptions are cold comfort for the slow atrophying of the wealth of the propertied, who still account for two-thirds of households (even if only about 16 per cent of households have mortgages that are certifiably “large”).
Property ownership in New Zealand is still broadly distributed. Most attention in the IRD’s report on tax paid by the super wealthy understandably focused on the enormous capital gains booked by a handful of ludicrously rich individuals.
But the same report also showed that even households in middle-income deciles were booking nearly $7000 in capital gains on their home in a year, rising substantially through each income decile. New Zealand’s bizarre treatment of capital gains isn’t just a story about the truly rich - it’s a story about wealth creation enjoyed by two-thirds of our households. That doesn’t make it right - it’s not, but it is what makes it difficult.
Treasury economists (distinct from Treasury itself) in 2021 published shocking research that rising house prices were, inconceivably, reducing inequality because New Zealand’s broad home ownership meant they lifted the relative incomes of the middle classes, who hold nearly all their wealth in property, relative to the super rich, who hold wealth in other assets.
None of this is actually good - it simply shows the importance of property to our politics. Capital gains addiction is a middle-class affliction.
Labour’s decision to turn its back on all of this - risking even higher interest rates in the midst of a property crash - looks like a very tentative, very beige, very New Zealand embrace of the politics of class - although good luck getting anyone to say it.
Labour, after spending the last six years defending capital from an electorally awkward tax, seems to finally be living up to its name.
One can’t oversell this.
For all his unabashed Piketty fandom, Mr Parker is not about to don a Phrygian cap and storm the Northern Club. This is New Zealand after all, where politics is painted in shades of beige. Here, we irrigate fields by depleting vulnerable groundwater through ethically questionable historic allocation mechanisms (another concern of Parker’s), rather than with the impure blood of our class enemies, as per La Marseillaise.
It’s nevertheless an interesting pivot by Labour to gamble so strongly in this move away from what has historically been understood as the electoral centre.
The state is growing - and permanently.
Labour inherited a state of 27.7 per cent of GDP. Core Crown expenses are currently 33 per cent of GDP and only slated to fall to 31.5 per cent of GDP by 2027.
But here’s the thing. That fall is very unlikely to eventuate. It’s predicated on the Government sticking to the announced size of its next Budgets, something Labour has made a hash of this term and something it is very unlikely to do if it wins another term.
Are we being prepared for a permanently larger state? Something closer to 33 per cent of GDP than the 28 per cent of the Key-English years?
To get down to that level of spending now would require shaving $22b off this year’s spending - roughly the size of the core health budget and something no one, not even Act, is currently contemplating.
The larger state seems like it’s here to stay, with the political battleground now being between a state of 30 to 33 per cent of GDP, say, rather than 27 to 30 per cent.
Before anyone gets too excited and thinks Labour has spent its $71b infrastructure digging a tunnel to Scandinavia, it’s worth remembering that for all the party’s transformational (to use a word Chris Hipkins reprioritised in January) talk, this is an incredibly miserly Budget for people on low incomes.
Benefits reap an indexation change, at a cost of $68.1m this year ($311.2m over the forecast period) and the 350,000 families who rely on Working for Families to make ends meet get nothing.
Both of those decisions are a massive middle finger to not one, but two Government reviews of the benefit system.
At the end of this Budget year, we’ll be left with an unusual state. Larger than we’re used to, with a very uneven source of funding (apparently tax will be a significant discussion come election time - make of that what you will).
The Government seems to be less in the pocket of the propertied classes, but they still haven’t showered money upon the truly poor.
The New Zealand Defence force has a budget shortfall of $130 million.