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Insights 19: 26 May 2017
Dr Oliver Hartwich: How freedom was lost in Brexit
Dr Eric Crampton: Tax system is heavily reliant on high earners
The Overseas Catch: The state of recreational fisheries management abroad

Election year Budgets, illusions and conjuring tricks
Dr Bryce Wilkinson | Senior Fellow |
On television early yesterday evening I saw a well-known presenter give Budget 2017 an 8 out of 10 for massaging the electorate. A subtitle read “something for everyone”.

Really? Can shuffling the same deck of cards improve everyone’s hand? That would be a conjuring trick.

Election year Budgets are first and foremost about taking and spending voters’ money. They don’t create more money. They reshuffle it. Billions more dollars are to be spent.

How can everyone be better off? Actually, we probably would be if we were spending our own money. Otherwise we would not spend it. That is the virtue of freedom of exchange. Mutual benefit from voluntary exchange is no conjuring trick.

Let’s look at Budget 2017 from that perspective. (In a longer article we evaluate it from the ‘what needs to be done’ perspective of our Manifesto 2017.)

The Budget-at-a-Glance document highlights new spending of $1 billion on a “growing economy”, $4 billion on infrastructure, $7 billion on public services, $2 billion in a family incomes package, and $321 million to improve the lives of the most vulnerable.

If that seems a bit parsimonious, turn to the Capital-at-a-Glance document. It pledges to spend $11 billion in new capital from 2017-2020. Adding existing commitments takes the total to $32.5 billion over the next four years. This is ‘the biggest increase in decades”. Are you feeling a warm glow now?

So, who is paying for all this? Not us workers surely. We are getting tax cuts because tax thresholds are increasing, lowering our average rate of tax.

That’s the conjuring trick. Check out the budget tables. Forecast tax revenues rise by 28% between 2016 and 2021. That matches the forecast growth in gross domestic product. (CPI inflation is 10-11%.) That’s a classic election year “tax cut”.

Basically, that additional spending represents less spending by those who earned the income being spent. Are we all better off nonetheless?

We would be if we would have spent or given away our money on the same things.  But then it would not have been necessary to tax us.

In short, what is critical is the quality of existing and proposed spending. Don’t expect much information about quality in an election-year Budget. If enough voters want the illusion of a lolly scramble, that is what we will all get.

Look up!
Dr Eric Crampton | Chief Economist |
While Budget days bring focus to the Government’s spending priorities, there is no budget day for regulation. Regulation never gets the same attention as spending, but it is at least as important. The Public Finance Act constrains government against doing particularly silly things in the budget, but it remains too easy to get regulation horribly wrong.

Yesterday’s Budget coincided with the culmination of one notable bit of regulatory success, to which we will return.

While the changes in the tax brackets were seven years coming, they only partially adjust for inflation since the brackets were set in 2010. David Seymour’s proposal to inflation-index the tax brackets would solve that problem, but rob the government of the political opportunity to package inflation adjustments as tax cuts.

The Government’s commitment to drive down net debt is particularly welcome. It provides the flexibility to take on debt should another earthquake demand it, and helps constrain against launching new and expensive entitlement programmes.

That constraint is necessary. By 2030, net debt will start reaching worrying levels due to the government’s reluctance to do much on the costs of an aging population. Greater spending discipline is needed if New Zealand is to avoid tax increases in the 2020s.

But while the Wellington policy wonks' eyes (ours included) were glued to spreadsheets, trying to put the Budget into perspective, something remarkable happened at Mahia. New Zealand entered the space age. Rocket Lab launched the first test flight of its Electron rocket.

It is usually jingoistic nonsense for a government to take credit for private sector innovation. Rocket Lab is a great private sector success story and the culmination of a decade’s work by Peter Beck. But it also could not have happened without quick and nimble regulatory reform in Wellington – something for which government is not normally known.

We cover more of the details in our coming report on regulation in the digital age. Because New Zealand was starting fresh, MBIE took the opportunity to lay the framework for world-leading rules. New Zealand’s regulatory framework for relatively simple launch approvals, combined with its geographic position, provides a remarkable opportunity.

Last night’s news brought the Government some praise for the Budget. But the real praise is deserved for the rocket ships – a beautiful display of Government's having got that bit of regulation right.

A Budget Day Conspiracy
Jenesa Jeram | Policy Analyst |
I thought the point of the Budget lock-up was to give everyone adequate time to process and digest complex information, and ensure no media organisation had an exclusive.

Now I’m not so sure.

In fact, I have a theory. Everyone in the room (excluding a few choice journalists*) paid off some chump to write op-eds that would be used as templates for every news organisation.

Approximately one hour is used “personalising” their Budget hot-takes. The rest of the time is spent doing fun and outrageous things that the rest of New Zealand will never hear about.

Social paranoia aside, I have reason to be suspicious.

Proportionate to the number of people who attend the Budget lock-up, only three real angles have emerged.

The first angle is that this is the “Budget for everyone”. The election year Budget. The Budget that spends enough in places where needed, but not enough to enrage fiscal conservatives.

Such an angle should not be confused with Bill’s Boring Budget of 2016. Last year, there were no winners. This year, there are no losers.

The second angle is that the spending is not enough, or is not in the right areas. The third angle is that the changes in income tax did not go far enough, or were not concentrated on the right groups.

And it goes without saying that every piece needs to be written through an election lens. Just in case anyone forgot that come September, National will be wanting more votes than those other parties.

Let’s face it, all three of these angles could have been written before the lock-up. Or any Budget lock-up, for that matter.

Then again, maybe I have it all wrong.

Maybe the reality is an exam-like atmosphere: a mixture of dread and desperation to find an original angle or nugget of information, combined with the fear that the person next to you has written a much better piece.

I totally sympathise with that pressure. The only thing about Budget day that really raised my eyebrows was Finance Minister Steven Joyce’s attire.

How can a Budget be boring when you are wearing such a fabulous purple tie?

*For fear of offending anyone, I won’t name my top picks for Budget commentary. But if you are a journalist, feel free to assume I am talking about you and give yourself a pat on the back.
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