NZI - Insights 18/2015 | Budget 2015 Breakdown

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Insights 18: 22 May 2015

Budget 2015: Not ambitious enough

Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz

Budget 2015 was delivered yesterday, and my colleagues below take a look at this mixed bag of good and questionable decisions.

But what about the overall direction of the government? The Labour opposition made much noise about the missed surplus. However, that is a sideshow. A few hundred million in deficit or surplus is a rounding error in the grand scheme of things. We should rather be looking at where National intends to take the country in the long run.

Though it is welcome to see core Crown expenses fall from 30.5 to 29.2 percent of GDP by 2019, it is concerning that for economic growth the trend is also downwards: from 3.3 to just 2.0 percent growth.

Budget 2015 shows there is work to do to make New Zealand more productive. Unfortunately, it did not give us any suggestions on how the government would want to achieve this. If the forecasts are right, the end of three terms of a National government will have brought overall government spending back down to where it was at the start of Labour’s second term under Helen Clark.

Is this the best that economic liberals can hope for?

Housing: Tinkering with demand

Jason Krupp | Research Fellow | jason.krupp@nzinitiative.org.nz

Housing formed one of the main cornerstones of the government’s budget. The announcements were dominated by demand-side measures, the most prominent of which was to make gains from the sale of any residential investment property within two years of purchase taxable.

Others included requirements for overseas buyers to supply enough information to IRD and the banks that a de facto register of foreign property investors could be put together. The government even hinted that a withholding tax for non‑residents selling residential property might be on the cards.

The announcements are a political masterstroke as they have reduced the property cudgel, which opposition parties have been using to bash the government, to toothpicks. Practically, however, we remain sceptical. Without meaningful measures to address the constraints that local planning laws place on land supply, the $122 million spent on social housing, improving housing outcomes for Māori, and the release of Crown-owned land in Auckland will count for little.

Supply is needed, and this is one way to tackle the problem.

Local Government: Passing the NIMBYism buck

Dr Bryce Wilkinson | Senior Fellow | bryce.wilkinson@nzinitiative.org.nz

Auckland City, Auckland house prices. Politically, that is the government's most immediate local government issue. The government knows RMA reform is needed to reduce its anti-subdivision bias, and the clout it gives to NIMBYism. But the Northland by-election has made that much harder. The budget, by default, leaves the NIMBY problem to the Auckland Council.

The New Zealand Initiative is advocating greater devolution – shifting government functions and funding to local authorities, as in A Global Perspective on Localism. This Budget does not do that. More public debate is needed. Instead, government is increasingly devolving the delivery of social services, particularly housing, to local community organisations. That is a complementary form of devolution.

The logic is the same. Local communities generally know their needs better than central government. Often local needs are best met by local solutions. Even when central government knows what is needed, it may not be able to deliver. Witness RMA reform.

Fiscal policy: Walking a tightrope

Khyaati Acharya | Research Assistant | khyaati.acharya@nzinitiative.org.nz

While that pesky surplus is proving rather capricious, this year’s budget shows tentative progress towards fiscal objectives.

The Initiative’s 2014 report Guarding the Public Purse, argued that greater productivity growth, competition and spending restraint were essential to achieving longer-term fiscal sustainability. And, to avoid a projected debt spiral, the annual primary operating balance between now and 2060 may well need to average 1.7 percent of GDP.

Treasury’s updated fiscal model projects an encouraging average annual surplus of 2.5 percent of GDP between now and 2029 on current policies. If achieved, a debt spiral becomes far less likely.

But how plausible is this? It involves reducing core Crown expenses from 30.5 percent of GDP to 26.7 percent of GDP by 2029, while revenues rise marginally faster than GDP thanks to the cheeky effects of fiscal drag.

Stuffing the promised fiscal cushion will be no easy task. How future governments will actually safeguard fiscal pressures from the (geriatric) demographic bulge is, alas, left to our imagination.

Poverty and hardship: Social service reform needed

Jenesa Jeram | Research Assistant | jenesa.jeram@nzinitiative.org.nz

There was much speculation that this would be the budget that would radically transform the way the government funds and delivers social services. In a speech made earlier this year, Finance Minister Bill English hinted at a new budget process: rolling out the ‘social investment approach’ to areas beyond welfare.

We have seen no such thing with this Budget. The increase in benefits could provide some relief to families in hardship. However, cash increases and childcare assistance (tempered with more demanding work obligations) for beneficiaries will not address the complex problems these populations face.

What we need is long-term solutions, and an acceptance that the state cannot pull people out of poverty alone.

More comprehensive reforms are expected over the coming years, with emphasis on contracting for outcomes, greater private sector involvement, and establishing an evidence base for policies. The New Zealand Initiative’s latest work on Social Impact Bonds looks at how these new reforms could deliver better results for taxpayers, social service providers, and vulnerable populations.

Regulation: The missing budget

Dr Eric Crampton | Head of Research | eric.crampton@nzinitiative.org.nz

The Fiscal Responsibility Act forces government to pay attention to its expenditures. But what about the cases where government instead compels you to do the spending on its behalf?

Sadly missing from every budget is any accounting of the costs government regulation imposes on the country. The Productivity Commission says we have about 200 different regulatory regimes and over 10,000 people employed in regulatory activities. New regulations are supposed to be accompanied by a cursory cost-benefit assessment, but we have no clear picture of the overall burden (or benefit) of the existing regulatory estate.

Spending programmes are bound by the government’s budget constraint. But we rarely even measure the costs imposed through regulation – and especially for rules that have been around for a while. An annual regulatory budget would provide some much needed transparency – and might force the regulators to find more efficient ways of doing things.

On The Record

Why are New Zealand wages so ‘sticky?’, The National Business Review, 22 May 2015.
Why the EU is hung up on mobile roaming, Dr Oliver Hartwich, Business Spectator, 21 May 2015.
Millions lost in tax through poor oversight of charities, The National Business Review, 20 May 2015.
NBR Radio discusses charities, The National Business Review, 20 May 2015.
Editor’s Insight: A budget success story you don’t hear about, The National Business Review, 19 May 2015
Call for NZ charity sector shake-up, The New Zealand Herald, 18 May 2015.
Charity legislation ‘favours’ big companies, Stuff.co.nz, 18 May 2015.
Charity legislation needs review, New Zealand Labour Party, 18 May 2015.
Jason Krupp on charities, Jason Krupp, RadioLive, 18 May 2015.
Small charities suffer under act: report, 3News, 18 May 2015.
Law favours big players over small charities, The Southland Times, 18 May 2015.
NZ Initiative on charities, Kiwiblog, 18 May 2015.
The importance of brands, Kiwiblog, 18 May 2015.
Free Press: ACT’s new regular bulletin (Taxing charities), ACT New Zealand, 18 May 2015.
The NZ Initiative’s Jason Krupp says the future for urban transportation lies with the car – albeit an updated version, Jason Krupp, Interest.co.nz, 18 May 2015.
Social Impact Bonds, Kiwiblog, 17 May 2015.

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