Budget 2010 was not fiscally neutral. To fund its large tax cuts package of $14.5 billion the government has borrowed an extra $1.1 billion over four years.
The Crown borrowing requirement rises and interest costs roughly double before declining around 2021.
The current account widens from 3% to 7% over the forecast period. The trend in net internation investment remains negative.
Longer term the fiscal aggregates look even worse. We will have more to say about this in due course.
Meantime the world around us is poised on the cusp of a potential double-dip recession. Germany’s voters are tiring of socialising the Eurozone’s mounting deficits. The US and UK are already running huge deficits and accumulating debt due in part to the last round of fiscal stimulus.
World markets are highly fragile. Korea and the Gulf of Mexico mean we don’t need too much else to go wrong.
Why has National strained the fiscal envelope so far while achieving so little economic return?
Treasury forecasts less than 1% additional GDP growth from Budget 2010 measures accumulatng over 7 years.
Only 3% of the forecast employment growth over the period results from Budget measures, and the total is around half that achieved under Labour.
Those desultory results look even worse given the optimism of the underlying GDP forecasts. Treasury predicits around 3% growth p.a. over the next three years.
With this external environment… really? How have the risks been factored in? What are the downside management strategies?
Enter the notion of the “strategic deficit”. Several highly experienced and qualified commentators have underlined to me in recent days that the senior ministers know exactly what risks they are taking, and why.
They are said to be deliberately running an unsustainable fiscal track: front end loading tax cuts and waiting for a second term (which they must not get) to privatise, asset strip and expenditure-cut their way out.
The underlying agenda: shrink the size of the state and lock in a lower tax and lower public investment fiscal environment, while rewarding traditional constituencies: the full flowering of their multi-year plan.
Fine if you want NZ to be a branch office economy and fine if you don’t care about raising real incomes or the conditions of hard working families.
But we in Labour do care. So this fight is only just beginnning.
Labour would be fiscally responsible, as we were in government. We would not have given such large tax reductions for the few but relief would have been better spread across the many. We would not have raised GST.
We would have invested more heavily in growth and productivity driving programmes in R&D and economic development. We would have worked more aggressively to lift sustainable savings rates and arrest the decline in our international position.
New Zealand needs a government that will put the long term interests of the country ahead of its own short term popularity.
Strategic deficits, fiscal risks and focus groups: therein lie the seeds of National’s forthcoming demise.