John MacDonald: Kneejerk reactions won't fix the fiscals

If New Zealand was a company staring down the barrel of running at a loss for at least the next five years and finding itself needing to borrow $20 billion more than it thought it did just six months ago, it would be lights out, wouldn’t it?  

And no amount of creative accounting could change that picture.  

Essentially, that’s the state we find ourselves in after yesterday’s fiscal update from the Government. With pretty much the only good news coming out of it being in the housing market, and an expectation that it is going to come back to life the year after next.  

Unfortunately, I think Dunedin can kiss goodbye to winning the fight over cutbacks to the new hospital. I think all the noise about the IT cutbacks at Health NZ will fall on deaf ears in the Beehive too.  

But I also think that the Government is doing the right thing holding its nerve and I think doing a Ruth Richardson and going harder and faster on the spending cuts would be a disaster.  

I was listening to independent tax expert Geoff Nightingale on Newstalk ZB this morning and one of the things he mentioned was how much of a role welfare costs are playing in the Government’s overall financial position.  

Which is why I mention Ruth Richardson. It was 1991 and Ruth Richardson was Minister of Finance and delivered what is forever known as the “Mother of all Budgets”. Because it was brutal - especially for beneficiaries and families.  

Unemployed people had their dole cut by $14 a week. Anyone on the sickness benefit ended up $25 worse off each week - in fact it was nearly halved, going from $52-a-week to $27-a-week.  

Universal payments for family benefits were completely abolished. She also brought-in more user-pays in health and education. Remember that was something Labour’s Roger Douglas stated in the 80s but Ruth Richardson took it further.  

And, 30 years later, Labour’s Grant Robertson delivered a budget that he said was increasing benefit payments to “right the wrongs” of Ruth Richardson’s 1991 budget.    

Nevertheless, the Finance Minister is saying today that, despite the way things are, we’re not going to see the Government going harder and faster on the spending cuts because it has already made spending commitments to the public.  

But she says re-prioritising spending will happen.  

So it seems that Nicola Willis isn’t going to channel her inner Ruth Richardson and deliver the Mother of all Budgets Volume 2. Which I think is wise.  

Not that I’m saying that the Government isn’t to blame for any of the shambles unveiled in yesterday’s update. As you’d expect, it’s pointing the finger at Labour - accusing it of economic vandalism, and how this just shows how much of a fix-it job it has on its hands.  

And don’t get me started on the creative accounting we saw yesterday, which Treasury was against the Government doing in the first place, and which some economists think is a justifiable thing to do but still kind of cheeky.  

I’m not going to get bogged down in numbers, but I can’t resist pointing out that part of the problem is the Government’s revenue from taxation being down.  

Over four years it’s going to earn $13 billion less. The cost of this year’s income tax changes is going to be $14.5 billion over five years. Just saying. But the tax cuts horse has bolted and there’s no going back from there.   

The other reason for the tax take being down is that businesses aren’t earning so much - which, of course, means they’re paying less tax too.  

And that’s going to be a key thing for the Government —and Nicola Willis said so this morning— it needs to do what it can to stimulate economic growth. It will say that that’s what things like the fast track legislation will do, all of that stuff.  

But it can't fix things with legislation alone, the Government needs to keep investing. Which is why it would be a terrible mistake for it to go all knee-jerk on it.  

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Episode Transcript

Speaker 1 (00:06):
You're listening to the Kerry Wood of morning's podcast from
News Talk said, be.

Speaker 2 (00:11):
You know, if New Zealand was a company steering down
the barrel of running a loss for at least the
next five years and finding itself needing to borrow twenty
billion dollars more than it thought it did just six
months ago, it'd be lights out, wouldn't it if it
was a business, and no amount of creative accounting could
change that picture. Essentially, that's the state or the position

(00:35):
we find ourselves in after yesterday's fiscal update from the government,
with pretty much the only good news coming out of
it being the housing market well yet to be good news,
with an expectation that it's going to come back to
life the year after next. But after what we learned yesterday, unfortunately,

(00:56):
I think Dunedin can kiss goodbye to winning the fight
over cutbacks to the new hospital. I think all the
noise about the it cutbacks at Health New Zealand are
going to fall on deaf ears at the bee hop
as well. But I also think that the government's doing
the right thing, holding its nerve and I think doing
a Ruth Richardson on it and going harder and faster

(01:16):
on the spending cart, so I think that would be
a disaster, an absolute disaster. I was listening to independent
tax expert Jeff Nightingale talking to Heather this morning and
one of the things he mentioned was how much of
a role welfare costs are playing in the government's overall
financial position. He talked about to New Zealand Souper, the
whole shebang, which is why I mentioned Ruth Richardson because

(01:39):
you will or you may remember nineteen ninety one it
was and Ruth Richardson was Minister of Finance and she
delivered what is forever known as the Mother of All budgets,
and it was called that because it was brutal, especially
for beneficiaries and families. There's some numbers where we unemployed
people they had their doll cut by fourteen dollars a week.

(02:02):
Remember this is nineteen ninety one, so more power and
fourteen dollars back then, anyone on the sickness benefit ended
up twenty five dollars worse off each week. In fact,
it was nearly halved, going from fifty two dollars a
week to twenty seven dollars a week. What else in
the Mother of All budgets. Universal payments for family benefits

(02:23):
were completely abolished, and she also brought in more user
pays in health and education. Remember that that was something
that Labour's Roger Douglas had started in the eighties, but
Ruth Richardsons she took it further with the Mother of
All budgets. There were more things as well, though some
of the main things relevant to today's conversation, and it

(02:44):
was thirty years later that Labour's Grant Robertson delivered a
budget that he said was increasing benefit payments to quote
right the wrongs of Ruth Richardson's nineteen ninety one budget. Nevertheless,
the current Finance Minister is saying today that despite the
way things are, we're not going to see the government

(03:05):
going hard and faster on the spending cuts. And here's why.

Speaker 3 (03:08):
There are commitments that we have made to the New
Zealand people. One that we are going to keep improving
frontline services and that will require more resources for our schools,
for our health system, for our police. And two because
what we've said will do is do that in a
sensible way, so we will have to deliver savings in
order to provide those extra resources. Elsewhere just to make

(03:30):
sure that we're beat meeting frontline service demands will require
significant reprioritization.

Speaker 2 (03:35):
So it seems Nicola willis she's not going to channel
her inner Ruth Richardson and deliver the Mother All Budget
or Mother of All Budgets, Volume two, which I think
is wise. Not that I'm saying, by the way, that
the government isn't to blame for any of the shambles
unveiled in yesterday's update. I mean, as you'd expect, it's
pointing the finger at labor, accusing it of economic vandalism,

(03:58):
and how this just shows how much of a fixed
job it has on its hands thanks to labor. Don't
get me started on the creative accounting you saw yesterday,
which Treasury was against the government doing in the first place,
and which some economists, some economists think is a justifile,
justifiable thing to do. No, this has taken a sec

(04:18):
out of the picture, so the numbers look better sooner.
But even though it kind of makes sense to the experts,
even they think it's been on the cheeky side. And
I'm not going to get bold down in numbers, but
I can't resist pointing out that part of the problem
is the government's revenue from taxation being down. Over four years,
it's going to earn thirteen billion dollars less and the

(04:39):
cost of this year's income tax changes is going to
be fourteen point five billion over five years, just saying
but the tax cuts horse, that's bolted and there's no
going back from there. The other reason too for the
tax take being down is that businesses aren't earning so much,
which of course means they're paying less tax too, and
that's going to be a key thing for the government.

(05:00):
And Nicola will have said so this morning with Heather
it needs to do what it can to stimulate e
growth and it'll say that's what things like the fast
tracking legislation will do all of that stuff. But it
can't fix things with legislation alone. The government needs to
keep investing. It needs suspend to accumulate, which is why

(05:22):
it would be a terrible mistake for it to go
all knee chirk on it and start cutting, cutting, cutting harder,
hard or harder. But what do you think. Are you
happy with Nikola willis as steady as she goes approach?
You're happy for the government to stick with the current
plan or do you think we need something like Ruth

(05:44):
Richardson's Mother of All Budgets to really shake things up.

Speaker 1 (05:48):
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