Budget 2023 is an election year budget. Many voters want to be fed (bigger) hand-outs. The government wants to appease them. But it also wants to appear to be fiscally responsible.
Last week the Government published its high-level spending and taxation plans for its forthcoming Budget in 2023. It did so because the Public Finance Act requires government to publish these Budget Policy Statements annually.
In the latest Statement for 2023, the minister of finance, Grant Robertson dutifully assures any readers that Budget 2023 will represent a wise and judicious balance between the need to “support” households and families, amidst recession, and the need to be fiscally responsible.
So how well did he do?
The answer hinges on the measures of fiscal responsibility. Everyone accepts that it can be fiscally responsible for governments to borrow to fund some of current spending when things go wrong. Households (hopefully) ‘save for a rainy day’ for the same reason.
But the flip side is that sustained spending beyond one’s means creates a debt spiral. Debt spirals end in tears.
New Zealand has ‘been there’. Global oil prices roughly quadrupled in 1973-74. Successive New Zealand governments over-spent their revenue for the next decade. This ‘borrow and hope’ approach led to a searing public debt and foreign exchange crisis in 1984.
It took the best part of a decade for successive governments to extricate New Zealand from that crisis. The experience was very painful. Many firms disappeared. The unemployment rate peaked at over 10% of the labour force. Many people blamed the governments that took the tough but necessary and ultimately successful measures. Multiple prime ministers and ministers of finance tumbled between 1987 and 1994.
The experience was so painful that Parliament passed a Fiscal Responsibility Act in 1994. That Act mandated compliance with principles for responsible fiscal management.
Departures from those principles must be temporary. The Minister of Finance must provide reasons for such departures and identify how long it will take for its corrective actions to eliminate them.
A core requirement is that each government must publicly announce a prudent level for the public debt. Doing so exposes it to public debate and scrutiny. Thereafter, it must justify any greater level and declare what corrective action it intends to take.
For much of the twenty years after 1994, Budget Policy Statements were brief documents focused on fiscal strategy in this debt context. Prudent debt meant very little debt by today’s standards.
For example, the statement for Budget 2006, by the then Minister of Finance, Michael Cullen, comprised only six pages.
Its long-term objective for public debt was to see gross sovereign-issued debt “passing through 20% of GDP [gross domestic product] by 2015”. To put this into a debt spiral perspective, in March 1984, that debt ratio was 59% of GDP, much of which was foreign currency debt.
In the 2006 Statement, net debt (inclusive of New Zealand Super Fund assets) was expected to “fall towards minus 10% of GDP by 2015 (i.e. a net financial asset position)”.
In contrast, last week’s Statement comprises 28 pages. It is full of political padding about Government’s good intentions with respect to wellbeing, living standards, the environment and Māori spiritual and other values.
All of it is worthy, if government decisions are taking value-for-money seriously. Unfortunately, the document does not demonstrate that.
The Government’s stated new long-term debt objective is to “maintain net debt at below 30% of GDP …”. That is a massive 40% of GDP higher than the minus 10% of GDP figure in Budget Policy Statement 2006.
It is also well above Treasury’s projected peak of 21.4% of GDP in 2023/24. So, it looks as if this government is the most relaxed about public debt in the last 40 years.
Moreover, the government is not being consistent. Back in Budget 2019, before Covid-19 appeared, the government aimed to get a different measure of net public debt down to 20% of GDP within five years of taking office. It then aimed to keep it within a 15-25% range.
Budget 2020 projected net public debt to be far above this target, but failed to provide any timetable for getting it back within the target range. Budget 2021 did the same.
Treasury projected in Budget 2021 that net debt on that measure would peak at 48% of GDP. It would still exceed 33% of GDP on that measure in 2033. (Treasury’s latest projections, released last week, show it dropping below 30% of GDP by 2028/29.)
In short, much of the earlier clarity and discipline in Budget Policy Statements has been lost. Whatever level Treasury is projecting as a central scenario appears to be deemed to be prudent.
A focus on central scenario projections invites complacency. Treasury’s central projections naturally assume a return to underlying rates for economic growth and inflation. Those projections lift government future tax revenue relative to unchanged expenditure plans. With low interest rates, any net debt situation look increasingly manageable as the years roll by.
The thing is that events happen. A prudent approach to debt does not assume that all will be well for the next ten or twenty years. More likely, bad things for debtors will happen.
To illustrate, as already mentioned, back in 2005, Treasury’s main projections envisaged that gross sovereign-issued debt would be of the order of 20% of GDP by 2015. The actual outturn was 35% of GDP. (Remember the global financial crisis and the Christchurch earthquakes.) For Budget 2015, Treasury’ projected it would fall to 27% of GDP by 2022. The outturn for June 2022 was 46 % of GDP.
There is a theme here reminiscent of the Lord of the Rings. It is that old lessons can be forgotten. Old evils can re-emerge. People who have not lived through double digit inflation and a debt spiral can become complacent.
The fiscal disciplines put in place in 1994 have been neglected with considerable impunity. This is dangerous. One option is The New Zealand Initiative’s proposal for a Fiscal Council.