Fiscal fantasy land, not just in Aotearoa

Dr Bryce Wilkinson
NZ Herald
28 May, 2021

Last week’s government budget reinforced the sense of fiscal fantasy that arises when one contemplates the unprecedented deficit spending funded by central bank credit creation occurring here and elsewhere.

The government plans to borrow around $30 billion net in the coming fiscal year.  That is over $15,000 per household and is barely less than its net borrowing in the year ended June 2021.

The Treasury projects Total Crown Borrowing will be $215b in June 2022, representing $119,000 per household. The pre-Covid level was $110b in June 2019.

All this would be well and good if the money was being well spent. The problem is that the Government's budget documents give no good reason to think that it is.

For example, the Government's "Budget at a Glance" document highlights 21 additional spending initiatives. All should benefit at least some of the recipients, but all will make New Zealanders overall worse off - unless the benefits exceed the costs. The cost is the forgone benefit from using labour and capital elsewhere. For example, to spend $5 million other than on road safety, sacrifices one statistical human life. Sadly, the document ignores real costs. It is as if resources are free.

In fact, the resources that this spending can command are anything but free. Witness the many recipients who have thanked the Government (as it intended) but have immediately added that it is not enough. School teachers want more, nurses want more, the hospitals want more, the environmentalists want more. The art community wants more.

There is no focus on why the people whose money it was could not spend it better for themselves. That absence means there is no criteria, other than political expedience, for determining how much should be spent, and for what purpose.

Even the likely outcomes from the spending are not particularly important. What are important are laudable intentions and, as the Minister of Finance emphasised, to find a political balance between the contending considerations.

Government spending is most likely to produce net benefits when its is spent on things that only government can oversee. National defence, the system of justice, law and order and public health issues such as Covid-19 response are unequivocally in this category. Much government spending is not of this nature. The vast majority of it is redistributive, and ill-targeted.

Among journalists, the Government's strongest supporters have argued that the 2021 Budget represents a return to traditional Labour – caring for the least privileged. The benefit-rate increases and the unfair demonising of the 1991 Budget measures illustrate this spin.

In fact, what the Government is overseeing is a massive wealth transfer in favour of homeowners. Its "good news story" - that Treasury heroically forecasts a much-diminished rate of house price inflation - effectively condones this transfer. What the community needs to see instead is falling land values because land supply for housing has been freed up.

Some other government policies also seem to be aimed more at benefiting the relatively well-off rather than the people at the bottom. Higher minimum wages are good for those who retain their jobs. They make things harder for those who were not employable at the lower minimum wage. The proposed Fair Pay Agreement legislation similarly promises to benefit those who retain their jobs at the expense of those who do not.

The Government's evident animosity to landlords is also likely to harm the most problematic tenants from a landlord's perspective. Similarly, policies that increase employer liability for workplace safety can make it harder for employers to take the risk of hiring those with convictions of a violent or anti-social nature.

The point is not that the Government should do nothing. The point instead is that good intentions are not good enough. Unintended consequences can produce results that are the opposite of what is intended.

The Government is, of course, alert to some degree of such problems. It surely intends that the benefit increases will help those whose opportunities it is shutting down.

The problem here is that if wellbeing is the goal, living on a benefit long term is neither fun, nor good for personal wellbeing. The purpose of government welfare should be to help people back to independence, where this is possible. It should not be to perpetuate their circumstances.

The previous government commendably brought this focus to welfare policy under the rubric of "the social investment approach". It sought to reduce long-term welfare dependency rather than fuel it. Its focus was on finding out more rigorously which welfare programmes worked and which did not. It set targets and published actuarial estimates of future welfare rolls and costs. The latter have been suppressed by this government and the focus on assessing "what works" seems to have been lost.

In my estimation, the big division in these debates is not between "left" and "right"; it is over time horizon. Politicians must focus on winning the next general election. People with short-term horizons are under pressure to address symptoms rather than causes. Throw someone else's money at need, and declare one's virtue.

Those with a longer-term view will be more worried about addressing the causes, shrinking the intergenerational pipeline of misery for example, rather than fuelling it. To accuse either side of this debate of being uncaring is to miss the actual point of division.

Well, given that no case is apparent that the additional money is being well spent, how much does it matter? Treasury's forecasts suggest that all will be well. With strong economic growth the unemployment rate will be under 5 per cent by 2023 and the budget deficit will be eliminated by 2027. And is not central bank credit creation a fine thing?

The first answer is that what counts for future wellbeing is productivity growth – the sole source of sustainable growth in real income per capita. Here, the news is bad. Treasury has reduced its forecast trend rate of labour productivity growth from a lame 1.2 per cent per annum to a lesser 1 per cent.

The second answer is that one can hope for the best, but should not plan for it. The international financial situation is fragile, with large fiscal deficits and asset markets reliant on exuberant credit creation by central banks. Ill-justified public spending increases the risks of future strife.

Some who should know better, such as a former prime minister of New Zealand, are promoting the fantasy that spending funded by borrowing from the Reserve Bank is not a problem. In their eyes the government, since it owns the Reserve Bank, could just wipe the debt out. The fallacy is the view that "it only owes the debt to itself".

In truth, doing that would not alter the above borrowing figures one iota. Total Crown borrowing statistics incorporate the Reserve Bank, and net out internal assets and liabilities in the process.

What these people miss is that the Reserve Bank is borrowing from the banking system to buy government securities. If the government defaulted on those borrowings the banks would be bankrupted and depositors would be both much poorer and very angry. It's not going to happen.

The current complacency and wishful thinking about the quality of government spending and its funding epitomise the "this time it is different" fallacy.

Sorry, fiscal prudence remains a virtue. Cost is relevant.









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