When the government announced revised fiscal rules earlier this month, Treasury provided a mild caution. Shifting from a net debt target to a net debt ceiling would require a greater emphasis on year-to-year fiscal discipline. Governments needed to ensure they received value-for-money in spending that they ran budget surpluses except during extraordinary circumstances.
Treasury warned that “If there is a high risk of projects being funded without a rigorous assessment based on sound analysis, the Treasury advised that the government should set a lower debt ceiling.”
The reason is obvious. Without fiscal discipline, a net debt ceiling too quickly becomes a net debt target, leaving too little headroom in case of emergency.
Budget 2022 may not be the best start.
Mainstream versions of Keynesian macroeconomics argue against deficit spending when the economy is running hot. Deficits should be saved for hard times.
The Budget Economic and Fiscal Update warns that the economy has been running hot and will continue to run hot through 2023, as measured by the output gap.
Economist Michael Reddell warns that the government will be running a deficit equivalent to 1.7% of GDP in 2022/23 despite a strongly overheated economy.
That kind of deficit spending, when the macroeconomic circumstances hardly warrant it, and when the Reserve Bank will only have to move harder on interest rates to undo its effects, really must be accompanied by rather compelling evidence that the spending makes sense.
Too much of it does not.
The government earns a lot of money by selling carbon credits in the Emissions Trading Scheme. It expects to earn about $1.4 billion dollars by selling carbon credits in 2023 – or about $1,080 for every family of four.
The government could have followed Canada’s example. There, the government provides a carbon dividend that sends carbon tax revenues back to households, based on the government’s best guess about its coming carbon revenues. The system meant that Canada’s Environment Minister could remind Canadians that eight out of ten households receive more money from their carbon dividend than they pay in carbon taxes.
This kind of scheme helps to lock in political support for rising carbon prices by enabling households to make their own best transition to a lower carbon future.
What did Kiwis get instead? A political slush fund for dubious schemes like cash-for-clunkers, and corporate welfare. We have yet to see the documents supporting the vehicle scrappage scheme, but if America’s experience with it a decade ago is anything to go by, Treasury will have had to have taken gymnastics lessons if it wants to provide political cover for the Minister on this one.
Expensive programmes targeting emissions in transport, which are already covered by the Emissions Trading Scheme’s binding cap, will have a very difficult time in reducing net emissions at all, let alone cost-effectively.
Sadly, while the Opposition National Party has opposed using ETS revenues for corporate welfare, it has not yet come out in favour of a carbon dividend – a difficult position for a Party that claims to want to rely more heavily on the ETS to do the heavy lifting in reducing net emissions.
And while the government is providing $350 to lower-income earners, funded again out of Covid contingency money, that figure just matches the extra tax paid by lower-income earners because of inflation from 2017/18 through 2020/21.
So instead of announcing an inflation indexing of the tax brackets from 1 April 2023 and automatic indexing thereafter, combined with a more careful ruler taken over ongoing spending, the government has provided a one-off payment. And if the next waves of Covid are worse than expected, the government will need more debt to make up the difference.
It is far from all bad. Shifting the decile funding system to instead provide greater funding to schools whose students have greater needs could be helpful – ongoing evaluation of the shift will matter.
And the government’s announced intention to free up land for new supermarket entry will, over time, make the sector more competitive and could bring down grocery costs. The first round of legislation, to be brought in under urgency overnight, may target restrictive covenants – but further work will be needed to free up zoning and consenting, as well as restrictions imposed by the Overseas Investment Office.
But Treasury may yet rue having supported the government’s new fiscal rules. Or at least the parts of Treasury that still remember the institution’s history.