Treasury released its economic and fiscal forecasts to 2033/34 last week. Because it is politically neutral and fully informed, Treasury is best placed to make such pre-election forecasts.
Voters can use the forecasts as a benchmark to judge whether political parties' campaign promises will make things better or worse.
Treasury's central economic forecasts see strong economic growth for the next three years. Unemployment peaks at 7.8% in early 2022; consumer price inflation (CPI) rises from 1.2% to 2.0% by 2025; and lost tourist income will see the balance of payments deficit peak at 5.6% of GDP by late 2021.
Investors in 10-year government bonds will incur capital losses due to forecast rising yields, with inflation and tax compounding the pain. Forecast pre-tax yields only persistently exceed CPI inflation after 2025.
The fiscal and wellbeing outlook is even less rosy. The burden of the welfare system on those with jobs and paying taxes will rise. The forecast number of welfare benefits paid to those of working age will represent 31% of the labour force in 2021/22, up from 21% last year. By 2028/29 this will drop back to 23%. In addition, those receiving New Zealand Superannuation rise progressively from 29% to 35% by 2028/29. The combined ratio peaks at 61% in 2021/2.
More worryingly, the government must borrow to cover all its operating expenses until 2027. Total Crown net worth bottoms out in June 2027 at 7.4% of GDP. That will be the lowest ratio in nearly a quarter of a century. (In June 2019, it was 45.1% of GDP, or $78,000 per household.)
The forecasts incorporated government policies as at 7 September. Labour has announced some new policies subsequently. But the big picture looks much the same. On the revenue side, Labour has pledged no new taxes and no changes to income taxes – beyond its new 39% rate. It also pledged to add a paid public holiday, increase paid sick leave and raise the minimum wage. The first two should reduce wage rates in time, while the third will make it harder for the least employable to get paid work.
Across the aisle, National announced its plans. Its two headline proposals are temporary tax cuts "to ignite the economy" and tax breaks for businesses. National plans smaller (and different) spending increases but thinks it can achieve this with less net borrowing and public debt.
Labour and National's fiscal proposals pander to a common belief that pushing borrowed money around can stimulate an economy. The notion is that if I borrow $100 from you and lend it back to you, you will save less and spend more. (Just replace "I" by "the government" and "you" by "the public" in that sentence, to see how the notion is usually expressed.)
The wage subsidy, increased welfare benefits and temporary tax cuts illustrate this kind of thinking. The government must borrow from the public to fund such spending. Why would this make Kiwis feel richer? Either future tax rates must go up or future spending drops. The other option is that the government might cheat those who lend to it, through inflation or by other means. The uncertainty makes it hard to plan.
Economists have debated this 'boot-strap' fiscal stimulus notion for decades. There are many qualifications to the proposition. I do not expect either party’s fiscal measures to lift economic activity meaningfully. I wonder if they do either.
The focus instead may be on the politics of winners and losers from shuffling borrowed money around. This is likely to induce a “what’s-in-it-for-me-at-someone-else’s-expense” mindset.
Over 150 years ago, French economist Frederic Bastiat pointed out that when the law sanctions government predation, “everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.” Today, government finances are mainly about transfer spending. The proportion spent on public or collective goods is minor.
Labour’s proposal that 98% of voters can arbitrarily agree to tax 2% is a great example of self-centered predatory thinking. It is the very opposite of kindness. Leaders should discourage majoritarian predation, not trumpet it. A single rate of tax that takes the same proportion of income from all would be fairer.
Labour will generate less revenue from the tax than it estimates. The fifth Labour Government forced a 39% tax rate on a minority of taxpayers in April 2000. The fifth National Government removed it in October 2010. Research published by Professor Norman Gemmell at the Victoria University examined taxpayers’ responses. He found strong evidence that people responded to the incentive to shift income away from the 39% rate from 2000 and reverted to less tax-distorted arrangements from 2010.
Further, Treasury’s forecasts assume steady state productivity growth of 1.2% per annum. This looks rosy compared with the growth rates in the last decade. Productivity growth matters greatly for living standards. There are material differences between the productivity and job creation policies of the two main parties.
Labour is promoting “shovel ready jobs” of dubious value, but to its credit it will axe the unsavoury Provincial Growth Fund.
National aims to generate jobs and raise productivity in good part by reducing regulatory barriers. This includes trimming anti-money laundering and Health and Safety regulations, repealing unwieldy employment laws, reducing limits on foreign direct investment and repealing the Resource Management Act.
Labour has recently moved to help councils resist anti-housing pressures. But it has also made it harder for Kiwis to attract foreign direct investment.
Both National and ACT want to bring back 90-day trial periods to increase employment. On top of this, National will freeze the minimum wage for 12 months, ACT for three years. Labour is keener to see people out of work than in a job at a low wage.
On education, National is more open to parental choice in that it would establish new partnership schools. Again, Labour would rather kids failed in state schools than succeed in partnership schools. Both parties want to increase spending for state schools without it being clear that this would improve slipping achievement levels much.
The bottom line is that neither Labour nor National appear to think that voters at large want serious action to fix the long-standing problems of low productivity and a ballooning welfare state. Kiwis will instead face another decade taking two steps forward, one step back. Along the way, workers will have to shoulder the rising burden of welfare dependency.