Finance Minister Grant Robertson has used Budget 2021 to turn back the clock, repudiating the 1980s and 1990s economic reforms and setting out a very different direction for economic and social policy. The Minister was explicit in using this year’s Budget to ‘undo the damage’ from the reforms of the 80s and 90s. His comments are largely political but nevertheless disappointing as they don’t recognise that the maligned reforms were not done for laughs but were necessitated by the economic decline and near collapse caused by the sorts of policies the Government is now promoting. The reforms, including to agriculture, were painful but they put the economy on a much sounder footing and helped New Zealand weather shocks like the Global Financial Crisis, the Canterbury Earthquakes, and COVID-19. The biggest Budget announcement was a substantial increase in welfare benefits by up to $55 per week by the middle of next year. This was widely expected as it was recommended by an earlier review of welfare. There are also plenty of examples where the economy will be subject to more government intervention, such as Fair Pay Agreements (FPAs) and Industry Transformation Plans (ITPs) across seven favoured sectors (advanced manufacturing, agritech, food & beverage, digital, construction, tourism, and forestry & wood processing). The Government’s reform agenda is huge. As well as FPAs and ITPs, it’s also looking at establishing a European-style social unemployment insurance scheme (potentially a sneaky way to increase taxes), and it’s progressing major reforms of the health, education (tertiary and schools), three waters, resource management all of which are centralising control. And don’t forget its work on climate change which will have profound economic impacts. There’s some new spending for agriculture and biosecurity, such as farm plans ($37 million), emissions research ($24 million), Mycoplasma bovis ($66 million), NAIT ($22 million), etc. Within environment, there is substantial funding boost for RMA reform ($132 million), and for environmental reporting ($25 million). There were no tax announcements in the Budget but the Minister announced that from next year revenue from the Emissions Trading Scheme (ETS) will be hypothecated to emissions reduction programmes.
Budget 2021’s economic and fiscal outlook is a lot better than last year’s. This reflects a less ugly economic and fiscal landscape than a year ago. Last year’s Budget was delivered in the midst of the national COVID-19 lockdown. It forecast a deep slump in GDP and a big jump in unemployment. The Government was staring down the barrel at massive fiscal deficits and years of red ink. Net core government debt was forecast to surge to over $200 billion by 2023/24. Fast forward a year and carnage did not eventuate. Massive monetary and fiscal support and the stamping out of the virus helped GDP bounce back after the national lockdown while unemployment has not turned out to be nearly as bad as feared. Commodity prices have surged to record levels, the housing market has been running hot, and retail sales have been robust. Farmers played a key role too. They delivered last year when food production was able to continue operating during the toughest period of lockdown. Agriculture has dominated our exports and higher farmgate prices for milk and meat are keeping regional economies afloat. While not acknowledged in the Budget, farmers can be proud of their contribution. A better than expected economy has flowed through to the fiscal indicators. Successive updates over past 12 months showed progressively better results. A better starting point provided the Government more options than looked possible a year ago and it has taken advantage by increasing benefit rates. But it’s not all plain sailing. The economy lost steam towards the end of last year and while the benefit increase should help boost consumer spending, the coming year is likely to be patchy and uneven, especially the longer border restrictions remain. The travel bubble with Australia is helpful but international tourism will take a long, long time to recover even when the borders eventually open to visitors from other countries. GDP growth averaging 3-4% over the next few years seems overly optimistic. So too inflation staying under 2% after what the Treasury thinks will be a temporary spike this year. And will unemployment stay low or will higher benefits dampen an already tight labour supply? Forecasts in the current environment, with such huge uncertainty both domestically and internationally, must therefore be treated with caution.
Interestingly spending growth is forecast to be relatively modest over the next few years. Despite this, operating deficits will continue to at least 2025, with a bigger deficit in the coming 2021/22 year as spending initially budgeted for 2020/21 and not spent is ‘rephased’. Net core Crown debt is forecast to peak in 2023/24 before reducing. Key risks to the outlook are (1) whether the economy recovers as strongly as forecast (I have my doubts) and (2) whether the control of operating spending implied in the forecasts transpires in practice (heroic assumption I think, especially in 2023 which will be an election year).
Rather than more government intervention in the economy, we wanted an unrelenting focus on policies that reduce the burden of the state on the private sector and make the economy more productive by encouraging a better business environment so firms and farms can invest and employ with confidence. We support a return to surplus and for debt to be reduced over time to get New Zealand in a better position to withstand the next economic shock and, in the longer term, cope with the impacts of an ageing population. It’s good there seems to be a path back but it’s going to take time and there is still much uncertainty about the forecasts. We want government spending focused on programmes and projects that deliver strong value for money. All its spending should be appropriately phased, controlled, and directed to maximise its benefits. Outcomes should be what is important not simply the amount of spend. Spending growth is forecast to be modest but it remains to be seen that it will be in reality. While benefit increases are a form of fiscal stimulus, we would like to have seen at least some tax relief and a bit of recognition of the needs of businesses, including farms, which generate jobs and income. The Government should have committed to better quality regulation through supporting the Regulatory Standards Bill and being serious about rigorous analysis. It should have signalled a pause or at least a softening of changes that threaten to choke the life out of businesses, including our farmers who are so crucial for export growth. Instead, it is increasing funding for a deluge of major reforms. It’s good the Government is providing new money to boost initiatives to tackle on-farm emissions from our already world leadingly climate efficient farms, including agricultural greenhouse gas research and development of integrated farm plans. From the next Budget the Government will ‘hypothecate’ revenue received from the ETS onto emissions reduction programmes. This could be significant. There is also funding to continue Mycoplasma bovis eradication and more for NAIT, the latter to help with compliance enforcement. But there is no mention of any funding for helping with the biodiversity work needed for when the NPS Indigenous Biodiversity hits. Meanwhile the extra funding for resource management reform will be swallowed up government bureaucracy and won’t help farmers cope with the expected greater compliance burden. As important is what we did not want to see in Budget. We didn’t want a return to the 1970s and 80s policies of big government planning, regulating, taxing, spending, and borrowing in a futile attempt to maintain living standards. A return to these policies could over time result in lagging incomes, high unemployment, runaway inflation, industrial strife, and mass emigration – and make us more vulnerable to the next shock. Overall, there was not a lot in the budget for farming or for wider business to help drive the economy. While disappointing it’s not surprising. Farmers and businesses were never the target audience. Maybe next time? Nick Clark Manager General Policy Federated Farmers of New Zealand