A govt has fewer options when its back is against the wall
Ever since I helped write Bill Birch's Budget speech 30 years ago, I love Budget Day — the most exciting day of the year for an economics and politics nut like me.
This year I am even happier than usual to be a mere commentator and not an active participant.
Unfortunately, our economy is one of the worst performers in the world. And so times are tough for many people, including us all collectively with respect to our government and its finances.
For several years, the government has had a "structural" deficit, meaning its spending will inevitably exceed its revenue. So the government's debt — on behalf of us all, currently around $100,000 per household — will keep rising.
Just like for ordinary people, a government has fewer options when its back is to the wall.
Continuing to live beyond our means will have dire consequences: accelerating interest payments, which could otherwise have been spent on other things, and deteriorating standards of living — and more brain drain to Australia.
Unless "something" is done.
There are just three possible "somethings" that can be done: increase taxes, cut spending, or grow the economy.
This year's Budget, Nicola Willis' second, ruled out higher taxes. Instead, her focus was on spending cuts offset by some spending increases — in other words, "spending reprioritisations" — and several growth-friendly policy initiatives.
More than a hundred spending reprioritisations — actual and forecast — were announced. Passed into law a fortnight ago, the largest and most controversial is, of course, changes to the pay equity regime.
In Ms Willis' words: "Making those [pay equity] changes means the government can repurpose $2.7b a year, on average, towards Budget priorities like health, education, and law and order."
Another central plank of this year's Budget is a new tax incentive scheme called Investment Boost, encouraging businesses to invest in productive assets.
Ms Willis began her speech with: "This is a responsible Budget to secure New Zealand's future."
I agree with the first half of her sentence (given her options). But I'm doubtful about the second. Much more reform is needed.
■Paul Hansen is an emeritus professor, department of economics, University of Otago.
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