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Steady As She Goes, For Now

by fatweb

By Murray Jack

What a difference a year makes! Last year’s budget was full of optimism with the most significant tax changes in 25 years targeted to provide a platform for productivity and economic growth.

A year and two Christchurch earthquakes later and the Government’s accounts are less rosy in the near term. The earthquakes and a slower recovery coming out of the GFC enhanced long recession have exposed prior assumptions.

The economy hasn’t grown and won’t grow much for the rest of this year. Beyond that there are hopes for a rapid growth by past standards — but that is not certain.

So in 2011 we see the first tentative steps to tackling entitlements. Working for Families faces a trim for the higher earners with fewer kids. Student loans are no longer as “interest-free” for some and others face curbs. KiwiSaver subsidies are trimmed and employers and workers pick up the slack with minimum contributions lifted to three percent.

We can fiddle with KiwiSaver as much as we like but as long as we have a relatively generous universal pension, health care free at the point of delivery, and a largely free education system backed at the tertiary level by interest-free loans, we will have to continue to pay people to save. More serious reform is needed.

But the entitlement changes are hardly frontal assaults on middle-class welfare. Bill English’s austerity budget cannot be remotely compared with Ruth Richardson’s mother of all budgets.

This is because most of the expenditure restraint is forecast to come from public sector administration efficiencies and “reprioritisation”. This is appropriate. To date the private sector has borne by far the greatest burden of adjustment during the long recession, both in terms of employment and wages. The predicted restraint in the Budget is sensible.

However, this comes with its risks. The risks don’t relate to cessation of services, but to the capabilities within the public sector to drive out costs and reprioritise expenditure and the speed with which they can do so.

The lower spending path of the last two years has helped condition attitudes, but this Budget sees a quantum shift in scale and urgency of action. As a consequence of this strategy there remains a reliance on rebounding economic growth to pull the country out of deficit (forecast to be in 2014/15 — just). The earthquakes complicate prediction here.

Some commentators believe Treasury has significantly underestimated growth and no doubt a positive surprise would be a boost.

But there are risks and many of these are on the downside — the global economy is not yet firing on all cylinders, Australia’s two-speed economy is becoming more apparent, and business investment in New Zealand is still anaemic and will remain so until consumer demand recovers.

More positively the Government has mainly held its nerve on infrastructure spending. While there are many views on the suitability and priorities of some of the spending there is no argument that overdue investments must be made and that productivity gains for business will follow.

Pragmatic approach

A commitment to partial asset sales is also encouraging. Forget the ideological battles here. Sales are a pragmatic way of improving the Government’s balance sheet, driving better performance, and relieving the taxpayer of the risks of business ownership.

They are also critical to re-energising our capital markets and providing an investment destination for the growing private savings pool.

Overall Bill English has produced a steady-as-she-goes budget. It is sufficiently austere to deal with the fiscal position we are in and will keep the rating agencies at bay — so long as economic growth returns. We will never know if this budget would have been more reforming in nature. That debate now shifts to the up-coming election.

Murray Jack Murray is the CEO of Deloitte New Zealand and a partner in the Wellington Consulting Practice. Prior to his current role he led the Deloitte Asia Pacific Consulting Practice, including stints as Public Sector Practice leader, Human Resources managing partner and Service Line leader.

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