Government living by someone else’s rules
Comment: Against all advice and reason, the Government is committed to its Budget Responsibility Rules. Thomas Coughlan asks why and ponders the consequences.
Before becoming Prime Minister, a politician sent leaflets to households in the Mount Albert electorate then being contested. The leaflets pledged first “that human values are more important than material values” and “Social Security is the right of every New Zealander, young and old”.
They were elaborating on earlier remarks made in a community newspaper, which told voters “politicians must never forget that they are dealing not with statistics, but with people” — a rallying cry against the data-driven state bureaucracy crushing the vulnerable.
That politician was not the current MP for Mount Albert and Prime Minister, Jacinda Ardern, but former Prime Minister Robert Muldoon, who ran and lost in Mount Albert in 1954.
On the face of it Muldoon and Ardern could not be more dissimilar.
His guiding political philosophy was government for the ‘ordinary bloke’ and he once publicly outed a homosexual for political gain. Ardern is female, pregnant, and marched in Auckland’s pride parade — certainly not a bloke, and not ordinary either.
But the two leaders sit as bookends to what people like to call the neoliberal era (whatever neoliberal actually means is a story for another time). After Muldoon, taxes went down, markets were deregulated, and the interventionist state had its powers wound back.
But as taxes went down, rates of poverty and inequality went up. Many lay blame for the high rates of poverty and inequality that have bedevilled New Zealand for decades at the feet of the two Governments that succeeded Muldoon’s, lead by Labour’s David Lange and National’s Jim Bolger, who has himself conceded the neoliberal project was a failure.
So it came as no surprise Ardern disowned neoliberalism on the campaign trail, telling RNZ’s Guyon Espiner it had failed.
"Any expectation that we just simply allow the market to dictate our outcomes for people is where I would want to make sure that we were more interventionist,” she said.
Winston Peters isn’t a fan either. He told his party conference in 2017 that after “32 years of the neoliberal experiment the character and the quality of our country has changed dramatically, and much of it for the worse”.
But Ardern has so far run a fairly conventional, neoliberal Government. With Grant Robertson’s first proper budget less than a month away ministers will be putting in funding bids for their ministries. The Government has signalled loudly that National’s underinvestment has left it with massive holes to plug in areas like health, but it has also said it will stick to its Budget Responsibility Rules, including its commitment to reduce debt to 20 percent of GDP.
With one hand Labour declares neoliberalism to be a failure, while with the other it drafts up a neoliberal budget — and this is a very neoliberal budget. With debt a third of what it is in most OECD countries and even ratings agencies telling the Government it could borrow billions more without spooking the markets, the Government is finding it difficult to make any sensible case for keeping borrowing so low other than sticking to neoliberal orthodoxy.
Taxes are also low - and flat. Our top income tax band of 33 percent is incredibly low by historic standards. New Zealand taxes every dollar earned, unlike other countries that only tax income earned above a certain level and there is precious little room between our bottom tax rate and our top. Even Don Brash, whose name is still cursed in the Labour caucus as one of the four horsemen of the neoliberal fiscpocalypse campaigned on a top rate of 39 percent in 2005.
The reason for Labour’s hush-hush adherence to a neoliberal fiscal policy has more to do with politics than policy. Party grandees have given up trying to convince voters their party is one of sound fiscal managers and have never even bothered to explain the Keynesian thinking that underlies their economic thinking. This is a failure of politics — a failure of communication, that has bled through into a failure of policy.
Robertson well remembers the Clark-Cullen years, during which he worked as on Clark's staff. He will remember Cullen’s nickname ‘Dr. No.’ for persistently refusing requests for extra spending, even when the books looked pretty good. The politics were obvious. If the opposition wanted to paint Labour as profligate, Cullen would give them no evidence to prove it.
The legacy of this decision lives on. The Government will continue to uncover evidence of underinvestment, but cite its own fiscal responsibility as reason enough to do little or nothing about it. National loses on both counts, for not fixing the problem when it should have and by not having any room to attack the Government for irresponsible spending.
The other reason is more complicated. Labour and union affiliates have been privately saying the party leadership is deeply fearful of borrowing at levels that might cause interest rates to rise.
When a government borrows too much, the cost of borrowing increases as investors become slightly more sceptical it will be able to pay back all the money borrowed. This causes the cost of borrowing to increase in the private sector too, meaning interest rates on homes are liable to rise were the Government to borrow too much.
It’s a spooky prospect. As house prices pull ever further away from incomes, homeowners have become more highly leveraged and could find themselves in difficulty were interest rates to rise. Every coming day sees more and more homeowners absorbed into this highly-leveraged, interest-rate dependent housing market.
Last week, the IMF again identified the high level of household debt as a threat to the economy and in March, acting Reserve Bank Governor Grant Spencer warned homeowners to think about whether they could still service their mortgages if rates rose.
"If you are borrowing you should be thinking if you can afford that mortgage at two percent higher than you are paying upfront. I'm not saying that two percent is where rates are going, but that's a typical buffer,” he said.
Robertson knows we are late in the economic cycle — due for a crash. And low debt gives the Government room to move should the economy head south. If the Government’s borrowing was to precipitate an interest rate increase, forcing highly leveraged homeowners to sell, he knows his Government would cop the blame for wrecking the Kiwi dream.
But this is a Labour Government, and they’re not going to let budget rules get in the way of some of their pet projects. This means looking to weird and wonderful ways of financing investment. Phil Twyford is availing himself of every debt trick his poor bureaucrats can think of to finance his ambitious housing and transport projects.
These include public-private partnerships, public-public partnerships (using crown-owned entities like ACC and the NZ Superfund for finance), and the scary sounding Special Purpose Vehicles or SPVs.
Work on SPVs was begun by National but Labour wants to take them a step further. We don’t know the full details yet, but essentially an SPV is created by a crown-owned entity like Crown Infrastructure Partnerships to issue its own debt, which doesn’t show up on the core Crown balance sheet. This conveniently allows the Government to borrow to the hilt without it showing up on the books — political problem solved.
But Government finance is a multi-headed hydra, and lopping off one problem creates many more. Public-private partnerships smack of moral hazard. How do we know a project is truly private — if it folds, will the Government bail it out anyway? It’s hard to imagine this Government or any other leaving a tram line half-complete, halfway down Dominion Road. And if that moral hazard is transparent, will ratings agencies and bond buyers factor it in as crown debt anyway, effectively neutralising the advantage of having the debt off the core Crown balance sheet?
As for the debt itself, it doesn’t matter which balance sheet it sits on, increasing the amount of borrowing is liable to increase the cost of borrowing. So there is still a risk that SPVs and other similar vehicles will have an adverse effect on the cost of borrowing for households.
So cui bono? Well, the big funds and investors who will expect a greater premium for taking on debt issued by the SPV than they would were they taking on debt issued directly. The debt is the same, but the structuring will allow the market to charge much more for it. So capitalists, including a few canny Kiwisaver funds will be rubbing their hands together.
Unfortunately, if you’ve got nothing stashed away in a Kiwisaver account or no spare cash around to invest, then you lose. You’ll get the same infrastructure, you’ll just be paying someone slightly more for it either through increased charges or taxation. It goes without saying this will only increase the gap between the haves and have-nots that this Government has staked so much on closing.
If moral hazard means most public-private debt is government debt anyway, the only thing placing it in an SPV or other vehicle accomplishes is to raise the cost to the Crown of that borrowing. The Government’s size and ability to raise revenue means it will always be the cheapest bet for raising revenue.
If the Government wants to borrow cheaply, it should look no further than its own balance sheet. A report from ANZ Research published this week recommended the Government just get on with it and borrow money itself.
The Labour and Green branding on the Budget Responsibility Rules is hollow. The rules truly belong to governments past - and even those governments would struggle to keep to them. The more this administration it tries to disguise its big-spending ambitions, the more it risks distorting the economy. If it is truly the transformational government it claims to be, the rules it lives by will be its own.