16/05/11
by

Politics With Paul – The Week of the ‘Zerø Budget’

Hone Harawira has successfully grabbed the political headlines once again with the long-awaited announcement of his resignation, and discussion of the consequent by-election for his Tai Tokerau seat.

All the while, Goff and the Labour Party have focused their efforts on centring media attention on hypocrisy in Key’s spending—think BMWs and bodyguards, which a New Zealand Herald editorial referred to as “the trappings of office”. Agree or disagree, in effect this constitutes a miniscule proportion of Government spending. As a result, one might be forgiven for having missed any pre-Budget discussion (up until now), and it really is astounding that the Opposition has not focused on the bigger picture.

Of course, there has been much Budget-related rhetoric making the rounds for months now, most visibly by Don Brash before the race card found its way back to the top of the pack. To be sure, across the entire spectrum, there have been concerns raised over the $250 million, then $300 million, and now $380 million the Government is borrowing every week, with the blame being assigned to different parties depending on who is vocalising concern at any particular time.

Largely owing to the two Canterbury earthquakes New Zealand is facing the prospect of a ‘zero-budget’, with just $800 million in reprioritised funding to go primarily to front-line healthcare and education services.

This Government has a huge operating deficit, totalling $10.16 billion in the nine months ending March 31. This is significantly worse than the deficit forecast in December, and while this is largely due to earthquake-related costs, it also indicates a failure in predicting the country’s economic recovery.

There were the short-lived fears that Bill English’s third Budget could match that of Ruth Richardson’s 1991 Mother-of-all-Budgets, although these were quickly put to rest; Key again assuring in a pre-Budget speech at a Fujitsu-Business New Zealand luncheon last week, that this will not be a ‘slash and burn’ Budget.

So, what is up for cuts?

By all accounts, it appears the predominant focus of this week’s Budget will be on cutting spending to three of Labour’s crowning achievements: KiwiSaver, Working For Families and the interest-free student loan scheme. Key has argued that these three schemes are totally unaffordable at a combined cost to the country of almost $5 billion a year. Notably, he also made sure to put in a knee into Labour, outlining how the programmes were introduced, and were only ever viable as a result of “a debt and consumption-driven bubble.”
Of these three schemes, undoubtedly the changes to KiwiSaver and of course the student loan scheme are of most concern to students.

KiwiSaver has been incredibly successful. With 1.67 million people signed up, the scheme has exceeded all initial expectations. Unfortunately, the success of the program could be the cause of its downfall. While the $1000 kick-start for new KiwiSaver members will remain in place, the Member Tax Credit (MTC) is on the chopping block. Key has indicated that the MTC—a brilliant incentive for long-term savings worth $1042 annually to members—will be subject to a significant cut.

With the reduction or removal of this incentive, responsible for much of the popularity of the scheme, it logically follows that many will now refuse to join KiwiSaver, and signed-up members may choose to opt out of the scheme. In the long term this is going to primarily affect low and middle-income earners who don’t necessarily have the capacity to save independently, creating real problems down the track when those people hit retirement. Furthermore, reducing or removing KiwiSaver incentives potentially puts the first nail in the scheme’s coffin, meaning that Key’s assertion that the changes are to “ensure (its) survival”, is laughable.

Another way of looking at this, as the New Zealand Herald’s David Chaplin writes, is that the National Government is simply implementing an under-handing “tax increase”. More transparent adjustments to the tax system are most likely completely off the table this year however; and this is what will probably be the biggest deficiency in the upcoming Budget.

Some might remember, in last year’s Budget, the Government’s stated intentions were to incentivise savings and investment by introducing a fiscally neutral tax-switch that would give Kiwis more in their pockets whilst simultaneously discouraging consumption.

Of course, while New Zealand could do with a fair whack of increased business investment, the Government’s failure to implement a capital gains tax, recommended both by the Tax Working Group and the International Monetary Fund (IMF), has done little more than encourage speculative investment in housing, which has little societal benefit. At the same time, those stuck on the country’s lower economic rungs have in reality faced a significantly larger increase in their weekly food bill relatively to their tax-cuts.

On the student loan front, current students and graduates can breathe a sigh of relief that the interest-free element of the student-loan scheme is safe for now. Like Budget 2010, cuts are likely to be seen around the edges, primarily through further restrictions of access to student loans.

From the 2010 Budget, requirements were instituted requiring students to pass more than 50 per cent of full-time course over a two-year period, in order to be allowed to continue borrowing. Moreover, the government placed a ‘lifetime limit’ on access to student loans—a limit of seven years for an undergraduate degree. Most controversially, the fees around borrowing increased in an attempt to pull more money out of the scheme without removing with the politically dangerous ‘interest free’ element—a move the Greens’ Gareth Hughes referred to at the time as “charging interest by stealth”.

As Tertiary Education Minister, Steven Joyce has indicated, Budget 2011 is likely to institute further restrictions, most notably making it more difficult for over-55s to get a student loan. The Government’s approach is understandable, but at the same time is fairly problematic. While the incentives around success instituted in the 2010 Budget justly targeted those taking advantage of and consequently undermining the scheme, restricting the older workforce from up-skilling just as we enter a period in which the average retirement age is likely to rise significantly is a puzzlingly short-term solution to combating student debt.

In addition to this, Joyce has indicated that the Government intends to take a more aggressive approach to ensuring debt is repaid by graduates living overseas. As Key pointed out in his pre-Budget address, for every hundred dollars invested in the student loan scheme, taxpayers can expect to only get $55 back. Overseas graduates are responsible for a significant portion of the remaining $45. Victoria’s own Professor Sir Paul Callaghan has taken an interesting approach with this, tugging at the nationalist heart-strings of expat graduates to repay their student loan debt to help pay for the earthquake recovery. Whether the Government or Sir Callaghan’s approach will actually work, remains to be seen.
KiwiSaver and student loans, are just two of the schemes that will find themselves in the crosshairs of the Budget this year, and it’s clear there is more than a little controversy on the table. This is what makes Labour’s lack of any real criticism to the likely contents of the Budget so disconcerting.

Sure, it could be argued that Key is doing Labour’s work for them. Cuts should be damaging to any government, almost by definition, and our Teflon-coated Prime Minister is taking a huge punt in attacking these programmes. However, if the polls are anything to go by, Key has got significant room to manoeuvre, and to his credit, it appears that none of these cuts will take effect unless National is re-elected in November.

On the opposition benches, Labour should be actively highlighting that along with the Government’s plans to partially privatise state assets, these cuts to important social spending programmes are a short-term fix with very long-term consequences that could significantly undermine many New Zealanders’ futures.

Further to this, and perhaps more importantly, Labour needs to focus attention on the inequalities caused, and inefficacious nature of Key’s incomplete tax switch. The bulk of New Zealand voters face a significantly higher cost of living than they did a year ago, without a corresponding increase in quality of life. If Labour can’t make this a central argument leading up to the election, they don’t deserve to be returned to Government.

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  1. You won’t see a capital gains tax in NZ

  2. Jenay says:

    Well maacdmaia nuts, how about that.