When the fiscal ends won't meet

“I’m only a little bit pregnant,” Michael Cullen protested (in effect) last Thursday. It’s an age-old cry and we can all titter about it. But it is not a laughing matter.

I refer to his breach of his self-imposed limit on new spending in the three fiscal years to 2002-03 from $5.9 billion to $6.17 billion.

Dr Cullen called it “modest” — and it is tiny against the $35-$36 billion of total spending and small even against the $5.9 billion. He blamed it, credibly, on unforeseeable factors, the impact of the currency collapse on defence purchases and emergency biosecurity measures. His business audience seemed little bothered.

They might have paused to recall that a lost virginity reduces inhibitions. National’s Bill English (though, being a moral conservative, he didn’t put it in these words) reckoned Dr Cullen should have gone for an abortion — cut back spending to preserve the integrity of the limit on new spending.

Mr English correctly said $270 million is a big increase on the next two years’ new spending. An even $983 million a year is needed to accumulate $5.9 billion over three years. Because the first year got far above $983 million and that higher figure is multiplied three times within the cumulative total, he left himself only around $600 million for each of this year and next.

Holding even this line against ministers and supporters wanting to repair and expand the welfare state has been made harder because total government spending is falling as a share of the economy — from 34.9 per cent of GDP to 33.1 per cent over the three years to fiscal 2002-03, the December budget policy statement projected.

So the breach is, first, a management matter.

A slick answer would be to use relative numbers for targets, not absolute numbers. Absolute numbers are rigid and thus a stout weapon against ambitious spenders which Dr Cullen has used well. But they can quickly turn brittle and ineffective. Relative numbers, such as percentages of GDP, being elastic, fit human nature better.

The breach is, second, a political matter.

Even in her worst days in opposition, rating 2 per cent, Helen Clark was trusted by focus groups to do what she said. Now, on this, she hasn’t.

OK, it’s small. But not for one group. Sticking to budget limits has been central to the government’s pitch for business tolerance and cooperation. What is to be said now to investors about fiscal probity?

As the government learnt last year, business is far more than a handful of votes. It is the difference between an economy that expands the standard of living of the government’s core constituency and one that contracts it.

A “hairline crack” (to take Jim Eagles’ apt analogy in the Business Herald on Monday) can cost dearly, as 10 grounded Ansett 767s at Easter showed Air New Zealand.

Most important, this small breach spotights a huge policy poser.

As Jenny Shipley found in 1998, an economic swing makes a mess of Budget numbers. If the world economy goes sour, Dr Cullen could quickly land in a spiral of soft revenue and hard spending commitments.

He has already severely constricted his room for manoeuvre with his super sinking fund, which requires surpluses if it is not to be a sham. Ring-fencing health by dedicating to it some of the tax take would further narrow his elbow room.

But even if the economy goes well Dr Cullen has a fiscal circle he cannot join up.

The health boards are underfunded now, with worse in prospect. The universities, negotiating their funds now, are in serious strife.

Telling these institutions to manage within revenue is myopic. The problem is far bigger. Relentlessly rising demand for their services, coupled with above-inflation, technology-driven rising costs, continually outstrip the Budget’s capacity to supply them.

Simply growing the economy faster won’t help: getting richer speeds up growth in demand for health and education services. Ask the Americans. Ask why our government spends a third of GDP now against a quarter 30 years ago, yet people think the social services are failing.

To escape that conundrum requires truly imaginative policymaking of the sort we have yet to see from either major party. And some daring politics. Being a little bit pregnant doesn’t qualify.