"Economic transformation" on the cheap

Last year’s Budget was the one to win the 1999 election. This year’s bypasses the 2002 election in the cause of long-range “economic transformation”. But it is trying to do it on the cheap and without using all the available tools.

Michael Cullen wants a high economic ranking — the top half of the OECE in per capita GDP — so the country can return to a high social justice ranking.

So he wants higher savings and to double productivity growth. In his emphasis on the second, he and National’s Bill English are coming into synch, though they remain wide apart on policy prescriptions.

Dr Cullen told his press conference that getting back to the top half is a “long-term” project. Just how long is indicated by the Treasury’s assessment that to hit the growth rates needed to achieve ACT’s target of the top OECD 10 (a little bit above half) would require increasing productivity growth eightfold.

So Dr Cullen is on a decades-long quest. And even this long time frame implies a big improvement in economic performance from the current 2.5-3 per cent sustainable growth to 4 per cent. His recipe centres on “increasing human capital” and a raft of industry-attracting and industry-enhancing mechanisms.

This list of “economic transformation” initiatives ranges from Pete Hodgson’s $100 million seed capital fund (at a cost, however, to the Crown Research Institutes and unnamed state-owned enterprises), through an enterprising “diaspora project” to lever off “world-class” expatriate Kiwis, centres of excellence and a small rise in research spending to Jim Anderton’s $2 million to celebrate entrepreneurial successes.

This is the Budget’s policy focus. It oozes urgency and improvisation. So you would expect the spending focus to go in the same place.

Not so. “Social spending . . . continues to take the lion’s share of increased spending” in this Budget, Dr Cullen candidly stated. “Budget 2001 asserts the need for economic growth to be the essential companion to social justice.” Not “precursor”, but “companion”. This is a government of the left.

In other words, ideology is inhibiting “economic transformation” funding commensurate with the Budget rhetoric. Singapore, already ahead of us, is spending vastly more on its economic transformation. Dr Cullen is trying to do it on the proverbial kiwi shoestring.

Ideology also precludes Dr Cullen’s resort to another transformation tool which Mr English would wield: continued moderate microeconomic reform.

And they divide on savings as a resource for “economic transformation”. Mr English thinks tax cuts more economically efficient than Dr Cullen’s looming superannuation fund, which Mr English thinks will crowd out private savings. Dr Cullen yesterday set out on a bureaucratic route to get private savings up: a government-industry task force.

But Dr Cullen has a plausible fiscal argument for his parsimony: he simply has too little money. The previous government, he said, had underprovided for wage increases in government services and this had to come out of new spending last year.

Moreover, it is a continuing problem. “Automatic drivers” built into previous years’ spending commitments, including last year’s, eat heavily into “new” spending, reducing it far below the nominal figures he thought he had available. Next year’s genuine election-year new spending may be as little as $200 million.

Dr Cullen’s seven years as shadow finance minister in opposition might have taught him that. At the least, analysts pointed it out to him last year when he threw the bulk of his “new” spending allocation at the 1999 pledge card. Now he has bust his $5.9 billion three-year limit.

It can also be said for Dr Cullen’s parsimonious funding of “economic transformation” is that going too fast will simply pour some of the money down the drain in suboptimal activities.

He also claims some of the “social” spending might be categorised as economic transformation spending. More than half the increased spending in education, he said, is in the tertiary sector, which, in theory at least, is geared to honing human capital for higher-productivity activities.

That is “in theory” because the government has decided the sector first needs extensive restructuring to redress “lack of differentiation, employer dissatisfaction, the proliferation of degree courses, unnecessary competition and underproduction of key skills across a wide range”. So it will not bite until next year at the earliest.

That, too, is in keeping with the long-range focus of this mid-term Budget. It is not a Budget to buy votes for 2002. Dr Cullen has left that sort of “socialist” profligacy to John Howard’s “conservative” government across the Tasman. He is spending the smallest proportion of GDP since 1978.