At heart a social spending government

The government’s health and education services are underfunded. That is what the next three fiscal years are about.

They are underfunded because the economy hasn’t been growing fast enough. So the next three economic policy years are primarily about getting the growth rate up.

And that means, Michael Cullen said — firmly divorcing himself from Laila Harre’s Alliance — squeezing social spending generally. “We are determined to keep money back for economic transformation,” he told journalists in the pre-Budget “lockup”, even while notching up sound, “conservative” surpluses now and for the future. In the Budget speech he said: “Our capacity to lift the sustainable growth rate will not be assisted by excessive growth in expenditure which squeezes out opportunities for contributing to economic development.”

Health escapes this stricture. Dr Cullen charted the rise in health spending from 5.2 per cent of GDP in 1989-90 to 6.8 per cent in 2004-05. Health takes the lion’s share of new spending and is one of his three priorities. But even health is on a warning: its rise in the share of GDP can’t go on forever, he said firmly.

Hence his choice of the other two priorities: education and economic transformation — and “a good part of the resources flowing to education are central to that transformation.” Education spending, particularly tertiary spending, the funding mechanism for which is this Budget’s centrepiece, must “centre much more on contributing to the nation’s development”.

That is a significant transformation for Labour politicians who have in the past seen education as above all an individual right. Wildcatting teachers’ salaries must be held down to steer money to upskilling the workforce and change the priorities. Dr Cullen wants a dramatic change.

To this Dr Cullen adds his raft of supply-side interventions, most of them delivered via Jim Anderton and Pete Hodgson. They are expanded and enhanced in this Budget, including a super-quango to go after foreign investment, though with precious little detail as to how.

This Budget switches the emphasis from Mr Anderton’s more traditional programmes to Mr Hodgson’s research and startups programmes: “Jim’s quite flexible,” Dr Cullen told the lockup, “not only in moving money between activities in his own vote but to other ministers’ votes”. It’s the sort of helpfulness that has got Mr Anderton drummed out of the Alliance.

But so far there is very little to show from these supply-side initiatives. Dr Cullen remains well short of his hoped-for 4 per cent growth, despite above-average growth over the next three years on the back of the forecast international pickup — and the “technical projections” out to 2012 leave us at half that rate.

Yet he continues to forswear the sort of tax and regulatory easing business insists on. He aggressively defended New Zealand as a relatively low-tax country by comparison with developed countries — and with fewer add-on levies on business than even the United States.

Tax simplification is as far as Dr Cullen will go, though he continues to flirt with measures to ease tax on superannuation savings, desirable foreign direct investment and funds invested abroad. There is also some money for improving Resource Management Act procedures.

That leaves room for opponents to his right, National and ACT, to differentiate themselves sharply in the looming election.

That doesn’t matter much this time — except perhaps as a factor in whether Labour will get a majority. But if in three years Dr Cullen cannot point to evidence of a lift in sustainable growth stemming from his supply-side initiatives he will face a more critical electorate — not to mention doubts from supporters who want much higher social spending.

This is a Labour-led government. Most voters would probably say the primary purpose of higher economic growth is to fatten the household balance sheet, that social spending is secondary and environmental and arts spending is further back. But in the final analysis, despite all the rhetoric around economic growth in the Budget, those sorts of activities are what this government is on about.