Next term for the acid test

The politics of the Budget are easy: promises of more of the same to come will win general electoral accolades. The economics are not so easy.

The Labour party congress last weekend displayed a party at the height of its powers, with a deeper and broader membership and reach into the public.

Labour is in part reaping a windfall from luck — rain and high prices for farmers have strengthened household balance sheets. But it is also reaping rewards from middle New Zealand for softening the pro-market policies of the 1990s. The public likes the moderate leftwards repositioning. Labour is likely to have more seats — perhaps even a majority — in the next Parliament.

It is, in political terms, a highly successful government. And that is what matters when an election looms.

But short-term political success says nothing about the economic success on which long-term political success depends. That was Michael Cullen’s challenge in drawing up yesterday’s Budget.

He set the goal last year: 4 per cent growth through the rest of this decade. That translates roughly into 2.5 per cent GDP growth per capita (which takes out immigration, which is pushing up growth this year).

That is quite a lift from the roughly 1.7 per cent in the 1990s which was double the rate in the 1970s and 1980s. To get to 2.5 per cent will take a so-far unforeseeable leap in productivity growth.

Economists generally don’t think he will hit his target on the policies of the first term up to yesterday. And that in turn will deny him the means to fund health and education services to the level Labour’s rhetoric requires and its followers expect — let alone Steve Maharey’s grand hopes for a universal benefit system.

And if Labour doesn’t over time deliver on that rhetoric its electoral success will fray. What is Dr Cullen to do about that?

He is clear what he will not do about it. He will not repeat the “failed policies of the 1990s”. Deregulation of the economy and of social services is off Labour’s political agenda and so off Dr Cullen’s economic agenda, too.

He has some good political reasons. Even after the post-1999 re-regulation, he could, if he wished, argue New Zealand is to the right of “conservative” Australia and “third way” Britain and Germany. And he can point to Gordon Brown’s tax-raising Budget in Britain in April and renationalisation of the railway tracks.

This economy remains relatively deregulated. And, with Labour’s conversion to free trade, even to the extent of making a special play of the restored good relations with the United States as a means of wheedling a free trade agreement out of that country, it is not exactly socialist.

Moreover, Dr Cullen can argue that there is not much more, if any, re-regulation to come, apart from protection of workers when businesses are contracted out or sold (so-called “transfer of undertakings”).

And business can have reasonable confidence in Dr Cullen’s fiscal conservatism. Though the windfall revenue from good rain and good export prices has eased his task in his first term, he has generally taken a cautious approach to his budgeting, to which his spending ministers, a frustrated would-be reformer Mr Maharey foremost among them, can attest.

This will continue, though he will not be setting a cap on new spending for the next three years, as he did in 2000. A cap is fine for keeping spending ministers in line but it tends to distort choices among portfolios, he has found.

Surplus budgeting in uncertain economic conditions with, in addition, a commitment to finding $2 billion a year for his superannuation fund, will keep spending constrained. So will a firm debt target. Raising taxes is not — or at least not yet — an option, except through some fiddling with the excise and at the margins.

Senior ministers, including the Prime Minister, are aware, after constant reminders from business, that life on the world’s periphery precludes the sort of tax hikes Britain, snug in the European Union, indulged in. Instead, Beehive hints suggest, he might well sequestrate the portion of revenue that now goes to health funding into a “hypothecated” tax, which can be adjusted distinctly from the rest of income tax as if it were a sort of health insurance.

But on the other side is the argument that prompted Brown into his tax hike: that the public won’t stand for substandard public services. That seems to rule out tax cuts — especially if the super fund is to be serviced.

And it leaves Dr Cullen’s bid for faster growth heavily dependent on the government’s supply-side interventions: the plethora of initiatives in research, centres of excellence, tertiary and skills education, venture capital funding for start-ups, clusters, industry task forces, assistance for foreign investors to get through bureaucratic hoops and form joint ventures, assistance to exporters, including the hookup with expatriate high-flyers, and more assertive enticement of desirable migrants.

Much of this has suffered from a lack of the necessary bureaucratic infrastructure and personnel after years of hands-off policies. So they are still essentially getting up to speed and largely untested.

That is not to say they will succeed — or fail — when they are fully up and running some time during this coming Parliament. It is just to say that Dr Cullen can rest his case politically for at least this Budget.

He can also argue that this government’s environmentalism strengthens the claim to the “clean and green” brand and, he adds, could generate income-earning opportunities as the world gets more, not less, concerned about environmentally sustainable development — though ministers have so far not put much effort into this dimension.

And Dr Cullen will argue that the workplace legislation may force or encourage more constructive cooperation between workers and employers (and in any case has not cost employers much, if anything, yet).

That at least is the argument. It is an argument that has not been tested in the first term — except in rhetoric and in high public approval of the government generally. The acid test will be over the next three years.

And even then it may be difficult to disentangle the impact of international economic ups and downs from the impact of the government’s policies.

There can be little doubt that deregulation was a factor in the better GDP-per-capita performance during the 1990s which arrested this country’s slide down the OECD wealth ladder at No 20 or 21. But how much was due to that policy positioning, rather than the economic factors of strong mid-1990s immigration and powerful growth in the United States, cannot easily be distinguished. On the other side of that ledger, an overvalued currency may have held us back.

Likewise, it is difficult to distil out the impact of Labour’s re-regulation from the excellent export returns in buoyant international conditions through much of this government’s term.

Some critics of the government point to international correlations between deregulation and/or low taxes and economic growth as evidence Dr Cullen will fail when put to the acid test of slower international economic growth.

But correlation is not the same as cause and effect. It does not allow for unique country factors. Australia did better than New Zealand during the 1990s despite having a consistently more regulated and subsidised economy.

One other factor applied to yesterday’s Budget. This is election year.

That has not meant a big spendup, as it used to during the bad old Muldoon years of pre-1984. Dr Cullen is too well aware that after a Christmas binge comes the Boxing Day hangover — and the most vulnerable in society get the worst headaches.

What the looming election means, however, is that ministers are under strict orders not to frighten the horses. So if there are to be any bold new directions or even just adjustments in a more business-friendly direction from this government, it cannot come pre-election.

Next year is the time to ask the hard questions. In the meantime sit back and watch the politics.