Look to next year's Budget

Incrementalism rules, OK. That is Thursday’s Budget. Health gobbles up its large annual dollop but otherwise it is a little bit here and a little bit there, with an accent on “innovation” and research. Very Michael Cullen. Very Helen Clark.

A “stable and certain fiscal policy”, as Cullen put it to Labour party faithful early this month, is one of his “three key principles” and central to this government’s pitch for credibility with investors.

And central to that is avoiding the fiscal errors of the United States and Britain: glowing surpluses that have whiplashed into glowering deficits. Cullen’s message to spending ministers this year has been: hold on for one more year.

But Labour-led governments, as a minister said last week, “are not put into office to rack up record surpluses”. That, too, is very Cullen, very Clark.

Since September 2000, Clark and Cullen have made the economy No 1 to drive growth up and get higher average incomes. But richer New Zealanders is not the endpoint. Labour parties seek office to redistribute wealth and make a more equitable society. This government is no exception. Both Clark and Cullen come originally from the left of the party.

Incrementally, Cullen’s Budgets have in fact already been redistributive: tax rises, a change in housing assistance, more money for doctors in poor areas if they accept semi-nationalisation (a focus of this year’s health spending) and so on. Margaret Wilson’s workplace measures are of the same ilk, reweighting the balance as a social aim.

True believers and supporters such as the unions and not-for-profit organisations have gone quietly along with this incremental approach, relieved to have a Labour-led government and hugely pleased that it is popular and durable. Patience is the byword.

This is not a passive patience. It is a confident patience. They expect a return. And Cullen and Clark intend to deliver when they are confident the revenue streams will continue to flow. For that reason the 2004 Budget is assuming iconic importance in the Labour movement as the one to bring home the bacon.

If all goes well on the revenue front and if present intentions hold, that Budget will be Steve Maharey’s.

As did Cullen before him in the social welfare portfolio in the 1980s, Maharey wants to simplify the benefit system, incorporating into the basic benefit many of the bewildering array of add-ons and special benefits that often don’t reach intended recipients because they don’t know to ask for them.

A unified benefit would be simpler and cheaper to administer. But it would also be expensive to fund, especially if at the same time, as also intended, the benefit is adjusted to assure income adequacy in line with the social indicators now assembled each year by the Ministry of Social Development.

Maharey also wants to extend his support for beneficiaries moving into work, to ensure their net income does not fall as a result and discourage them from getting the work habit. His slogan is “making work pay”. It is to be underpinned by a lift in income tax credits for low-paid working families, which Cullen has already flagged. The message: you will get by on a benefit but you will be a lot better off working. That is also not cheap.

All up, Maharey’s plan comes to around half a billion dollars. Not the sort of money a prudent Treasurer would commit himself to unless assured of future revenue streams. And Cullen wants to be known as a prudent Treasurer.

Nevertheless, if Cullen is sure the funds are there, this welfare restructuring will be first charge on the funds in the 2004 Budget.

It will put political lightyears between Labour and National. National and ACT’s priority is tax cuts for corporations and individuals on the presumption that will stimulate higher productive investment and in turn economic growth, higher living standards and jobs into which beneficiaries can be cajoled or, if necessary, driven.

But will the funds be there?

Two spectres have stalked this year’s Budget-making.

In Britain Chancellor Gordon Brown lifted spending a few years back on the strength of bullish Treasury projections which proved optimistic after the dot.com bust.

In the United States Bill Clinton basked in large federal surpluses in the 1990s which were confidently projected to last through this decade — George Bush is presiding over a triple deficit: at the federal level, in the states and in local government. Some horror stories, including of deaths, are emerging as states cut into social, health and educational services to balance their budgets.

A Labour-led government in this country cannot contemplate such cuts. Hence Cullen’s and Clark’s caution for one more year.

Cullen says he is following a “strict form of keynesianism”. This is not the profligate pump-priming of the 1960s and 1970s but reliance on the “automatic stabilisers” to clip the peaks and troughs of the economic cycle.

“As an economy picks up speed in the upturn of an economic cycle government revenue will increase above trend and expenditure moves below trend so that fiscal settings automatically tighten, slowing growth,” he explains. “On the other hand, as the economy enters the downside of the cycle, revenue tends to fall (or its rate of growth slows), expenditure increases, fiscal settings loosen and become stimulatory thus offsetting the decline.”

Cullen’s problem is working out how much of the buoyant last two years is a genuine and durable lift in the economy’s workrate and how much is just the result of an extremely rare confluence of high commodity prices, rain and a low dollar.

We don’t know and nor do he and his advisers. Moreover, we don’t know and neither does he how much the economy will slow this year and how much of that will genuinely reflect the economy’s workrate and how much will be one-offs, due to passing phenomena like SARS, the electricity fiasco and the world cyclical slowdown.

“This is one of the most unpredictable environments we have encountered since the stagflation and Third World debt crises of nearly 25 years ago,” he told Canterbury manufacturers last Thursday. Result: “There is going to be less confidence about the forecasts we make in the Budget than would be ideal.”

So he wants us this Thursday to look not just at one fiscal indicator but a “suite” of them: “the operating balance, the OBERAC (revenue less expenses, adjusted for revaluation and accounting policy changes — the “underlying surplus”), trends in expenses and revenues as a percent of GDP, levels of gross debt and trends in gross debt, levels of net debt and levels of net worth, as a package”.

Those trends have been benign over the past three years — net debt, for example, is below 15 per cent of GDP and gross debt is below Cullen’s target 30 per cent of GDP. But a 1 per cent difference in each of revenue and spending slices $820 million off the surplus. It doesn’t take much of a change in growth to turn a surplus into deficit.

So for one more year it is tai hoa. But if the ducks stay in a row, as Cullen puts it, next year will be a big Labour year. And a Labour year is not a time for tax cuts.