After the budget, a Treasury drive for growth

One clause in Treasury Secretary John Whitehead’s speech last Friday spoke volumes: there have been “structural spending increases rather than temporary fiscal stimulus”.

Thursday’s budget will aim to make a start on fixing that.

A “temporary fiscal stimulus” can be unwound when it has done its work or the money runs out. The government goes back to the way things were. For those in the state’s employ and locked into its activities, life goes on.

A structural spending increase can be unwound only by cutting staff, salaries and programmes. For those in the state’s employ and locked into its activities, life gets tougher.

Michael Cullen’s last budget delivered a large fiscal stimulus — but in structural spending increases, not in temporary programmes.

This would matter less if the world economy was still rampant, taking ours with it. But large parts are contracting. And when it grows again, it will grow more slowly than in the past 10 years.

The result is that the Treasury now projects large budget deficits and rapidly climbing debt. We can’t pay for Cullen’s “structural spending increases”.

So Whitehead’s message — and Bill English’s, though not always with Whitehead’s clarity — is that departments have to trim, in order to slim those future deficits. If not, the debt burden, and so the tax burden, will climb year by year.

To adapt the analogy with household budgets Whitehead used in his speech, the state’s large outgoings befit a bigger national income, able to generate more revenue. Until that bigger income arrives, debt grows, adding interest costs to the commitments.

If the world economy was poised to rebound, as John Key used to argue, we could sit tight and wait till rising national income got on top of the state spending. But the big-early-rebound evidence is weak. For every “green shoot” so far a squirt of Roundup has followed fast. In any case, the green shoots are so far more of the getting-bad-less-fast sort than the getting-better sort.

So the prevailing cabinet view going into budget week is that the world is going through, in Whitehead’s words, “a major shock”. Things change after such a shock.

Hence the turnround from National’s soothing pre-election assurances of a “cap” on public service staff, with some reprioritisation but not real cuts. English wants cuts. The Treasury wants to give him cuts. The more able public sector chief executives are delivering cuts (though in this budget mostly only the easy first options).

The argument against cuts comes in two parts. One is permanent: that the government should spend more anyway because it does good, especially social spending. The other is temporary: that while the “major shock” works through it makes sense for the public sector to offset the private sector slack.

The counter-arguments are essentially that too much government means too little private sector activity to deliver the rate of economic growth needed to sustain more ambitious social programmes in the long term. Running up debt makes it worse because interest takes an increasing share of taxes and therefore of incomes and leaves less room for the social programmes.

That was the impasse reached in the early 1980s. Getting out was painful. Hence English’s angst.

But behind these fiscal considerations, which will be the most talked-about items on budget day, there is a bigger issue: how to lift the economy’s productivity growth so that national income grows faster — that is, how to work smarter, not least to reduce the gap with Australia.

So, said Whitehead, “after the budget I’m going to talk in more detail about the Treasury’s view on what we need to do to really drive growth.” He highlighted tax and regulation.

Take note: Thursday’s budget will be much less a definitive roadmap to the future than a peg in the ground while English and Co assess the lie of the land and plot where to go from here.

For months now, English has been as much focused on that longer view as on the next few years’ fiscal problems. Stopping debt getting out of hand requires more sophisticated responses than slash and burn. Social misery is not an ingredient of economic success.

But who is to do the thinking behind Whitehead’s future fireside chats? Outsiders, yes, including some drafted in. But if the Treasury really is to lead us to the uplands, it needs in-house horsepower as well.

In the early 1980s a Treasury unit called “economics 2” imported fashionable American theories as the basis for radical reform. That unit had the intellectual horsepower to outgun resistance elsewhere in the public service and in academia.

But over the past decade, economists say, theTreasury has lost that edge — wound back by its own internal spending constraints and by a government with ideas of its own.

To rebuild to the point where it can again lead the debate requires money. So the word is that, while other departments are being reined in on Thursday, the Treasury will get a boost. A nice irony.