There's a hole in the budget*

There is a hole in the budget and it is an issue for your kids. Will Bill English fix it next year?

English stated on Thursday that the budget had two principal aims: to tide the economy, and the people, through the recession; and to build a more competitive economy for the future.

The first aim can be seen in the choice to maintain social spending and defer the promised 2010 and 2011 tax cuts. Spending for 2009-10 overall is up by $2.9 billion on 2008-09, in part to cope with higher unemployment — and including enough crumbs for the Maori party to say the budget is mana-enhancing.

So, on the Treasury’s figures, the government will for most of a decade run very big budget deficits. It will build up debt to the worryingly high levels we thought we had left behind. A genuine rating agency — as distinct from those which rated United States financial sector junk debt tops — would twitch.

And even to hold to those levels the government has cancelled tax cuts rather than make tougher spending cuts, even though it caned Labour last year and this year for spending too much.

So one of John Key’s read-my-lips pre-election promises goes west. Will eventually another, the guarantee of government superannuation at 66 per cent of the average wage at age 65, also go?

Payments to the Cullen fund are suspended until 2020 and drawdowns are now not to start until 2030 instead of the mid-2020s. It is possible to read into that a second-term retreat on the retirement age.

The fiscal and equity logic is that life expectancy lengthens by one to two months for each yearly cohort reaching 65. Other countries, including, now, Australia, are lifting the pension qualifying age. Sometime before 2020 a government here may be forced to (at least for the universal pensions).

For now, however, English on Thursday vehemently insisted the 66-at-65 rule (a Winston Peters idea, by the way) will stay. So under-45s will pay higher taxes to keep baby-boomers in leisurely comfort even though the average boomer at 70 can expect as many pensioned years as could a 65-year-old 10 years ago.

The choice to maintain pensions for able-bodied 65s-70s and trade off tax cuts for gentler spending cuts is one Michael Cullen could have made.

At issue is the balance between the past and the future. Every dollar spent on the old is a dollar not available to spend on the young. National’s fear of the old vote is a limiting factor in its second budget aim: a sharper, more productive future economy.

Most economists say that, if attention is also paid to social cohesion and equity, lower taxes are an ingredient in lifting productivity growth (that is, increasing the return on work-hours and dollars invested).

English can point to his tax working group, which has been challenged to rethink the tax system — which could include cuts. On Thursday he told the media that �you will hear a lot more over the next 12 months� on ways to lift productivity growth.

In this budget English identified four “areas” of “initiatives to lift productivity”: increasing investment in infrastructure; improving the business regulatory environment; lifting literacy and numeracy levels; and improving the public sector’s productivity.

Most economists would agree that those types of initiatives, done skilfully, help lift productivity growth.

But most would also say that innovation is a bigger and critical ingredient.

National went into the 2008 election without an innovation policy to speak of. It still does not have one. Key toyed with making himself innovation minister but was persuaded that tourism was sexier electoral politics. So he settled for a part-time “chief scientist” reporting to him.

A few days ago he got round to appointing the excellent Peter Gluckman.

Gluckman knows what’s mainly wrong with RS&T (research, science and technology) policy: too little money, resources and respect. A fine entrepreneur, he has augmented his rations by tapping into other countries’ resources, including Singapore which does take RS&T seriously.

The budget’s RS&T section was a resounding tinkle: $10 million a year for the Crown research institute capability fund, $9 million for the Marsden Fund, $8 million for health research, $1 million for a science prize and a $16 million capital injection into the ultra-fast broadband network for researchers. Add $190 million over four years for primary sector research in place of Jim Anderton’s funded scheme but offset that with the scrapping of the business tax credits.

The result: RS&T funding contracts from its already sub-OECD-average level. As the Scientists Association said, that does not indicate the government views science as a major contributor to economic growth.

Under-spending on innovation is under-spending on the future. It is a big hole in the budget and it’s an issue for your kids. Fixing that hole is one the young might want to “hear a lot more” of from English over the next 12 months.

* With apologies to Harry Belafonte.