Bill English’s budget this month has two points to prove. He must demonstrate he is holding spending enough to get on a credible path back to surplus. And he must encapsulate the government’s broad economic policy thrust.
The first is straightforward. English is determined to stick to his $1.1 billion limit on new spending (adjusted for inflation in future budgets).
Last year’s budget was stimulatory to counter the recession. While in this month’s budget for 2010-11 the government will still be spending more than it takes in revenue, the gap will be smaller, which will mean it has a contractionary effect.
That doesn’t mean the government will do a lot less, as ACT’s Rodney Hide wants. The National party accepted big government in its 2008 election policy.
So, while the DominionPost headlined last year’s budget “slash and burn”, at most that budget prefigured a slow burn.
English thinks the government does some things that are not effective or are low-priority. At different speeds government agency chief executives have been identifying those.
English also thinks that there is scope for more efficiency in some of what the government does.
So he is shovelling small agencies into larger ones. Amalgamations don’t necessarily achieve significantly more savings than by sharing systems, as some agencies do, and they incur irrecoverable costs in money, morale and loss of institutional knowledge. But they give the appearance of purposeful activity, which is a large part of politics, including of budget politics.
English’s second route to efficiency is to deliver more services through private and not-for-profit organisations. This can be more effective as well as more efficient. It can also simply reduce services, which can cost the government in other ways. ACC rejects turn up on welfare rolls, for example.
But the quest for efficiency is about more than money. English sees in it a reflection of a deeper shift in the government’s role. He understood back in the 1990s what has now become a commonplace: that mass production has given way to mass customisation. Products and services must be more differentiated to meet modern, especially younger, consumers’ wants and expectations.
Government services are no exception. A more entrepreneurial, or at least more imaginative, approach is needed.
That butts on to the second dimension of the 2010 budget: to crystallise the government’s first-term policy initiatives and point towards the longer-term. John Key has said this year’s decisions are more likely to be judged in the 2014 election than the 2011 election.
The bigger test therefore for this month’s budget is what it says about the government’s ambitions.
Last year’s budget was silent on innovation. Spending on research was actually cut. This year Key has been saying innovation is the key to lifting productivity growth. In a year of fiscal constraint, he has declared there will be more money for research. How much more will be a major test.
A second focus is English’s determination to rebalance the economy so that it is driven less by domestic consumption and more by activities that earn foreign exchange.
In the immediate aftermath of last year’s budget English brandished charts showing that while the domestic GDP had roared on under Labour’s rule, tradables GDP had stalled and then turned down. The result is an external net debt among the highest in the world, around 90 per cent of GDP.
To fix that requires a major turnround by households from borrowing to saving. There has been a small shift, induced by the recession, and Simon Power is working on measures to deepen and enliven the anaemic domestic capital markets. But there is a long way to go to get tradables GDP driving the economy.
Part of Key’s response has been to join — sort of — Gerry Brownlee’s quest for a minerals windfall. But if there is a windfall, managing it so it builds real economic strength will be a major challenge in future budgets.
English has focused more on “institutional” change: improving the quality of regulation (in harness with Hide), government efficiency and tax.
Most of the headlines on budget night will be on what the budget’s tax changes do for various households and individuals. The real value will be in how the changes alter firms’ and households’ behaviour and how that will benefit households in 2020.
That makes the 2010 budget the biggest test of English’s political career. The comforting news for him is that whether he passes or not will not be known for half a decade or more.