Igniting potential — but where are the matches?

John Key plausibly excuses the lack of strategic impetus in Bill English’s first budget last year on the grounds that he had to fight the recession. Now Key claims to be plugging the huge hole English left in that budget: innovation.

Key has discovered the economic commonplace that it is innovation, not bulk, that durably drives up real incomes.

Had he taken as his prime ministerial portfolio not tourism but research, science and technology (RST) as he originally intended, he might have got to this understanding sooner.

Sir Peter Gluckman would have got in his ear faster. Since Sir Peter signed on as Key’s chief science adviser last July, Wayne Mapp has discovered the RST part of his duties and has, with outside help, been restructuring administration and delivery.

Next step in Key’s journey to the future is to squeeze money out of English. That was the nub of his pre-budget pronouncement last week.

But will he turn rhetoric into a step-change? Or is he actually more at home irrigating more of the Canterbury plains and digging up minerals — that is, mining the landscape on which New Zealanders perch rather than mining New Zealanders’ intellects, insights and inventiveness?

New Zealand’s economic history since about 1810 has essentially been that of an extractive economy: forests, soil, aquatic and underground resources. That it built one of the world’s richest economies by 1950 reflects both the bounty the settlers found here and their ingenuity — plus, critically, some good science.

For a quarter of a century governments have starved the last bit. Under the Clark ministry state spending on RST slid as a percentage of GDP, except for a last-gasp business tax credit and primary industry fund in 2008.

Not only does the private sector underinvest in RST by comparison with countries which have gone past us since 1950. The government underinvests too.

In last year’s budget English cut RST funding.

Since then Sir Peter has been blunt-speaking round the Beehive traps. Even English has softened. In February Key said RST would get some of the little new spending English was letting him have. Last week he said new spending on RST is third biggest after health and education.

The new RST spending is $56 million a year, focused (with some reason) on business. Another $24 million a year is being siphoned off some existing research and channelled to businesses.

So, roughly $80 million out of $1.55 billion additional spending in Thursday’s budget goes to RST. (That total is $1.1 billion of new spending plus $450 million reallocated from “low priority” spending such as getting tax forms out to taxpayers on time.)

You get Key’s picture? RST is really big. It is gobbling up one-twentieth of the additional spending. Expect your children to live in one of the world’s most sophisticated economies.

Not exactly. Whether Key’s munificence takes spending back past, or even to, the level Labour left, plus inflation, cannot be known until we have all the budget numbers. But we do know it is not a step-change. Key talked in his RST pre-budget speech of “igniting potential”. But he used a small match, well clear of all but a little flammable material.

But let’s be fair to Key who has seen Kevin Rudd’s poll ratings plunge, a discomforting experience for a poll-watcher. Selling science to a complacent, gimme populace is tough. How many hip operations could you get for a boffin’s annual salary? Who cares that Weta Digital thinks up world-leading imaging technology? It is easier to promote staples: aquaculture, dairying, tourists and (with a half-pie skilful sales pitch) minerals.

But factor in the recent slippage in former rhetoric that Thursday’s tax changes are supposed to be revenue-neutral. If they are not, then cuts in income tax will be part-funded by borrowing.

If some of that borrowing goes into savings and investment (an English budget objective), that will lift future incomes. Likewise with borrowing to swell the Cullen fund, which English blocked last year, thereby passing up a global sharemarket windfall which could have funded some development here.

The point: borrowing to pay for flat-screens or move into an overpriced house does not lift incomes; borrowing for investment does, far more often than not.

RST is (mostly) investment. A younger, adventurous Key might have lifted the $11 million a year for the Global Research Alliance on agriculture greenhouse gases he added post-budget last year to $111 million a year — still modest beside this budget’s additional spending.

That might have made the AgResearch-based Centre for Agriculture Greenhouse Gas Research a world centre, attracted cutting-edge scientists from round the globe, done some bold new science and generated unpredictable spinoffs that lift incomes here.

A risk, of course. And so far, unlike young trader Key, middle-aged political Key is a play-it-safe man.

* South Korean President Lee Myung-bak is spelt thus, not as misprinted here last week.