Bill, the budget and disruptive thinking

It’s nearly Christmas: time for gloom … oops, cheer. Tomorrow Bill English issues the half-yearly economic and fiscal update. The message will be caution and constraint, though with dashes of positivity.

The short-term basis for positivity is that, while the economy is unbalanced and seriously indebted and the budget is in structural deficit (temporarily accentuated by the looming drought, which might slice 2 per cent off GDP, the Canterbury earthquake, the mine explosion and kiwifruit disease), we are not under the same economic and fiscal pressures which are forcing difficult choices on much of the rich world.

And, as English has put it, we are “hooked to the Australia-China train, which is the fastest train in the world”. Add to that east Asia and, in a few years, resource-rich Russia and Kazakhstan, high commodity prices cushioning us and, next year, bonuses from rugby world cup tourism and Canterbury reconstruction.

Longer-term, this economy has strong competitive resource advantages in water, food, energy and relatively light climate change impacts.

But English is cautious. The credit rating agencies have got sniffy, which bothers him. He worries there might be a sharp slowdown in China and consequently Australia: in a speech on November 25 he talked of house bubbles in both countries.

Add spikes in global basic food prices (now approaching 2008’s crisis levels which destabilised trade and some governments), energy shocks and tension in north Asia — and a possible big financial shock from Europe’s serial debt crises which could limit banks’ and the government’s ability to borrow abroad.

Then there is the impact of what English calls “radical change” in public services in the United States and Europe as they shrink spending, in some cases by up to 20 percent. Fixing their debt problem will take decades, he thinks, and require new political solutions. That equals weak markets for us.

So English in his November 25 speech pushed “active, vigorous and disruptive” debate on public services. “We will need to use every bit of our intellectual capacity to ensure vulnerable people get the services they need.” How that fits with the Welfare Working Group’s core brief, to reduce sickness and invalids benefit numbers, now more likely a 2012 than a 2011 budget item, is not clear yet.

English’s speech was off-the-cuff, at the School of Government’s prize-giving. He said he saw the school as a “natural intellectual catalyst for a public service and a government”, then added, with remarkable candour, that politicians “don’t believe in vigorous analysis. We believe in hunches, feelings, moods — and votes”, a belief “often at odds with excellent analysis”.

English thinks we are heading into what he called in a speech on November 18 a “new normal”: more saving, less leveraged property investment, more cautious bank lending, an economy that is export-oriented and geared to emerging markets, initially with lower growth potential than pre-2008 — and a more flexible government that is more “interactive with business, more contracted out, more tech-savvy, more value-conscious and more responsive”.

That last needs English’s “disruptive” thinking if public services are not to erode along with public servants’ numbers under the pressure of his sub-inflation public spending rises. English does not want an indiscriminate 1990s-type sinking lid and thinks he is already seeing the change of culture (for example, in IT) that will avert that.

English aims to eliminate the structural budget deficit built in Labour’s later years by 2015-16 — but then wants to resume contributions to the Cullen fund and build a buffer against shocks. To do all that will take until about 2020 unless there is a marked lift in real economic growth.

Lifting real economic growth depends largely on innovation: from science across to marketing. A pair of OECD experts underlined that in workshops and a symposium in Wellington last week. Fine-tuned macroeconomic settings are relevant — and the 2011 budget will incorporate some Savings Working Group’s measures to lift saving — but so are budget settings.

On the table is a push by Science Minister Wayne Mapp and Chief Science Adviser Sir Peter Gluckman for a step-change in government support for science and innovation, in emulation of successful small economies.

English is sceptical. Because of sluggish GDP growth this year and uncertainty abroad, there is pressure to reduce new spending even below the sub-inflation track the 2010 budget set.

That adds spice to the chats he and John Key will have over the summer that will set the budget’s parameters and tone, as they did in tax reform last summer. Conservative English will want “disruptive” thinking to be on ways to get more from less from public servants. “Ambitious for New Zealand” Key has been saying in some quarters that he wants a lift in innovation investment (but that could delay the return to fiscal balance).

Watch this space.