Postponing the future — the real fiscal deficit

Where was the future in the budget? Postponed. Yet again. Ministers’ minds were on past sins and present preoccupations.

Nearly all economists agree that those preoccupations — balanced budgets, an efficient tax system, well-designed regulation and a public sector that is efficient and effective — are necessary to a well-functioning economy. They agree also that investing in and maintaining the hard infrastructure — roads, broadband and water storage, for example — and soft infrastructure — education, for example — are also necessary.

But a growing number of economists now also say that to lift our household incomes nearer to those in richer countries more is needed. The budget’s focus, while necessary, is not sufficient.

One big element of the future given scant attention in the budget is children and their eventual contribution (or not) in the workforce and in society. Labour deputy leader Annette King went big on this at Labour’s “congress” at the weekend with her child-centred policy. More next week on this topic.

Another element of the future I will also touch on next week (though in a different context) is the environment. The budget treated it as cost but it is actually part of the economy’s infrastructure. Neglect of it comes at an economic cost. Labour’s new president, Moira Coatsworth, came into politics via environmental activism.

New Zealand is well behind what multinational firms and other governments are doing. The OECD, not a lefty, tree-hugging institution, has had former Environment Minister Simon Upton analyse “green growth”. He will issue a major report on Wednesday.

The report will say that “business-as-usual” economic development is “unwise and unsustainable” and risks imposing human costs and constraints on economic growth and development. It will say green growth — or the greening of growth — can address both economic and environmental challenges and open up new sources of growth through productivity, innovation, new markets, predictability for investors and reduced resource price volatility. It will require a wide range of policies, taking into account the full value of natural capital and with a longer time horizon than traditional economic policy.

Here Business New Zealand boss Phil O’Reilly’s advisory group, appointed long behind the play in January, is heading down a similar track but with timid terms of reference. A discussion paper is due soon.

The budget’s third big missing ingredient of the future is innovation. Labour leader Phil Goff went big on this yesterday.

The budget allocated zero new spending — in fact, spending falls slightly in dollar terms. Yet back in February it was billed as an innovation (and savings) budget.

Real wages rise sustainably only if productivity rises. Productivity grows on the back of innovation, which the OECD defines as implementing a new or significantly improved product (good or service) or process or a new marketing or organisational method.

New products and processes come from science and technology. That is where a government can usefully contribute.

The government moans that the private sector does far less research and development (R&D) than the OECD average. Sir Paul Callaghan attributes that to the economy’s heavy dependence on tourism and commodities: like-for-like, sectors here do roughly the OECD average. To match the overall OECD R&D average, there will need to be a lot more of the TIN100 high-tech sorts of firms, which do spend heavily on R&D and now have $5 billion of exports.

That’s where the government comes in — or doesn’t. Successive governments — Labour in Goff’s day and John Key’s through the whole of his first term — have kept their contribution to science and technology, and so to up-teching rising businesses, well below the OECD average.

Other governments — Denmark, Finland and Israel are examples — have invested in innovation and got the predictable higher-income return, a spinoff Science Minister Wayne Mapp was quoting late last year. Ireland, hit by a fiscal earthquake the match of Canterbury’s seismic event, ring-fenced innovation from its budget cuts.

Shaun Coffey, chief executive of the government’s Industrial Research Ltd, has a plan to lift the R&D game: double the size of his institute and thus its capacity for original and applied science, R&D partnerships with businesses and commercialisation.

Coffey is an entrepreneur. He would not need twice IRL’s state funding to double his operation. But his initiative earned no public government backing.

Behind the scenes there is some activity. A report next month on leveraging government input to get more R&D in high-value manufacturing and services is said to have some “big ideas”. There are hints that will feed into next year’s budget.

If so, will it be well financed as an investment in the future? Perhaps — though not on the past 20 years track record. Budget after budget, the future has been postponed. That is the real budget deficit.