How more with less can be less than more

Australian Treasurer Wayne Swan is contorting himself and fiscal numbers to get his promised budget surplus this fiscal year as his economy slows. Here John Key and Bill English are less adamant about making good their muscular election and May budget promises of a 2014-15 surplus.

Key and English have an advantage over Swan.

First, they have two more years. Second, the underlying numbers in the 2011-12 fiscal outturn reported last week were close to the Treasury’s projections and far better than in most “developed” economies.

Third, they can play the “near-enough” game in the 2014 budget by pointing out the balance is between two very big numbers, so a small deficit is not materially different from a small surplus, or get a surplus by not discouraging Treasury boffins from optimism when projecting economic activity and revenue. Fourth, they can keep up the “more-with-less” pressure on officials.

At budget time in May, despite accumulating evidence of global troubles, the Treasury projected 2.9, 3.3 and 3.1 per cent GDP growth through the three fiscal years to 2014-15. Some economists thought this over-optimistic then. Bank of New Zealand economists now project a deficit in 2014-15 of around 1 per cent and another deficit in 2015-16.

The point is that breezy algorithms cannot gainsay cautious, depressed or cash-strapped people and businesses. Algorithm slaves across the world have been trimming their forecasts through 2012 as reality has not kept pace with the equations. And as those real-economy numbers drift, some of the imbalances, rigidities and distortions in China’s super-managed economy are being unveiled: China’s managers are not superhuman.

That has stripped some grandiosity out of Australian miners’ bluster. That in turn has sapped business and consumer confidence, house prices, construction, retail and, recently, employment elsewhere. Australia still looks pretty good from here but not so good that it will keep our industries buoyant selling there.

The world might turn round. But the slowing looks more like reality biting than a short “dip”. One reason is that “developed-economy” governments are getting edgier about their soaring debt and central banks are running out of booster options.

That in turn is heating up the debate between those who say budgets must be got back to surplus (for example, German Finance Minister Wolfgang Schauble) and those who say fiscal austerity is making it harder to get back to surplus (International Monetary Fund boss Christine Lagarde). The IMF cites Britain’s sad 1918-38 experience when GDP-sapping austerity helped send debt up from 140 per cent of GDP to 190 per cent.

Key and English have much more leeway, despite the Christchurch earthquake costs. They have not had to be severe and have had time and scope to push for public sector innovation and efficiency to get “more with less”, the “less” coming by way of zero, or tightly limited, additional spending.

Up to a point that has worked, notably in the health sector. But it may be nearing the point when it turns into “less with less”.

A health example is home care for the elderly, typically supplied by companies or not-for-profits through workers paid the minimum wage or little more, who do cleaning, meals, shopping and personal care such as showering, dressing and help with eating.

This care is expanding because it is cheaper than institutional care, because people prefer to stay in their own homes if they can and because numbers are growing of those entering needy old age (as distinct from just passing the superannuation qualifying age of 65).

At the same time the squeeze is on district health boards to live within constrained budgets, deliver more of the operations and other services Health Minister Tony Ryall favours and still meet the rising home care demand.

The Wellington DHB, which in 2011 forecast a 7 per cent rise by 2013-14 in over-65s in its area, solved this insoluble problem last year by cutting its home care funding 15 per cent and its providers from three to two. Chief executive Mary Bonner blandly asserted there would be no service cut.

But David Moore of Sapere consultancy (in a High Court affidavit for dumped supplier Healthcare of New Zealand, which doesn’t want the contract back but argues the DHB did not follow correct procedure) says that because home care is labour-and-input-intensive, reducing supplier numbers can’t deliver those savings. Moore estimated a cut in service hours of at least 22 per cent, unless there are (unrealistic) productivity gains of at least 28 per cent — or unless (which Moore didn’t add) part of the cost is paid by charities or voluntary work or the recipients.

Is this “more with less”? The taxpayer is paying less. But has the cost to country come down? Has production gone up?

Real innovation cuts cost and lifts output. Illusion does neither. But the budget looks better and all but the minorities caught in the vice feel better. Roll on budget day 2014.