English's real fiscal balancing act

This month Bill English produces his last budget before the one which is supposed to have a plus sign in front of the balance. Can he do it? What is the point?

Whether he can do it depends partly on Beehive determination, partly on the global economy and partly on untoward events at.

English measures up on determination in two ways.

He is keeping the lid on new and existing operational spending by government agencies, despite a growing risk of political fallout from trimming of services, as evidenced in the outcry in March over the Department of Conservation’s restructuring. How long can Tony Ryall keep his health services balls in the air?

English has also pushed on with selldowns of state-owned electricity generators, against majority opinion and despite Solid Energy’s collapse and Meridian’s dogfight with a desperate Rio Tinto.

As to untoward events, English has had more than his share: Christchurch earthquakes, Pike River, ongoing fallout from finance company excesses and leaky homes and this year’s drought. He can probably count on no more such events before May 2014 and even May 2015.

But he can’t count on good news in the global economy. Australian figures have been mixed and depend heavily on China, which has a property bubble and wavering production growth numbers. Japan is trying to reflate out of stagnation. Europe is anaemic and its banks are fragile. The United States’ modest GDP growth is unbalanced: unemployment is chronic while the stockmarket puffs into a bubble.

That ties English back to the domestic economy. There he has an earthquake upside: Christchurch’s rebuild has picked the construction sector out of the gutter. And more houses and commercial buildings are getting built elsewhere.

But this has a downside which English made much of when first Finance Minister: construction does nothing for exports, sucks in imports and pushes the balance of payments further into the red.

English’s aim was to rebalance the economy toward exports from its heavy dependence on domestic activity. That has not happened so far, despite very high commodity prices and despite the cabinet having made its No 1 priority GDP growth, particularly for dairy expansion and mining.

And that is the bigger fiscal point. The fiscal balance is not a one-year event. That is clear from the fact that the large surpluses year by year when Michael Cullen was Finance Minister said nothing about what was waiting for English around the corner.

English does think ahead. After he gets the budget back to surplus he wants to build up the surplus enough to restart transfers to the Cullen fund to help pay baby-boomers’ pensions and then to build a buffer against shocks.

And the Treasury is thinking ahead — to 2060, the end-date of its next long-term fiscal forecasts, due to be published in July. With English’s backing, the Treasury has taken these forecasts seriously.

What they will show is that as the population age structure changes — to a higher proportion of older people — some complex and tough decisions will have to be made as to how those older people’s living, health and other costs are to be met.

As Berkeley professor Alan Auerbach told a Treasury seminar in March, fixing near-term fiscal issues does not fix longer-term issues. In a paper he wrote in 2010 on United States’ “ageing” fiscal implications he said that regardless of sorting out its near-term fiscal deficit, addressing the longer-term “burdens”, which will reduce economic performance whether they happen gradually or suddenly, needed “significant and sustained changes to spending and revenue policies in the very near future”.

This point John Key doesn’t get when he insists no action is needed on pensions until next decade. The Treasury has got the point. So the hard-edged judgment on this month’s budget is not whether it “returns to surplus by 2014-15”. It is whether it makes a start on offsetting the long-run deficits.