Bill English’s sixth budget was an election-year budget in three respects.
First, it doled out some cash, mainly to take gloss off opposition parties’ election promises and medicate some itches. This doesn’t compare with Labour’s 2005 middle class welfare splash, including making student loans interest-free. But English did have an eye on September 20.
Second, the budget projected a realisable upward fiscal track. That reassures business and investors and generally soothes voters. It constrains opposition parties’ tax-and-spend promises because households are not over-confident and mortgage rates have begun to rise.
Third, the budget’s upward track rests on forecasts of steady GDP growth which for households means more jobs and higher earnings from those jobs. This upward GDP track is predicated on improving economic competitiveness, continuing demand for primary commodities coupled with expanded output (more cows) and no big shocks in the wider world.
The Treasury commentary did canvass some global risks. But English, who a few months back frequently highlighted the risks so as to dampen public expectations from his budget, did not say much last Thursday that might disturb consumer confidence, which is critical to keeping John Key and him in office.
There are two big risks. One is the financial system’s continued fragility, particularly in Europe, coupled with grossly overvalued stockmarkets when measured against earnings fundamentals. Our high and rising country external debt makes us very vulnerable to a shock in either.
China’s Minister of Commerce, Gao Hucheng underlined that risk on Friday. Chairing an APEC trade ministers meeting in Qingdao, Gao said: “The recovery of the world economy is picking up, however there are still many instabilities and uncertainties. More risks are gathering.”
That it was Gao who said that points to the second big risk: China.
In its budget commentary the Treasury generally expected China to go on providing a lucrative market for primary commodities. But it also worried about China’s property and investment boom, rapid credit growth, high local government debt, quality of lending in the “shadow banking” sector, exposure of the financial sector to “housing market vulnerability” and a potentially disorderly transition from investment-led to consumer-led economic growth.
Drop into Beijing for a week, as I did last month, and you get a very wide range of insight-rich assessments, from “Pamplona” (“running with the bulls”) super-optimism to “polar bears” predicting imminent financial contraction and a hard landing into a patch of slow GDP growth or even contraction.
This last point arises from a huge credit expansion through trusts and other “shadow banking” vehicles, which in part launder loans official banks are barred from making. Optimists say this is manageable because the government has huge reserves and shadow banks are a minority in the financial system. Pessimists say credit bubbles of this dimension always cause an economic contraction at some point and China cannot just reimport its foreign reserves for a bailout. Authorities have tested the water by allowing some small-ish trusts to go bust.
Bears point to overinvestment in infrastructure, housing and shopping malls which they say are a productivity drag on the economy. Bulls say these will be fully used in due course and are overstated.
State-owned enterprises still have a huge share of the economy and stashes of cash. Officials say performance must sharpen and dividends must rise. Bulls think this is do-able. Bears think vested party and other interests will blunt it.
Official Chinese think tanks, which feed into government thinking, frankly spell out serious soil, water and air pollution problems and energy and resource constraints. Bulls say the technocrats have leeway on pollution because for now public opinion backs economic growth. Bears point to rapidly rising emigration to cleaner rich countries, among other things.
There are very wide and rising income and wealth inequalities, compounded by party bigwigs’ egregious corruption and rent-taking. Bulls say the new leadership is addressing them. Bears expect political convulsions beyond the centre’s control capacity.
Next: how does the Communist party become more flexibly responsive to increasingly cosmopolitan public aspirations while keeping a monopoly on power and policy? Elsewhere in east Asia autocracies morphed into forms of democracy at a certain level of country wealth. Is China unique?
And the rate of GDP growth is slowing. The government is trying to manage expectations down to 7 per cent in the short term without frightening investors or stirring popular resentment. Not too far off, some say, they will be managing expectations down to 5 per cent.
That’s still big and getting bigger — cause for optimism. But there will be bumps, possibly big ones, on the way to 5 per cent. Cause for caution about English’s upward fiscal track.