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Bryce EdwardsPolitical Commentary

Scandinavian ambitions with a US attitude to tax

Political commentator and analyst Bryce Edwards comments on the 2024 Budget.
To understand the Budget, it’s worth returning to a statement made in 2020 by the then British High Commissioner Laura Clark – that New Zealand has “Scandinavian ambitions in terms of quality of life and public services, but a US attitude to tax”.

Her point is that New Zealand politicians want an economic setting that doesn’t work – low taxes mismatched with high spending.

Eventually, the country must choose to follow Scandinavian high taxes and high spending or US low taxes and low spending or something in the middle. But, what is not a serious option is what Labour and National governments continue to promise: relatively low taxes and relatively high government spending.

The 2024 Budget continued with that Frankenstein mix, which has produced a relatively incoherent and messy Budget. The centrepiece is an array of complicated tax credits, boosts to Working for Families and tinkering with tax thresholds.

Although the result is that the Budget delivers “tax relief” and “fiscal responsibility,” which will have some immediate voter appeal, there will be doubts about whether both of those are illusionary.

Hence, no serious economist or political analyst could endorse Budget 2024 (nor the last Labour Government’s budgets) as a credible blueprint for creating a good society. This Budget, like previous ones, just hasn’t represented the Scandinavian or US path; instead, it is continuing to try and force the best of both models to fit together.

The best big-picture analysis of this year’s Budget comes from Danyl McLauchlan, who was recently awarded the Voyager Media Award for ‘Best Columnist in New Zealand’.

His online Listener column [May 30] was short and to the point, arguing that Finance Minister Nicola Willis has attempted to spend more on the welfare state while giving tax cuts and promising an eventual return to surplus. He says that once you ignore the accounting tricks, the Budget fails to deliver any of those things.

The critical point of McLauchlan’s analysis is his explanation that our economy has been hampered by severe structural weaknesses for decades, especially in terms of low growth, low tax, and high expenditure, but then Covid pushed Labour to supercharge the settings in 2020.

Much like how Naomi Klein’s book “Shock Doctrine” warned that right-wing governments would opportunistically use natural disasters and emergencies to push through ideological agendas – under Jacinda Ardern and Grant Robertson, Labour suddenly ramped up spending, producing a much bigger state without any real commitment to returning to pre-Covid levels. And now, Willis and her Government have embedded the Covid settings with their first Budget (despite some promises to downsize in the future).

McLauchlan explains: “When Covid hit, the government responded to the crisis with a huge one-off emergency spend: vaccines, the wage subsidy, the stimulus funds. But there was also an additional increase in the overall size of the state.

“This was locked in during Labour’s post-Covid budgets, but the additional spending wasn’t matched by an increase in taxes. This created the structural deficit Treasury has been warning about with increasing urgency. It’s the macroeconomic equivalent of buying the groceries with your credit card.”

After factoring in the Government’s numerous accounting tricks and the political realities, National’s tax cuts won’t be meaningful, government departments will struggle, and future budgets will get bigger.

Grim state of our economy

Another big problem is that the 2024 Budget showed that the tax take is well down and will likely remain so.

Economist Brad Olsen told Newsroom that the state of the economy can be summed up in one word: “grim”. He elaborated; “The fact that the economic track is so much worse over the next couple of years, I think we expected that downgrade, but seeing the numbers is still pretty stark.”

The poor structural state of the economy is pointed to by left-wing political commentator Josie Pagani, who says that eventually, a government is also going to have to deal with raising productivity, and there was nothing in Willis’ Budget to suggest this is a focus for the current administration.

“Here’s our basic problem: Big ticket costs in health, superannuation, crime and infrastructure go up by more every year than the economy grows. That’s been happening for decades. The population is ageing, equipment costs are rising, and we need to pay cops, nurses and engineers more to keep them here.

“As expensive things keep getting pricier, more taxes or ever deeper cuts in other areas are needed to pay for them. We are in a doom loop from which the only way out is an economy that undergoes a step change in productivity supported by a state sector that can deliver more and better.”

Pagani also points out that “Government debt is forecast to total 43.5 percent of everything the economy produces next year,” so the country needs to produce more. We can’t just smooth over these economic cracks by turning the immigration tap on.

“It has been 50 years since we earned more overseas than we spent. Our productivity is dismal, so we work longer hours for less than nearly any developed country. We grow by adding people instead of by innovating,” says Pagani.

 

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