Labour/Green Budget Responsibility Rules

Grant Robertson, for Labour, and James Shaw, for the Greens, released on Friday a short document on the “budget responsibility rules” the two parties would adopt if they are in a position to form a government after the election.

As others have noted, it was PR win for the two parties, in what was in any case not a great week for the government (Afghanistan and all that).    If one criticism of the left-wing parties in the 2014 election was that no one seemed sure what a Labour-Green government might look like, or how the key figures might get on, this is the sort of initiative that helps build confidence and makes people nearer the centre, or just tired of nine years of a government that has accomplished little, think harder about the possibility of voting for a change.   Whatever their other specific policies, whatever their other limitations, in this release –  and, for example, in the double-page spread in the Herald, – Shaw and Robertson looked and sounded like plausible responsible senior ministers.

On the substance, I think it is only fair to note that for 30 years or so there hasn’t been a huge difference between the two main parties on the overall approach to fiscal policy, and that has been to the credit of both parties.  Roger Douglas and David Caygill broke the back of our record of fiscal deficits, and Ruth Richardson and Bill Birch finished the job.  Both parties ran surpluses through much of the 1990s and the 00s.  The budget was run badly into deficit late last decade, through some combination of poor official forecasting, the global recession and productivity slowdown, and the earthquakes.  Policy played a part –  Labour in government was responsible for a large increase in spending (advised by Treasury that it was sustainable). But had National been in government in 2005-08 it is difficult to believe that fiscal bottom lines would have been much different.  They’d have been getting the same Treasury advice about revenue sustainability, although presumably they’d have done more about tax cuts than Labour did, and put through fewer spending increases.   Since then both main parties have had a shared commitment to get back to surpluses –  helped along by relatively favourable terms of trade, and unexpectedly strong population growth, which tends to flatter the fiscal position in the short-term.

Of course, the Greens have remained a bit of an unknown quantity in the broad area of economic management, not helped by for example the flaky suggestion from their former leader that New Zealand should have been adopting quantitative easing, at a time when there was still plenty of scope for conventional monetary policy.  But that now seems to be in the past, and in this new agreement the Greens have pretty much signed on for an orthodox and fairly sensible approach to broad fiscal management.  Perhaps they always were, but sometimes writing things down and stating them openly matters.

There are six points in the Budget Responsibility Rules document.  I’m mainly interested in the sixth of them –  the genuine and welcome innovation.    My comments on most of the others are mostly around the margins, intended as constructive technical points rather than any very substantial disagreement.

The first two points are

1. The Government will deliver a sustainable operating surplus across an economic cycle.

An OBEGAL surplus indicates the Government is financially disciplined and building resilience to withstand and adapt to unforeseen events. We expect to be in surplus every year unless there is a significant natural event or a major economic shock or crisis. Our surpluses will exist once our policy objectives have been met, and we will not artificially generate surpluses by underfunding key public services.

2. The Government will reduce the level of Net Core Crown Debt to 20% of GDP within five years of taking office.

To give future generations more options, reducing government debt has to be a priority. By setting a target, provided that economic conditions allow, we will be able to make responsible debt reductions and invest in housing and infrastructure that strengthen our country and prepare us for future challenges.

On which I would make just two points:

  • if nominal GDP is growing at, say, 4.5 per cent per annum (say, 2 per cent inflation, and 2.5 per cent through some mix of population and productivity growth) then a stable debt to GDP ratio of 20 per cent is consistent with annual deficits of 0.9 per cent of GDP.  I’m not opposed to the commitment to run surpluses in normal times –  presumably offset by deficits in years with serious economic downturns –  but since those severe downturns typically come less than once a decade, and a parliamentary term is only three years, they will need to do some hard thinking about how to operationalise these self-imposed rules jointly, as the 20 per cent target comes into view.   There is a real risk of seriously pro-cyclical fiscal policy quite late in economic cycles, compounded by the fact that the commitment to run surpluses is not expressed in terms of a structural balance (ie stripping out the estimated budgetary effects of the state of the economic cycle).
  • what is a sensible debt target with, say, zero population growth would, all else equal, be too low a target if population growth was to continue at 1.5 or 2 per cent per annum.   The Greens have announced a net immigration target which is consistent with population growth of on average around 1 per cent per annum.  We don’t yet know what Labour immigration policy is.      (I should add that this technical point is relevant to the current and past governments’ specification of debt targets as well –  such targets typically arose more out of political framing etc than out of robust economic analysis.)

The third of the rules is

The Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand.

The Government will prioritise responsible investments that enhance the long term wellbeing of New Zealanders – such as restarting contributions to the Super Fund. In addition we will invest in infrastructure to support our growing population, and reduce the long term fiscal and economic risks of climate change.

I’m not going to get into debates about NZSF here (the bigger fiscal issue is how much overall public sector saving there should be, not the institutional form it takes), and presumably no one is going to quibble with the high level of generality in the italicised commitment.  All the arguments –  including those within any future government – will be about the details of specific policies, values, and preferences, and about how hardnosed project evaluation and cost-benefit analyses should be.

The fourth rule is interesting and somewhat surprising

4. The Government will take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio.

During the global financial crisis Core Crown spending rose to 34% of GDP. However, for the last 20 years, Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.

Here is the chart of core Crown spending as a share of GDP.

core crown expenses

The average over that full period has been 30.8 per cent of GDP.

I’m more hesitant about this “rule” or commitment than you might expect.   On paper it looks like a timely recognition of the cost to productivity and real future incomes of too large a state.  But when, thinking about fiscal rules, it is really important to think about (a) how they might be gamed in future, and (b) how they might lead even the authors of those rules into decisions that might less than ideal.  I’ve also not seen anyone ask Labour, in particular, how they square a semi-commitment to hold core Crown expenses to around 30 per cent of GDP with doing nothing about NZS.  Even the most enthusiastic supporters of the NZSF recognise that it will make only a modest contribution to covering those ageing population costs  –  and probably none at all in the life of any Labour-Green government elected this year.

But even setting that specific issue to one side, this is a commitment around core Crown expenditure, but there are other ways to skin a cat.  If a future government feels bound by an expenditure commitment, why not try regulation.  There doesn’t appear to be anything comparable limiting future extensions of the regulatory state (thus, say, in a US context a statutory mandate compelling people to buy health insurance might be a substitute for more direct government spending on health).  And it isn’t clear that this commitment by Labour and Greens would limit the use of tax expenditures.  And people closer to the details of how governmemt activity is classified might want to pay attention to the possibilities in the distinction between core and total Crown.  Finally, expenditure to GDP ratios can be flattered by the state of the cycle –  a ratio of 30.000 per cent late in a big boom, can quickly transform into one of 32 or 33 per cent without any new discretionary fiscal choices if there is a serious recession.

These comments are, mostly, not intended to take away from the welcome overall thrust of the Labour/Greens commitments, but they are some details to think about when it comes to firming up what the commitments might mean if/when they are in office.  Under pressure, ministers and smart bureaucrats find “outs”.  For now, one should welcome the fact that the parties believe it is politically advantageous to commit to something like an expenditure (share of GDP) ceiling.

I’ll pass over the tax commitment quickly

5. The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

Since no one –  apart perhaps from one or two lump-sum taxers lurking under rocks somewhere –  will disagree, it means very little in substance and constrains no practical choices.  The substance of any tax reform will no doubt flow from the tax working group they propose to establish –  where the terms of reference and the people they agree to appoint will matter rather a lot.

My main interest in the whole document is the commitment to establish a fiscal council.

Measuring our success in government

  • The credibility of our Budget Responsibility Rules requires a mechanism that makes the government accountable. Independent oversight will provide the public with confidence that the government is sticking to the rules.
  • We will establish a body independent of Ministers of the Crown who will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public, and will cost policies of opposition parties.

It isn’t in the official document, but in another interview with Robertson he confirmed that the body would not be located inside Treasury.

The establishment of a body of this sort would be entirely conventional for an advanced, open, economy.  It is something the OECD, for example, has recommended for some time and (from memory) the Treasury’s own external reviewer a couple of years ago also favoured establishing one.

Early last year the Green Party came out advocating the establishment of an independent policy costing unit.  I wrote about the proposal here.  It was a well-intentioned, but somewhat flawed, proposal – including because, somewhat surprisingly, it had proposed locating the independent unit, to cost opposition party policies, inside the Treasury.

I noted at the time that

I reckon that if New Zealand is going to establish such a unit it should be done as an office of Parliament, and I wonder why the Greens chose not to take that option.  Perhaps they took the view that such a unit would be cheaper if it operated within Treasury (drawing on the corporate functions of a larger organization).  But even if that were true, I suspect it would be a false economy.

On the overall proposal, I noted

But is it worth going down this track?  I’m still ambivalent.  I don’t think there is enough thoughtful scrutiny of macroeconomic policy issues in New Zealand (and touched on some of that here), and before the Greens proposal goes any further it would be worth looking carefully at what is done in other countries.

Before concluding

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

I presume Labour and the Greens are still some considerable way from pinning down all the details of how the proposed body would work.  I remain a bit sceptical about the policy costing dimension of the proposal, for reasons outlined at greater length in the earlier post, and suspect that if they do get the unit up and running it will be a distinctly secondary function.

The main area where a fiscal council –  or indeed, a broad macro policy advisory council –  could add value is around the bigger picture of fiscal policy (not just rule compliance, but how the rules might best be specified, and what it does (and doesn’t) make sense to try to do with fiscal policy).

But there are still important caveats.  For example, it is fine to talk in terms of the council having “oversight of government economic and fiscal forecasts”, but quite what level of resource would that involve?  Does the proposal envisage that the core forecasting role, on which government bases its policies, would move outside Treasury?  Even if there was some merit in that, it would be likely to end up with considerable duplication –  since neither the Treasury nor the Minister is likely to want to be without the capability to have their own analysis done, or to critique the work of the fiscal council.  The UK’s experience is likely to be instructive here, but we also need to recognise the small size of New Zealand and the limited pool of available expertise.  Our population –  and GDP –  are less than a 10th of the UK’s.

Again, I think Labour and Greens are moving in the right direction here, so I’m keen to see a good robust institution created, not to undermine the proposal.   The success of such a body over time will depend a lot on getting the right people to sit on the Council, and to keep the total size of the agency in check.   Too large and it will be an easy target for some other future government –  no doubt enthusiastically offered up by a Treasury keen to remove a competing source of advice.  But make it too small, or with too many establishment figures on the Council, and people will quickly wonder what is the point.  As it is, we don’t have a lot of independent fiscal expertise in New Zealand at present (as distinct, say, from specific expertise on eg aspects of the tax system).   I presume that if they form a government later in the year, Labour and the Greens will be looking quickly to the experiences in this area of small advanced countries like Ireland and Sweden.

My other caveat isn’t a specific criticism of this proposal, but rather a more general one. It is always easy to establish new, small, government entities.  Each on its own doesn’t cost much, but they all add up.  Perhaps there would be something to be said for a one-in one- out “government entity budget”, to parallel the “regulatory budget” approach being tried in a few places.  I wonder which entity Labour and the Greens would kill off to make way for a fiscal council?   It would be easy for someone on the more sceptical side of the debate around the role of government, and the incentives/capabilities of government, to come up with a list.  But that isn’t usually where Labour and the Greens are coming from and in time layer upon layer of marginally useful government entities provide lots of jobs for the boys (and girls).  It has been a while since there was a good quango-hunt.  Perhaps we are overdue for another?

14 thoughts on “Labour/Green Budget Responsibility Rules

  1. My read of the political landscape is that there are moves afoot for the 7 Maori seats to shift from Labour to the Maori Party together with Hone Harawira. The Maori King has already started the ball rolling in favour of the Maori party by making it public that his support is with the Maori Party. Paula Bennet is certainly making all the right noises and sounds more like a number 1 than a number 2 overshadowing Bill English.

    I think we are seeing our very first Maori lady Prime Minister in the waiting if National party cannot garner enough seats to maintain control. A loss of one or 2 seats in the election would put the Maori Party together with those 7 guaranteed Maori seats control of the government. Especially if Peter Dunne or the David Seymour falters.

    Like

  2. You quite right about it being too easy to establish yet another small government entity. We have literally hundreds of them!

    What annoys me is that these entities always seems to have to have commissioners rather than a panel of senior staff being able to make decisions, which is not what usually happens in the rest of the world. I know from MBIE staff that it is difficult to find quality people to become commissioners and from personal experience that commissioners tend to encourage long-winded and slow decision making, with individual commissioners each trying to prove how important/smart, etc they are. They have every incentive to rack up as many chargeable days/hours at around $350 an hour or similar. And they really can’t get sacked – the worst is likely they will just not get offered another term.

    Liked by 1 person

    • Thank you for the link. It was a pleasure to read something that is so well written.
      The crunchy bit for me was “PPP arrangements – such as the need to ensure that entities have the expertise to manage complex contracts, the fact that accounting issues should not drive the decision to enter into a PPP”. Does this apply to some of the suggestions made for developing Auckland’s infrastructure without unduly increasing rates?

      Like

    • I”m not very familiar with that Act, although the Magawhai episode was clearly inglorious. I am uneasy about suggestions of encouraging OAG to review policy – some mix of “and what do they know” and “stick to your knitting – doing that well really matters a lot”

      Like

  3. I have to wonder if the amount of spending they propose is enough to fix or significantly alleviate the major problems the country is facing.

    Because of that, my questions are: How much headroom is there for extra spending before we start harming te economy significantly, and what would be the best way to raise that money?

    Like

    • There are no very robust answers to your question, but perhaps as importantly they’ve committed to no material increase in the share of govt spending in GDP. Higher taxes always come at some real economic costs – how much depends on which tax – but our overall tax burden (% of GDP) isn’t overly high by OECD standards. I think your first sentence is why many of the “far-left” are unhappy with these new self-imposed rules.

      Like

  4. You have to look at the Greens proposed Quantitative Easing in the context of that period when the Christchurch Earthquake needed to be funded and when the US was launching into QE itself.

    This was an opportune time to have got a freebie $50 billion that would have accelerated and completed the Christchurch earthquake repairs within 5 years instead of the extremely slow progress we are currently making because the government is trying spread out its borrowings over the next 30 years for Christchurch.

    Like

    • A NZ QE would have also forced our interest rates lower and the NZD much lower and kept inflation around 2%. When Central Banks around the world is printing cash it was rather silly of NZ not to follow. Nothing to lose other than the poorest productivity ever due to the decimation of our productive industries unable to compete around the world. Left us pretty much with cows and houses.

      Like

      • Yes, but a central bank that had got things right would have had interest rates quite a bit lower anyway, delivering inflation averaging around 2 per cent. Other countries only used QE because interest rates got to around zero. That didn’t happen here, so no need for the tool (yet – next recession might be a different story)

        Like

      • Well the OCR is at 1.75% but floating rates are around 5.8%. The OCR is currently innefective. The last 3 OCR falls have been ignored by the banks. QE would have been far more effective especially when all the Central banks were in QE mood.

        Like

    • The problem with the Labour party is that they are not suggesting anything that benefits employees.

      1. No mention of an additional public holiday for the NZ Land Wars. It took a National party of course with prompting from the Maori Party to even recognise the NZ Land Wars as a significant national event equivalent to ANZAC day.

      2. Continuos harping of CGT when it is ordinary employees saving in investment properties for their retirement and they want to steal that retirement.

      3. No mention of increasing Employer contribution to Kiwisaver knowing full well that Universal super is not affordable as baby boomers age abd trying to just buy voters with a sudden 360% turn on their previous policy to extend the Universal super age to 67 or later.

      4. Stealing average employees access to tax losses from Investment property so that the average employee property investors pays more tax.

      5. Promising 100,000 houses when they know that there is no way they can build that without a hefty $30billion in infrastructure spending on top of the $30 billion that the government needs to borrow for Christchurch and for Kaikoura and Wellington.

      The Labour party sure does not help employees. Might as well call it the Not Labour Party.

      Liked by 2 people

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s