Fiscal caution to be welcomed

The bumper $5.5billion Government surplus announced this week exceeded expectations. The economy, at least for now, is powering along, although much of Labour's spending is still to be implemented.

The figures, as have been widely noted, put more pressure on Labour to spend, or, in the case of petrol to stop tax rises. Public servants, including teachers, will feel more entitled to reject the plea to introduce pay increases over time. Already, the Greens have used the surplus as a cry to spend more on homelessness.

Like Finance Minister Grant Robertson, we argue for fiscal caution. As has been pointed out, the surplus looks backwards and to a large degree was inherited. National left the books in a good and improving state. In turn, National had inherited relatively low public debt because of Michael Cullen's prudence as finance minister. This helped National immeasurably to ride through the rainy days of the global financial crisis post-2008.

Spending promises and pipeline costs are only now gathering pace for Labour and partners, and these must be accounted for.

Importantly, a buffer should be built up during good times such as are being experienced. The Canterbury earthquakes and, particularly, the global financial crisis wrecked the National-led government's desire for surpluses until the end of its run. There is plenty that could do the same for the current Government.

Petrol price rises, for a start, will flow through the economy through increased costs and lessened competitiveness. International tariff battles, already beginning, will hurt trade. New Zealand businesses, already wary because of the ad-hoc oil and gas exploration ban and looming labour law changes, could pull back on investment.

The surplus size, though, appears to have made the so-called National "tax cuts", at $1.5billion a year, feasible. Inflation, even at relatively low levels, pushes more income into higher tax brackets and this "fiscal drag" creates annual tax increases. There is a strong argument adjustments should be made to compensate for these automatic tax increases, while not actually "cutting" taxes.

That is not going to happen under Labour, however. There are always many demands for more spending of public money and the Government is responding to some of these. Labour will tax more and spend more.

Accepting that fact, Mr Robertson is doing his best to emulate the clever Dr Cullen in calling for restraint. Mr Robertson has said the risks in Treasury's forecasts are on the down side, even as the amount of tax income rose 6% in a year to $80.2billion and more rises are expected. Labour's plans and budgets, and Treasury forecasts, rely on a growing economy and further increases in tax-take.

Mr Robertson can also note the early and unexpected success in taxes coming under 20% of gross domestic product - 19.9% - five years ahead of the target. That is impressive. Can it now be maintained?

Mr Robertson has the challenge of warding off what will be increasing demands to spend more. There is a bottomless bucket of needs and expectations. The realities of government demand strength and wisdom to spend where needed most and where necessary, but also to show restraint.

New Zealand has been blessed for years with low inflation, in large part because of cheaper imports which have counteracted substantial rises in the likes of local authority rates and electricity prices. As the New Zealand dollar falls, increasing the costs of imports, and international oil prices rise, it will be fascinating to see what happens to costs. Mr Robertson and his colleagues will be wary of the looming threat.

New Zealand is small, isolated and vulnerable. Generally, it has been and is being managed reasonably well. That must be maintained and, despite this initial bumper surplus, fiscal caution is in order.

 

Comments

We need to keep in mind the $6.5 billion of borrowings kept off the books by Mr Robertson for NZTA and Housing NZ. A bit of smoke and mirrors going on.