23 Jul 2018

Govt urged to scrap self-imposed spending cap

11:44 am on 23 July 2018

The government is being warned it has no chance of fixing run down public services unless it ditches its self-imposed spending rules.

Jacinda Ardern's Labour-led coalition promised to loosen the fiscal straitjacket of the previous National administration to rebuild public services, and pledged in the Budget to spend an extra $24 billion more over the next four years.

Under its budget responsibility rules, the government pledged to keep spending at 30 percent of GDP, and reduce net debt to 20 percent of GDP by 2022.

But the government's efforts have fallen short of the expectations of some, who argue it's not nearly enough.

"If we stick to those caps for anything more than the next couple of years then we won't get anywhere near solving the infrastructure deficits that we've had across this country, built up over the last couple of decades," BERL chief economist Ganesh Nana said.

"There's a lot of catching up to be done."

Salvation Army social policy analyst Alan Johnson said there was a real danger that the crisis in mental health, social housing and well-being of older New Zealanders would become ingrained.

"One of the things with those caps is that they were literally straight out of the National Party rule book, which was disappointing that both the Greens and the Labour Party signed up for them even before the election.

"They are unnecessary and they could be relaxed I think without a massive impact on our credit rating, and the cost of capital and borrowing," Mr Johnson said.

Finance Minister Grant Robertson does have some wriggle room.

Core government spending is forecast to be about 28 percent of the value of the economy for each of the next four years.

In the 2018 financial year, the gap between the Mr Robertson's spending plan and the 30 percent cap equates roughly to an extra $6bn.

Net debt already sits just above its 20 percent of GDP target - four years early.

That's still not enough for Ricardo Menendez March from Auckland Action Against Poverty.

He wants the cap set much higher.

"I would say their limits should be at least twice as much.

"Some European countries have established 60 percent of core Crown spending in relationship to GDP and I don't think that's unreasonable," Mr Menendez March said.

"But ultimately the spending limits should be based on what society actually needs."

Robertson confident of improving public services

Finance Minister Grant Robertson is confident the extra $24bn already earmarked will help remedy many of the problems caused by "nine years of underinvestment".

But Mr Robertson said he needed to keep close control of the finances to weather any unexpected shocks.

"I believe we are going to make really good progress in improving our public services, improving the well-being and incomes of New Zealanders over this term of government, and then into the next term as well.

"That's the prudent and right thing to do to balance that against making sure we've got the money aside for a rainy day, and we're protected against the changes in the global economy," Mr Robertson said.

However National Party leader Simon Bridges said lifting the self-imposed fiscal cap would be borrowing for "loose, untargeted spending" and he would not support that.

If the Labour-led government had its priorities right it would be able to achieve more, and it was going to benefit from a higher tax take than had been expected, he said.

"They're taxing us I think a couple of billion dollars more over the next four years and they're borrowing $17bn more than the National government was going to do over the next four-year period already."

Instead of the projects funded from in the Provincial Growth Fund National would spend on "quality transport, broadband and infrastructure that would really make a difference", he said.

National's finance spokesperson, Amy Adams, said Labour had over-promised as well as made poor spending choices such as waiving fees for first year tertiary students and more diplomats.

"There is no doubt they have over-promised, there is no doubt they've paid far too much for the cost of coalition and in my mind there is no doubt they are going to be looking to borrow more and more tax to make up the shortfall and I don't think that's fair on New Zealanders."

Labour should focus on bolstering business confidence and reducing wasteful spending to ensure a fast growing economy that would fund the services people want, Ms Adams said.

Get the RNZ app

for ad-free news and current affairs