Originally published in the National Business Review, 11 November 2016
A Finance Minister’s decision-making is a lot easier, as Bill English cannily commented, when the Government’s books are in deficit. When the columns bleed red you simply say ‘no’ to everything but the bare essentials.
But the books are back in black and, more importantly, the Government is heading into an election year. There are now difficult decisions to be made, some which will require the answer ‘yes’.
It will pain English’s admirably parsimonious heart but political reality demands the purse strings be loosened.
This is English’s first real budget surplus after the ‘Clayton’s surplus’ in 2015 and it is substantial: $1.8 billion. Add in the just-announced $494 million partial sale of Kiwi Bank to state owned investors, NZ Super Fund and ACC, and the Government is building a respectable war chest with which to persuade the public it deserves a fourth term in office.
Not since the Holyoake administration of 1960-1972 has a political party earned four terms in New Zealand and it would be an historic achievement for the Key Government were it to prevail in 2017.
The question is how best to spend the surplus to ensure electoral success and a continuance of this Government’s good governance of the country.
Along with paying down debt, tax cuts have long been part of the agenda, although attached with English’s firm caveat, “when circumstances allow”, which many would argue is now.
Although anathema to many on the Left, tax cuts do serve a desirable purpose of providing economic stimulus, lifting consumer confidence and spending, business growth, investment and job creation. With inflation near zero and deflation a real prospect, a bit of stimulus can be good medicine.
Tax is also globally competitive and New Zealand needs to stay in that race or lose the fight for foreign capital.
Having said that, the Government’s books are not yet in a state to deliver meaningful reductions in the corporate tax rate, meaning the stimulatory impact is diluted.
Cuts to the personal tax rate, or more likely an adjustment to the income tax bands, risks further inflaming household enthusiasm for debt. Presently sitting at 165 per cent of disposable income, it’s still lower than Australia’s number which is north of 180 per cent, but is getting into higher risk territory should a global correction occur.
There is also a risk that a possible reduction in Government revenue from tax cuts will reduce expenditure in important sectors crying out for intervention and investment. More jobs, more research and development, big increases in spending on housing and transport infrastructure are required. Each of these line items come with a big price tag.
Having worked hard over many years to deliver "a healthy set of public accounts" and create jobs (an unemployment rate of just 4.9 per cent is the latest indicator of the economy’s rude health), Key and English have a great opportunity to build an even better platform for growth and future prosperity. Recent experiences in Australia provide a salutary lesson on what not to do in these circumstances.
Australia has spent the last decade enjoying the benefits of a once in a lifetime resources boom but has failed to fully capitalise on the opportunity it presented. Nation building is an expensive business and the time to invest in big ticket items like infrastructure is when revenues are up. While the Australian government is now talking about investing in knowledge-intensive sectors of the economy to transition away from an over reliance on resources, this work should have commenced years ago and progress is curtailed because ‘budget repair’ is the order of the day.
The thing about a boom is that it doesn’t last forever and while Australia benefited greatly, with more bravery from the nation’s leaders it could have been transformational. Unfortunately, five prime ministers in five years was a symptom of national interest being consistently trumped by self-interest and history will show that successive governments squandered the chance.
The return to surplus presents the Key Government with a great opportunity to make real change - to ensure it is enduring is the challenge.
New Zealand must not make Australia’s mistake. It is time to seize the day.
Alex Malley is chief executive of CPA Australia