Budgeting for aspirations and wellbeing

Dr Bryce Wilkinson
The National Business Review
4 May, 2018

The Coalition government’s first budget is just over two weeks away. Its core is always fiscal policy – how much it is planning to spend and how it is planning to fund that spending. But its regulatory intentions will be important too.

An intriguing aspect is the move to a wellbeing framework.

Fiscally, I expect this budget will stay within Labour’s pre-election commitments for spending, tax, operating surpluses and debt. These commitments include five budget responsibility rules. It put its credibility on the line as an economic manager for keeping to them.

So far Labour looks lucky in that tax revenue has been running above forecast, there has been no global financial crisis and no costly earthquake.

Even so, the government has a major fiscal problem further out. Put simply, its spending aspirations appear to far exceed its capacity to fund them, given its fiscal rules and self-imposed tax rate limits.

Planned health spending illustrates the problem. In December, the Treasury projected it would be $17.3 billion in 2022 based on the Coalition’s policies for the first 100 days. This is barely more than the $17.2 billion of spending in 2018. Yet health spending was only $14.9 billion in 2014. It will be $19.8 billion in 2022 if it increases at the same rate as between 2014 and 2018.

The Treasury’s fiscal forecasts for 2022 provided leg room of $8.0 billion to cover for public sector wage and other cost increases, unexpected spending contingencies and scope for new spending. Based on the above extrapolation, health alone could soak up $2.6 billion of that provision, largely under existing policies.

The Treasury made no specific provision for wage or other cost increases to 2022 for a further 10 categories of government operating spending. If spending on all 11 rises as fast between 2018 and 2022 as between 2014 and 2018, actual spending on these items in 2022 will be $12.7 billion higher than Treasury projected for 2022. The $8.0 billion provision would not be nearly enough.

In short, the Coalition’s spending plans imply budgets beyond 2018 that are much tougher than under National. Yet, the Coalition is criticising National for not spending enough.

Rules more attractive
When governments run short of money to spend, regulation becomes more attractive as an alternative. The costs to the community might be much the same, but they are not visible in the government’s books. Labour’s plans include many regulatory changes. Significant areas to date include foreign buyers of houses, climate change, education, employment law, including minimum wage hikes, and the oil exploration ban.

The test for the Coalition’s initiatives is whether each item is more likely to improve or reduce community wellbeing in some overall sense.

Finance Minister Grant Robertson is seeking to put wellbeing at the centre of his future budgets. Good for him. Making that meaningful will be a challenge.

Meanwhile, the Treasury is advocating for its own Living Standards Framework based on four capitals. How it plans to determine whether a policy to raise those capitals is also likely to increase community wellbeing is far from clear.

The mainstream approach in economics for assessing whether a spending or regulatory policy is likely to improve or lower community well-being is cost-benefit analysis. In principle, it considers all the costs and benefits expected to be experienced by affected members of the community.  What could be broader than that?

Mandate enough?
I have yet to see any of the government’s 100-day initiatives supported by a convincing cost-benefit analysis. The public sector’s attitude seems to be that as long as the Coalition campaigned for the policy, its likely effect on community wellbeing is not to be assessed. The government’s attitude seems to be that as long as it campaigned for a policy, a mandate to govern from New Zealand First is justification enough.

A month or two ago I looked at all the regulatory impact statements then publicly available in support of the Coalition’s first 100 days programme. None seriously attempted to demonstrate a wellbeing gain.

Take housing for example. Banning overseas persons from buying homes will likely reduce both their wellbeing and that of the would-be seller. It is not a good look internationally. No case was made that the wellbeing gain to the successful buyer will be greater.

Similarly, building 100,000 new government homes cannot be expected to add enduringly to the total of new homes built. First, a builder working on a state house is not available to work on a private house. Second, to increase the housing stock enduringly requires the government to reduce the sum of the cost of land and the cost of constructing a new house. Fortunately, Housing Minister Twyford gets that but can he achieve it?

Similarly, poverty and hardship cannot be sustainably reduced by paying higher benefits to those for whom lack of money is a symptom rather than a cause of their predicaments. This includes those with drug or alcohol addictions, those who can’t budget and those who continue to have children they can’t support without welfare. Policies that address underlying causes, not symptoms, are needed.

We strongly welcome greater rigour in ensuring budget proposals actually improve community wellbeing. We expect that that is best demonstrated through comprehensive cost-benefit assessment for major spending proposals. And we hope that that same rigour is extended to the more hidden regulatory side of the ledger.

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