Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University
Introduction • I make six points in this opening comment. – We are living in hard times. – We know why times are hard. – We know how to cope with hard times. – These ways of coping are our responses. – So, what is in the Budget? – Welfare reform.
Point 1: We are living in hard times NZ$ Billions (1995/96) S.A. Per Quarter 15 20 25 30 35 40 45 Mar-93 Mar-94 Mar-95 Mar-96 Real GDP Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Point 1: We are living in hard times NZ$ Billions (1995/96) S.A. Per Quarter 15 20 25 30 35 40 45 Mar-93 Mar-94 Mar-95 Mar-96 Trend Real GDP Mar-97 Mar-98 3.6 per cent per annum Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Point 1: We are living in hard times Thousands, S.A. Per Quarter 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 Mar-93 Mar-94 Mar-95 Mar-96 Employed Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Point 1: We are living in hard times Per Cent of Labour Force, S.A. Per Quarter 10 12 0 2 4 6 8 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Unemployment Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Point 2: We know why times are hard This is a slide The biggest destruction of from Dr Alan global wealth ever? Bollard’s Value loss address to the (est. $US) Employment Credit-related losses $2 trillion Equity Markets $30 trillion Summit Housing $4 trillion Conference in Lost output $3 trillion 2009. THE RESERVE BANK OF NEW ZEALAND
Point 3: We know how to cope Hard times are not unusual and we have learned how to cope when times are hard: • Fiscal Policy – increase public debt • Monetary Policy – lower interest rates • Social Security – unemployment benefits and public support for families
NZ$ Billions 10 20 30 40 50 60 0 Mar-1993 Mar-1994 securities on issue Total Government Mar-1995 Mar-1996 Mar-1997 Public Debt Mar-1998 Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 Mar-2004 Mar-2005 Mar-2006 Mar-2007 Mar-2008 Mar-2009 Mar-2010 Mar-2011
Interest Rates
Number of Main Benefits 500,000 400,000 300,000 200,000 Number on all 100,000 Main Benefits 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 March Data Each Year
Point 4: These are our responses These responses are not something the government does to us. These are mechanisms we have created over the years which the government (in our representative democracy) controls on our behalf.
Point 5: So what is in the Budget? Minister Bill English comments that: “ The fallout from the global financial crisis of two years ago is gradually receding.” Consequently, the Budget lays the foundations for how the government intends to phase out the higher debt levels that were accumulated to get us through the worst of the crisis.
Point 5: So what is in the Budget? These foundations are important because a large part of the initial fiscal response were in the form of tax cuts. Tax cuts by their nature favour higher-income households, so that if the removal of the stimulus is in the form of expenditure cuts the overall result will be a further redistribution of income from lower to high income households.
Point 5: So what is in the Budget? • Changes to KiwiSaver • Phasing in more targeted Working for Families • Tighter criteria for Student Loans • $5.2 billion cutbacks in public services over 5 years • Offset by $4 billion in new spending (mostly in health and education) over 5 years
Point 5: So what is in the Budget? • Investment in transport, electricity transmission and ultra-fast broadband • Social infrastructure investment in schools, hospitals, housing and student loans • Funded in part by the partial privatisation of energy SOEs and Air New Zealand
Evaluation of the Budget • It is a cautious budget, fitting firmly within the National Party’s manifesto three years ago. • It represents a shift away from government involvement in favour of private involvement. • It is likely to reinforce growing inequalities in New Zealand’s income distribution. • There is some recognition of the need for investment in social infrastructure.
Point 6: Welfare Reform • I want to finish by talking briefly about an issue that was not mentioned at all in the Budget speech – welfare reform. • The government set up the Welfare Working Group last year, and the Budget’s background papers make one reference to the Group’s recommendations:
Welfare Reform “On 22 February 2011 the Welfare Working Group made 43 recommendations to the Government on options to reduce long-term benefit dependency. Ministers have directed officials to develop advice for consideration. Many of the recommendations would result in large up-front costs if adopted. The Government will respond to the Welfare Working Group’s report later in 2011.”
Motives for Welfare Reform I think it is fair to say that the Welfare Working Group reports were based on two considerations: • Trends in beneficiary numbers were said to be unsustainable. • People ‘choosing’ to be on benefits were said not to understand that paid employment is the way for their family to escape poverty.
100,000 200,000 300,000 400,000 500,000 Number of Main Benefits 0 1998/99 Main Benefits Number on all 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
Employment Ratios in the OECD 10 20 30 40 50 60 70 80 90 0 TUR POL HUN ITA ISR SVK Average 2006-08 MEX BEL GRC KOR LUX FRA ESP CZE OECD SVN BRA CHL Average 1995-97 or first available period RUS PRT IRL EST DEU FIN JPN AUT USA GBR AUS CAN NLD NZL SWE NOR DNK CHE ISL
Welfare Reform • I think the foundations of the Welfare Working Group’s analysis were misconceived. • I am very anxious at how the recommendations will be received by the government. • This is a case, I think, where we need to insist that social security is our response to hard times and not the government’s to throw away.
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