This week the New Zealand Government reported a weaker than forecast fiscal position for the first four months (July to October) of Fiscal 2010/11. The deficit is $1.9 billion behind forecast, much of this due to a lower tax take on the back of weaker than expected economic growth. The Minister of Finance has announced another review of public spending for the New Year.
In my view, the Government isn’t going to achieve much in the way of fiscal consolidation until it accepts that a large part of the fiscal problem is structural, not cyclical. At the time of the May Budget we gave the Government high marks for the structural changes to the tax system (lower income taxes and higher consumption taxes), high marks for making further progress in reining in the deficit and public debt, but low marks for recognising the structural nature of the post-GFC fiscal challenge.
Twice in New Zealand’s history, Government’s have brought down challenging and difficult Budgets, the nicknames of which have found their way into the Kiwi lexicon: Arnold Nordmeyer’s 1958 “Black Budget” and Ruth Richardson’s 1991 “Mother of all Budgets”.
All around the developed world, Governments are grappling with large structural deficits and high and rising levels of public debt. They are making politically challenging decisions as the reality of lower living standards hits wallets. Fortunately, New Zealand isn’t in the same boat, but this is primarily because of difficult decisions that have been taken earlier.
At Budget 2010 the Treasury’s economic growth projections were higher than ours, but given the uncertainty in the outlook, they were not outside the bounds of possibility. The lower growth outlook is becoming entrenched as households focus on getting their balance sheets back into order. That has clear implications for tax revenue, budget deficits and public debt.
It is time for a really hard look at government expenditure. This is not the time for tweaks; it’s time for another Budget to earn a nickname.