Budget 2021 Is a Major Shift of the Economic Dial to the Left

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Your humble taxpayer advocates and analysts spent Thursday morning working through the Budget 2021 papers.

I’m afraid to tell you that from a taxpayer perspective there are no redeeming features of this Budget. It represents a major shift of the economic dial to the left by rejigging the tax and transfer system strongly towards those not in employment.

And there’s yet another broken promise. As predicted by the Taxpayers’ Union, Grant Robertson’s ‘no new taxes’ promise is out the window. He’s foreshadowed a new Unemployment Insurance Tax – to operate like ACC, where unemployed will get 80% (that’s not a typo) of their income if they lose their job.

The Government’s spin is that this is the ‘Recovery Budget’ but the sole economic plan is to hike benefits. There is no reference to productivity in the material we’ve seen, and the only help for business is an expansion of an initiative for MBIE bureaucrats to teach businesspeople how to sell things on the internet.

Labour Is Out of Control

Despite significant improvement in the economic and fiscal outlook, Grant Robertson has decided we are now in a permanent emergency.

• Benefit increases pushed through last year as part of our “Covid Response” have been entrenched and expanded – even while unemployment is forecast to fall. The cost of this amounts to $3.3 billion or $1822.22 per household.

• The “Covid Recovery Fund” has been raided for all and sundry poor-quality spending. Here’s a small(ish) example: $527 million is being used to expand the rollout of so-called “free school lunches”. Strangely, this measure is not only linked to COVID, it is also justified in the Budget documents as a “job creation” measure for 2000 roles. For those following along, that’s a cost of $263,500 per job (far more than the jobs lost due to the tax taken in the first place!).

• With the economy running stronger than expected, taxpayers should be picking up less of the tab – but government spending is forecast to run nearly $14 billion ($7,722.22 per household) higher between 2022 and 2025 than forecast in December.

It’s one thing to prop up the economy when we’re all locked inside, but now we’re (mostly) back to normal, isn’t it time to turn off the tap?

Return to 1980s-Style Social Welfare Will Reduce Long Term Living Standards

The benefit hikes announced yesterday will reduce the incentive for Kiwis to work, and result in more intergenerational unemployment poverty.

Economic analysis in the United States over recent weeks suggests that if you increase unemployment benefits too high (as Biden has done) people simply won’t show up to work – one reason why experts have said employment growth there has been so disappointing. With large benefit increases on the way, we risk making the same mistake: why turn up to work, when staying home pays so well?

Unlike President Biden’s relief, our Government is locking in these measures permanently and with their new policy to link benefits to wage growth, the problem doesn’t go away even in a hot economy.

Labour rightly applauded Bill English’s targeted social investment approach – to get people off welfare and into work. Labour’s abandonment of that approach will see higher intergenerational welfare dependency.

Making Trains at Home

In the 1980s we learned the hard way that making everything at home is an expensive way to live. Forty years later, the Government has decided to rekindle the spirit of Muldoon and begin making KiwiRail’s equipment in Dunedin rather than buying it in from overseas. The total increase in funding for KiwiRail will cost taxpayers $722.22 per household.

Grant Robertson’s New Unemployment Tax

And if that wasn’t enough, we can reveal the Government is doing a deal with the unions to introduce an expensive new unemployment insurance programme. The scheme will cover 80 per cent of incomes for those who become unemployed. That sounds generous – and it is – if the scheme follows similar European models, it will mean a new tax.

Health Sector Sucks up Billions More

Health takes the lion’s share of new spending – with more than $4.6 billion allocated to the sector alone through 2025. More than two-thirds of that amount is just allocated to support budget-busting DHBs. But the Government should read our reports on health productivity – unless the sector focuses on becoming more efficient and catching up with other OECD counterparts, our health system will continue to be an unpredictable liability.

Joe Ascroft, our consulting economist who joined us in the lock up, is equally unimpressed:

The Economist’s View

This time last year, the country was staring down economic armageddon. Coronavirus had all-but closed the economy and near-term forecasts for unemployment, debt, and economic growth were extremely dire.

A year on and the economic environment is better than all but the most optimistic of forecasts. Yet, even as unemployment sits at 4.7% (forecast to fall further) and economic growth is again firmly positive (expected to peak at 4.4% in 2023) debt is still expected to climb considerably reaching a peak of $184.2 billion in 2024 (46.9% of GDP or $102,333.33 per household).

While that is considerably better than even Treasury’s forecasts in December (debt was then expected to peak at $194.2 billion – or $5,555 more per household than today), the Government has taken advantage of the rosier economic forecasts to spend even more over the forecast period than had been forecast just six months ago. Between 2022 and 2025, government spending is now expected to cumulatively come in $13.9 billion ($7,722.22 per household) higher than in December.

Normally you might expect forecast government spending to come in lower with the economy tracking better (lower unemployment should mean less social spending), but clearly the Government has chosen to take advantage of the moment and press on with some of the more expensive items on their policy wish list.

The Big Picture

It’s now been a decade since New Zealanders last received a tax cut (legislated in Budget 2010, taking effect in 2011) – but main benefits have been increased four times (three times under Labour and once under National). Instead, a new tax is in the pipeline to fund the Government’s planned unemployment insurance scheme.

At some point, something has to give. With the global economy opening up and opportunities to work overseas expanding, many taxpayers will be thinking seriously about moving overseas to earn more and pay less tax. That could be the start of a nasty downward spiral – as high-earning taxpayers move overseas, the burden of Government spending grows with higher taxes or debt required to fund the gap.

Obviously the circuit breaker is stronger growth and higher incomes – but there was no sign of any focus on that problem in today’s budget.

More to Come

We’ll keep you in the loop as we continue to work through the detail.

With the new economic figures, our official Government debt clock has been updated. Keep an eye on www.debtclock.nz – it’s slowed, but only a little…

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