Wellington, May 2, 2022
With inflation worsening, mortgage interest rates rising, and businesses facing increasing shortages of goods and raw materials, many will be looking to this month’s Budget for relief.
Economists, business commentators and non-government political parties alike have been calling for the Budget to reset current government spending levels to take some of the heat out of the economy. But comments this week from the Finance Minister make it clear they are all going to be disappointed.
Not only has the Minister defiantly defended both the level and content of increased government spending since the outbreak of the pandemic but has also ruled out curbing spending or introducing tax cuts to help families struggling from the currently rapidly rising cost of living. His answer is more of the same, and more, rather than less, spending.
This time he says that his target is the health system, which the government largely ignored in the lead-up to the pandemic, leaving it so woefully unprepared that many of the restrictions introduced subsequently were more because of a fear that the health system would not be able to cope with the Covid-19 virus, than the virus itself.
While on the face of it the government’s belated commitment to better funding of the health system is laudable, it will be met with scepticism. After all, this is the same government that committed an additional $1.9 billion to the mental health system a couple of years ago, only to admit earlier this year that none of the additional funding has yet been spent and that consequently there have been no service improvements.
Yet, the government has no alternative but to continue its high spending policy. To do otherwise would be an admission of failure. Its constant refrain since coming to office nearly five years ago, and excuse for things not happening as it might wish has been blaming it all on apparent underinvestment by the previous government.
Given that nothing much has improved in that time and significant areas like housing and deprivation have gone backwards, the government can hardly turn round now with a recession looming and cut the very spending it said was not necessary.
Heavy public debt
However, New Zealand has been no different to most other countries facing the pandemic. Spending in critical areas had to increase to meet a wide range of hitherto unforeseen needs. Like others, we borrowed heavily, although not nearly as much as some of the world’s major economies, and now face having to repay those loans over time.
Now that the worst of the pandemic appears behind us, and economies are starting to return to more normal times, albeit with the global inflation spike and rising interest rates the pandemic has caused, the time has also come to return to more normal Budget times. And that means looking more closely at expenditure settings and whether the priorities set by the pandemic are as relevant now as they were two years ago.
That is where the challenge around the coming Budget begins. There is a balance to be struck between carrying on with Covid-19 Budget settings unchanged and paring some of these backs to address current circumstances. Neither Labour nor National is yet showing the finesse required to manage such circumstances.
Protecting Budget settings
For Labour, it is all about protecting existing Budget settings as evidence it knows how to manage the economy effectively. National, on the other hand, seems yet to have grasped fully the implications of the pandemic, and its impact on the Budget. It gives the impression that the country can easily return to pre-Covid-19 settings and expenditure levels and priorities, whereas its real opportunity – yet to be shown – is to position itself as the Party with the fresh ideas for the future.
By ruling out spending reductions or tax cuts, the Finance Minister has already begun the branding of this Budget as a genuine Labour Budget for the difficult times ahead. He has been finessing two broad lines which we can expect to be repeated more strongly and frequently in the lead-up to and aftermath of the Budget. The Prime Minister and other Ministers also will join in this refrain.
Labour’s first line of attack (and defence) will be to hark back to its claims of underinvestment by the previous government. It is to the credit of Labour’s media management strategy that it is still able to blame everything on the previous government, without public ridicule, after nearly five years in office.
That is normally an excuse new government can only use credibly in their first year or so in office until their own Budget settings kick in. But to be still running that line of argument nearly five years on and apparently having it accepted as legitimate is virtually unheard of, and a remarkable tribute to the current government’s powers of political spin over substance.
The second prong, which flows neatly from the first, is to dismiss any criticism of its new spending by demanding to know which essential services the Opposition wants to see cut. It will also shamelessly play the Covid-19 sympathy card of how this government’s spending kept people alive during the pandemic. (By unproven implication, more people would have died had National been in office).
The government is helped in this by a pliant media which sees it as quite appropriate to persistently demand the Opposition spell out where it would cut spending, but rarely if ever challenge the government on the purpose or quality of any of its additional spending.
Labour’s unstated ideological assumption is that all government spending is of itself good, regardless of value or purpose. It dismisses Opposition calls for performance targets and cost-benefit analyses as just codes for spending cuts. The approach easily enables Labour to portray itself as kind and caring, concerned more about people, and paint National and ACT as just focused on the money and looking after “the rich.”
This is the superficial level that debate around the coming Budget seems set to focus on. More detailed analysis, commentary and criticism will be confined to the business sections of the media, where it will be written off as the whining of special interest groups.
Opposition parties seeking to raise these concerns in the wider public environment will easily be portrayed as looking after “their rich business mates” or the “top end of the town.” And Labour will be hoping that the more households are struggling, the more resentment there will be of perceptions the better off are trying to look out for themselves.
Strategy for Election 2023
Labour pulled off a massive electoral victory in 2020, by its appeal to the majority of the “team of five million” over its handling of the pandemic. Mindful of this, Labour will now be hoping to mobilise the support of most of the country’s “team” of almost 1.9 million households in the vastly different circumstances of the 2023 election. New Zealand’s comparatively flat income distribution scale – with only 16% of households earning above $100,000 a year – makes this a far more achievable goal for Labour.
This month’s Budget will be effectively Labour’s opening shot in its 2023 re-election campaign. It will do its best to trap National and its allies in its headlights, as modern-day Grinches, planning to take away all the “good” spending Labour has made. National’s challenge is to avoid being caught in this trap while sharpening its argument that the main reason New Zealand households are suffering at present is that the rise in the cost of living is a direct consequence of this government’s economic management.
Its task then is to convince enough New Zealanders that the Finance Minister’s “more of the same” approach is not going to change things in their favour any time soon. However, so far, National seems to be playing into Labour’s hands.
The first indication of which of these approaches has the greater public appeal could come as early as the Tauranga by-election a month after the Budget.
Peter Dunne was a Minister of the Crown under the Labour and National governments from November 1999 to September 2017. He lives in Wellington.