Caygill’s Budget problem: to win hearts and minds

Press, 22 July 1989, Page 20

Caygill’s Budget problem: to win hearts and minds

Pattrick Smellie,

in Wellington, looks at what

may be in store in the Budget next week

Next Thursday’s Budget will be a test both of how much the Government has changed, and how much it is staying the same. A large part of its function will be to cement in the aspects of Rogernomics that the Cabinet is sticking with — principally continued deficit, debt, and inflation reduction. The Minister of Finance, Mr Caygill, is expected to announce a financial deficit — which excludes asset sale and S.O.E. debt repayment receipts — of around 1 per cent of gross domestic product, or about $7OO million. He will then be in cooee of a true Budget surplus to announce just before the 1990 General Election campaign begins. But it is this year’s Budget which sets the scene for most of the period running up to the election. And it appears that it will be this Budget, and a series of initiatives to follow it, which will see the Government attempting to honour the social policy agenda outlined by the Prime Minister, Mr Lange, during the 1987 election campaign. The Royal Commission on Social Policy, which the former Finance Minister, Mr Roger Douglas, attempted to supplant with the flat tax package, will be honoured. What remains to be seen is whether it will be honoured in a way which is any more electorally acceptable than the genuine but stumbling attempts to honour the Treaty of Waitangi. The principal area where announcements are definitely on the way next week is the reform of National Superannuation. Just what the Government will propose is extremely murky. It is clear that early enthusiasm by the Minister of Social Welfare, Dr Cullen, for a compulsory fully funded scheme is now out.

He seems to have been persuaded that a scheme which compelled every working person to contribute a large, fixed proportion of their income into a personal super, savings scheme was not politically viable. All the more so, because the Government is firm it will not return to tax incentives for retirement income savings. What appears more likely is a formula along lines suggested by economists from Colonial Mutual and the broking firm, ANZ McCaughan, who see a universal part-pension funded from tax at a lower level than national super.

On top of that, they suggest employers may face an extra impost, not unlike A.C.C. levies, to go to an earmarked fund which would fund a proportion of future pension spending. This would provide an element of the “social insurance” concept which Dr Cullen has coyly punted in a couple of recent speeches. It is quite possible that it will be a White Paper-style announcement.

The, Government is putting its proposals up with a view to implementation only after next year’s election is over. That gives a year in which detail of funded elements of the scheme could be worked through. Trying to second-guess in this area, however, is fiendishly difficult. Officials are keeping details close to their chests, and the superannuation industry has, on the whole, failed to come to grips with the absence of tax incen-, tives.

That possibly reflects the ex-

pectation that National will win next year’s election and restore tax breaks for long-term savings, even though there is no indication of how generous they might be. While financial sustainability is the driving force for reform, political sustainability is the key to whether any reform will work.

It is to be hoped, but is perhaps too much to expect, that the Government has given thought to a scheme which can survive a National win. If it has not, another year or more may

be lost while everyone waits to see what the new Government dishes up for them. In the short term, that will mean less productive investment by the super, funds, which are major players in the economy. The commercial property sector can whistle Dixie for another year, and more employer-funded schemes can be expected to close, at least to new entrants.

Marrying the long-term financial disciplines of superannuation with the woefully short horizons of the average politician is a naturally combustible mixture. But those New Zealanders who are most affected — those under 40 — are becoming increasingly aware and realistic in their expectations. Tying into the superannuation reforms are expected to be announcements on passage to a standardised welfare benefit system. In this all beneficiaries will work from the same base benefit, instead of the plethora of different rates, entitlements and rationales that exist at present.

While this will create some losers who fall within the Labour vote, such recommendations formed an integral part of the

Royal Commission’s report — a powerful totem for the Government in the face of its in-house critics. The reforms are also likely to find favour with the general public, who are at present paying around $3 out of every $4 in income tax on social welfare, and who want to see savings.

These reforms will also open the way for fairer and more rational transitions between the tax and income maintenance systems. There are particular problems, with people on benefits who lose out by taking up work, which are crying out for reform. Changes to accident compensation also appear to be a possibility, with suggestions that the scheme, already financially troubled, be extended to cover sickness at the expense of minor accidents.

This too is a minefield for the Government. Any increase in A.C.C. levies on top of extra levies for the new super, scheme would threaten a substantial extra tax burden on the business community, struggling as it is to believe there is an economic recovery under way. While the general flavour of the Budget will be one of fiscal restraint, the major exception is expected to be education. That is partly because more needs to be spent on New Zealand’s skill levels in a world which is fast overtaking our education system. As the Planning Council said this week: “The traditional notion that one of New Zealand’s advantages was a well-educated workforce is no longer valid.” But generosity in education also reflects Mr Lange getting what he wants, while other Ministers have little or no clout for their

pet projects. The biggest new spending in education is expected ip the early childhood field, recognised even by the Treasury to be a vital and under-resourced area.

On the fiscal front, there may be room for a few surprises, some analysts believe. The lower than expected deficit for the last financial year prompted recent debate about whether this month’s GST increase was really necessary.

Moreover, the Treasury is likely to be forecasting total tax revenue on the basis of a strengthening economic upturn going into next year. They will also be expecting slower growth in spending on unemployment and other benefits where the casualties of restructuring are taking shelter. If such factors have given the Government more room to move than it expected, it is possible the forecast financial deficit may be lower than Mr Caygill’s target of 1 per cent of GDP. That would be a boost for financial markets. Combined with the resumption of some long-term borrowing by the Government, it could provide renewed impetus for lower' retail interest rates. <’ The lack of new Government borrowing at the three to fiveyear end of the market has recently been blamed as part of the reason for interest rates remaining stuck where they, are. The benchmark indicator for future mortgage rates is fiveyear Government stock. Arid it is falls in those stock rates which the Reserve Bank wants to see before it will let other rates fall.

Yet the sheer unavailability of such stock in recent months has been keeping long-term interest

rates up. This is because the Government has been doing almost all its borrowing in the short-term money market. Most observers believe the main round of spending cuts was announced in the March miniBudget, and little more is expected bn this front, bar the benefit reforms mentioned already. Smaller reforms may include moves to deregulate chemists, with the aim of cheaper drug bills for both consumers and the Government. A Chemists Bill is in draft already, and the Government is known to be unhappy with the closed shop arrangements which allow chemists to charge average mark-ups of around 60 per cent, against a rough average of 40 per cent among other retailers. The Government also has plenty of scope for a large assetsales programme, allowing a big public debt reduction over the next year. Obvious candidates are parts of Telecom, and State forests, which could raise around $1 billion each. To these can be added another $1 billion for sales already in the pipeline such as the Rural Bank, and the Maui Gas contracts and Synfuels plant. Debt repayments from Electricorp could yield another $1 billion, while a further $5OO million could come from the Housing Corporation. While analysts foresee a capital injection of up to $5OO million for the Railways Corporation as a likelihood, they still see the Government having around $4 billion in various receipts to apply to debt reduction. That would provide the biggest Table 2 Budget surplus the Government has achieved so far. So the message from the Budget will be one of fiscal restraint and social caring. While Mr Caygill is said to be drafting much more of the Budget personally than his predecessor, Mr Douglas, ever used to, he is essentially trying to meld two strands of the Government’s approach which he embodies, but is not the creator of. He is in the tricky position of trying to prove that Labour’s head is still hard, while its heart is still soft, without spending much extra money. The Government has a big selling job to do on that mission if it is not simply to alienate both camps, by squeezing social services through to the election without taking any more bold steps on the economic front. Mr Caygill is not big on selling. He has made no pre-Budget “curtain-raising” speeches. But there are rumours that the Government will swing into high gear to sell its superannuation changes with a new round of publicly funded advertising. One of the frustrating factors for Mr Caygill must be that his first Budget looks unlikely to get a clear run to make its own impact where it arguably counts most — among investment decisionmakers and interest-rate setters.

While Mr Caygill has apparently irked Mr Lange by taking a laid-back attitude to Mr Douglas’s new manifesto this week, he is nonetheless somewhat upstaged by those events. And as soon as the Budget is digested, attention will again go back to Labour’s internal wranglings with the run-up to the Cabinet reshuffle early next month. The Budget presents the opportunity for the Government to make a fresh start if it is ever going to. In the circumstances, it will need to be a humdinger.