Caygill avoids quick fix

Press, 28 July 1989, Page 4

Caygill avoids quick fix

By TONY RAYNER, professor of economics at Lincoln College With the public popularity of the Government at very low levels, the issue of prime economic interest in David Caygill’s Budget was whether he would show the same fiscal responsibility that characterised the Budgets of his predecessor. While the temptation to seek the quick expansionary fix advocated by some economists must have been considerable, in the event it was avoided in the interests of longer term stability and growth. A predicted financial deficit of $729 million, with a targeted surplus in the next year, will prove valuable in bringing the public debt ratio down to levels that are less damaging. They will also be an important aid in enabling interest rates to fall. Both of these factors will assist the sustainability of future growth. A deficit of the size predicted is fully in accord with that recently advocated by the Economic Monitoring Group of the Planning Council as being appropriate at this stage of the business cycle. Once the decision had been made to stay within the bounds imposed by fiscal responsibility, there were severe restraints placed on the Minister’s options for new expenditure initiatives. With the recently introduced increase in GST and the effect of fiscal drag pulling up income tax receipts, total tax income is projected to rise 13 per cent. In contrast, expendi-

Commentary

ture will rise only 6 per cent, the difference being largely required to reduce the financial deficit. Once again, taxation has risen as a proportion of gross domestic product. This is an almost inevitable consequence of the necessity to reduce the deficit from the 7 per cent of G.D.P. that existed five years ago. The general underlying economic philosophy of the Budget is simply a continuation of that set by Mr Douglas. The point of interest then becomes one of looking for the major new thrust on this occasion which can be interpreted as the new Minister putting his mark on policy. The Douglas Budgets produced major achievements in rationalising many aspects of economic policy with the intention of enhancing efficiency in the economy. The Caygill Budget has continued with the same aim of efficiency, but has focused his innovations in several areas of social policy. The changes in the A.C.C. put more responsibility on the individual in meeting minor costs, by reducing short term benefits payable after accidents. The savings from this allow A.C.C. benefits to be spread to those incapacitated by illness. Hopefully, this will resolve one of the greatest inequities in the present social policy of the Government. It should also promote greater individual responsibility and so

hinder the apparently inexorable increases in the costs of the scheme. Many of the other social policy reforms can be seen in this same light of promoting both greater efficiency and equity by better targeting and rationisation. While there are some aspects to the changes in superannuation that can be viewed in this way, it is nevertheless very disappointing that there was no attempt to make a more radical change in this area. Although a funded scheme would be more costly to present taxpayers than the continuation of the pay-as-you-go method, it would have given a much-needed boost to the country’s savings rate. It would have also made it more probable that there will be something to pay pensions from, once the baby bulge has reached retirement. A minor complaint concerns the abolition of the Economic Development Commission. The E.D.C. has produced many valuable reports in its brief time, pointing out areas of required reform in the economy. While it would be pleasant to think that all such problems have now been overcome and that the task of the E.D.C. has been successfully accomplished, such an assumption is probably rather premature, in spite of the considerable achievements of recent years.