From BEFU to PREFU, from budget to election, our politicians are having to flip and flop to make their policies fit the times
Sometimes Michael Cullen can be too smart for his own good. This looks like being one of those times.
Voters will go to the polls next month, wondering how on earth the Clark-Cullen Labour-led coalition could suddenly convert nine years of prosperity into a future of ballooning budget deficits and borrowing as far ahead as Treasury eyes can see.
The cautious confidence of Treasury’s Budget Economic Forecast Update [BEFU] last June has evaporated into a cloud of gloomy uncertainty in its Pre-Election Economic Forecast Update [PREFU] last Monday.
Projections of GDP growth and employment growth have been cut. Forecasts of consumer price rises have been increased. Projections of wage increases have been trimmed. A new line showing a rise in unemployment has been introduced.
Weaker growth will reduce Government tax revenue by around $900 million a year for the next three years. Spending on benefits will increase by about $500 million a year over the same period.
New policies—such as Kiwisaver and the increased education spend—will cost around $480 million more each year than previously expected.
Labour’s happy history of budget surpluses and Crown debt reduction has been wiped away by new projections of substantial deficits for the next nine years.
Cullen’s favorite budget line, the true operating balance in the Government’s books—OBEGAL, excluding retained revenue from the NZ superannuation fund—will move into deficit of $31 million this year and the deficit will grow to $3.2 billion by 2012/13.
Between next year and 2013, net core Crown debt is expected to rise from 5.3% of GDP to 13.2% of GDP. Government debt servicing costs have been hiked by around $500 million per annum.
The really bad news is that this gloomy update is not up to date. The number-crunching for the PREFU finished on 28 August—before the perfect storm rolled out of Wall Street and the big bipolar flip began.
The notion that traders in the global money market are bipolar was advanced in yesterday’s New York Times in a fine piece of commentary by David Brooks, author of "Bobos In Paradise: The New Upper Class and How They Got There".
“When these traders are in their manic phase, they flood countries and economic sectors with capital. Without meaning to, they dissolve the moral fabric and spoil their own profit zones… Then, when things go bad, the social contagion sweeps the other way. One minute there’s an ocean of credit, the next minute there’s barely a drop.”
Brook says leaders around the world have to figure out how to stabilize economies amid these global capital flows.
That is why Helen Clark and Michael Cullen and John Key and Bill English are now dancing to the Bipolar Flip.
Clark and Cullen started their flip with the budget last June.
Their cunning plan was to kick in a “modest, prudent” tax cut just before the election. It would sweeten the voters’ mood as they went into the polling booth, and take the edge off National’s tax cut pledge.
The strategy was to show how Labour could manage the long-suppressed appetite for lower taxes, without cutting Government spending or increasing its borrowing.
As soon as National unveiled its more ambitious tax cut programme, Labour would hammer them to reveal just where State spending would be cut, or how much would need to borrowed.
Unfortunately for Labour strategists, the flip has flopped. The combined impact of the PREFU and the global credit crunch looks like blowing the cunning plan to hell.
Cullen has compromised his nine-year-old mantra that borrowing to fund tax cuts is not prudent economic management. That attack weapon has now lost its edge on the twin rocks of his last budget and the borrowing requirements revealed in the PREFU.
Another Labour attack weapon—fresh policy announcements saved for release during the campaign—has also been blunted by the PREFU.
In the current environment, new spending commitments will look like desperate, irresponsible vote-buying—especially when cost over-runs on recently implemented Labour initiatives have started showing up.
Key and English may find voters more receptive to a judicious pruning of State spending as they join the dance in Campaign 08.
Saving National’s tax policy announcement until the PREFU was published has proved to be sound strategy. Its content shows the caution was fully justified.
Announcing that the gloomy new forecast required some scaling back of National’s planned tax package also looks like a sensible response—conditioning voters not to expect too much too soon, but confirming that National remains committed to a programme of tax reduction.
In Campaign 08, Labour and National are flipping back to their traditional positions—Labour expanding the State’s role in the economy and National releasing resources to encourage private sector-driven growth.
Think back to where the two parties were positioned in 1984—another campaign dominated by depressing global market forces—and you will see what I mean about the Bipolar Flip factor at work in this campaign.