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Crisis budgets and returns to prudence

Summary:
The Spinoff asked me for comment ahead of last week's budget.Here's some of what I'd told them, hit the link for the rest:The government should have two priorities in this budget. First, and most importantly, the health system needs to be ready for the medium-to-long term changes that the pandemic has forced on the country. Second, the government needs to ensure the temporary measures necessary are in place for all of us to deal with the current mess.Those two priorities lead to one unavoidable consequence. Permanent spending increases – increased spending on matters unrelated to the pandemic that are locked in and hard to reverse – means less room for dealing with the pandemic.Why is that the case? The government will need to take on debt to deal with the current crisis. Tax revenues

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The Spinoff asked me for comment ahead of last week's budget.

Here's some of what I'd told them, hit the link for the rest:
The government should have two priorities in this budget. First, and most importantly, the health system needs to be ready for the medium-to-long term changes that the pandemic has forced on the country. Second, the government needs to ensure the temporary measures necessary are in place for all of us to deal with the current mess.

Those two priorities lead to one unavoidable consequence. Permanent spending increases – increased spending on matters unrelated to the pandemic that are locked in and hard to reverse – means less room for dealing with the pandemic.

Why is that the case? The government will need to take on debt to deal with the current crisis. Tax revenues will be down and spending will have to be higher. But while the Public Finance Act allows this kind of response to emergencies, it also requires the government to think about the path back to prudent debt levels. This requirement makes a lot of sense: we just cannot know when the next crisis will hit; the Alpine Fault is overdue. We will need room to deal with the next crisis too.

Returning to prudent debt levels after this is all over will be much harder if the government locks in increases to baseline expenditures; that would limit how much debt the government could afford to take on now. An adequate response to the current crisis requires fiscal discipline about matters unrelated to the pandemic response.

After lockup ended, I wondered why the government didn't seem interested in the tiny investments it would take to be able to start reopening the border to safe travels: travel from safe places, or under strict quarantine and testing requirements.

I had a bit of a chat with Duncan Grieve about it at Spinoff

Then I filed this with Stuff:
The Budget headlines will focus on the extent of the Government’s additional support for households and businesses through extensions of the wage subsidy programme, worker retraining initiatives and job creation schemes in areas like environmental improvement and house-building.

The Government avoided locking in too many increases to entitlement spending. But it will still take until 2034 for its net debt levels to fall to levels twice what they were prior to this crisis.

What seemed more absent was a vision for economic recovery grounded in some of the advantages New Zealand now enjoys. The Budget presents a vision of a Government-led recovery with a comforting message: the Government is there to provide support, jobs or retraining — a sealed lifeboat bobbing on rough seas until the storm clears.

But small investments in setting rigorous quarantine facilities so others can safely join our lifeboat would pay off rapidly — and many times over — while enabling different visions.

One bit that did worry me during lock-up: the budget documents project net debt rising to well over 50% of GDP, but only dropping to 42% of GDP by 2034. I asked Minister Robertson whether he viewed 42% Debt-to-GDP ratios as being the new long-term fiscal prudence, or how much longer it would take to get back to normal levels. Rather than answer the question (which I thought was a fairly simple one), he said he viewed himself as acting prudently and in line with his obligations under the Public Finance Act. But I hadn't said that taking on debt was imprudent. I had wondered about whether the end point in the forecasts was just because they couldn't see getting back to prudent debt levels within the forecast window, or if they'd revised their view on what counted as prudent. 

However, Government borrowing is considerably greater at $140b over the next five years. New operating spending, excluding welfare and health, peaks in 2022, long after the economy is expected to have turned the corner.

It is also hard to find evidence of the reprioritisation referred to by Grant Robertson. Nearly every part of the public service sees new spending.

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