Government and Fiscal Policy

Structural Deficits Require Structural Solutions

Thursday March 08, 2012

 

The latest financial statements for Treasury for the seven months to January 2012 show a big hole in the fiscal accounts. The response from Labour’s David Parker, is that this highlights that the Government has a structural deficit problem, not just a short term issue related to the business cycle. That is, the Government would still face a deficit under its current policy settings even if the economy were out of the recession and back on its long-term growth track.

 

The tax take is well down on the Treasury’s forecasts, with income tax 3.0% below the forecast, GST 4.0% and corporate tax 5.1%. Tax revenue from a Total Crown perspective, which includes the activities of Crown entities and State Owned Enterprises, as well as the core government departments, is around $1 billion (2.9%) below forecast for the seven months. Core Crown revenue however, is $1.4 billion (3.9%) below the forecast.

 

While expenses are also below forecast ($794 million, or 1.5%), the Government’s operating balance before gains and losses is $473 million (12.3%) below target at this point in the fiscal year. This suggests that the deficit is worse than the target, of an annual deficit of $10.8 billion. While the Minister of Finance has acknowledged this, the unanswered question is, how much worse?

 

The lower than expected levels of GST (also the single largest below forecast item at $345 million, or 4%) might be taken as an indicator of weak consumer sentiment. It may also be a reflection of the rebalancing of the economy towards greater saving. Nonetheless it has short-term implications for business profits and employment, as well as the fiscal accounts.

While the short-term impacts are important, we have to keep the bigger picture in mind and what is going to be done about it. Parker says Labour has learnt its lesson about addressing structural problems in the economy. He argues that trimming government expenditure won’t be enough to resolve a structural deficit, and that major tax reforms are required too.

Arguably there is scope for improvements to the tax system that could help both the Government’s books and the economy as a whole. And this is likely to be part of a wider set of solutions about rebalancing New Zealand’s economy. After all, economists believe that people (and businesses and investors) respond to incentives.

 

Changing the structure of the New Zealand economy involves actually increasing productivity and earning more money from the rest of the world through our exports. This has to come from more than just a focus on the Government’s books, be it on the expenditure or the revenue side of the ledger. Having tabled the issue of the structure of the economy, this needs to be the focus of attention, not just the Government’s latest (debt) statistics.