Labour/Greens budget rules give wiggle room on debt reduction and surpluses, but largely in line with current forecasts

A Labour-Greens government will target surpluses, reduce government debt almost in line with current forecasts, focus on long-term financial challenges, maintain government expenditure at historical levels and ensure a progressive and fair taxation system.

Releasing a set of Budget Responsibility Rules for if they form a government after the 23 September general election, Labour finance spokesman Grant Robertson and Greens co-leader James Shaw said the promises provided a foundation for sound fiscal management.

The rules give the parties a bit of extra room on the debt and surplus tracks to the government’s current forecasts. They allow for another two years to return net government debt to 20% of GDP. And they won’t hold a Labour-Greens government to maintain operating surpluses every year, but rather over an economic cycle.

The parties promised to set up an independent body to oversee whether they were sticking to the rules. The announcement should be a “clear and direct statement to New Zealanders that we will manage the economy carefully and be held to account,” Robertson said.

Labour and the Greens last year signed a memorandum of understanding that the parties would look to work together to form a government after the next election.

Fiscal promises include:

• Running a government ‘OBEGAL’ surplus over the economic cycle unless there is a significant natural event or major economic shock.
• To reduce the government’s net debt to GDP ratio to 20% within five years of forming a government.
• Restarting contributions to the Super Fund
• Maintaining government spending at about 30% of GDP (versus a high of 34% during the financial crisis)
• Establishing a group of independent experts to advise on changes to New Zealand tax policy

“In government, we’ll be a steady pair of hands. These are economic principles but we’ll measure our success by how many children we lift out of poverty, how many rivers we make clean enough to swim in, and how much progress we make towards a low carbon economy,” Shaw said.

“The Greens and Labour are very much on the same page about this. This is what a stable, responsible, alternative government looks like.”

Wiggle room

The government’s current fiscal track, with forecasts released in December 2016, is for it to run operating balances excluding gains and losses (OBEGAL) of surpluses every year over the short to medium term, growing from 0.2% of GDP in the year to June 2017 to a 2.7% surplus by 2021.

Meanwhile, Treasury expects net core government debt to GDP will drop from 24.6% in 2016 to 20.3% by June 2020 and 18.8% the following year.

Labour finance spokesman Grant Robertson acknowledged the longer debt reduction timeframe, but told interest.co.nz that the extra “grace period” was to allow a Labour-Greens government to kick-start extra infrastructure spending from day one. Housing, rail, road and broadband spending were all required on top of that for social initiatives, Robertson said. The Greens' Shaw added water infrastructure, particularly in Auckland, was on the list.

Resuming Super Fund contributions was a priority, although Labour would first like to see the government’s 25 May Budget and forecasts before giving a definitive view on spending promises, Robertson said. The government is currently targeting resuming contributions to the Super Fund once its net debt to GDP ratio hits 20% - about the start of 2021 on the current track.

Labour and the Greens understood the importance of reducing government debt, Robertson said, raising the track-record of the previous Labour-led government in doing so.

The parties would aim to run a government surplus each year, although the cyclical nature of the economy and given various shocks might occur, they settled on language to run a surplus over the economic cycle, he said.

Shaw said the parties did not want to lock themselves into a promise of running surpluses every year given the risk of surprises once they opened the government books. Government spending should also be counter-cyclical, meaning government should spend in downturns to support the economy while pulling spending during cyclical upturns, he said.

Tax change timelines differ

Meanwhile on tax, Robertson acknowledged the different timeline stances held by Labour and the Greens on tax system reform. Labour leader Andrew Little recently said the party would go into the 2017 election with a ‘no change’ tax stance.

Robertson clarified that any proposals on structural changes to the tax system would be sent to the new working group to assess ahead of the 2020 election. However, there would likely be minor changes including Labour’s already-announced bright line test expansion from two to five years, and the removal of secondary tax, which would effectively be a fiscally neutral change.

It was hard to comment on how potential tax policy timeframe conflicts would be dealt with before seeing how many votes each party received at the election, both Shaw and Robertson said.

Shaw said his party agreed with setting up the tax working group again. However, the Greens were still keen to take a tax reform package to the electorate in the run-up to the election, which would be announced closer to the time. The package would likely be similar to the party's current policy stance, he said, referencing property speculation and climate change as particular points of focus.

Both parties in recent weeks have also been calling for a tax on water extracted from the ground and exported.

See the full set of rules released by Labour and the Greens below:

THE GOVERNMENT WILL DELIVER A SUSTAINABLE OPERATING SURPLUS ACROSS AN ECONOMIC CYCLE.

An OBEGAL surplus indicates the Government is financially disciplined and building resilience to withstand and adapt to unforeseen events. We expect to be in surplus every year unless there is a significant natural event or a major economic shock or crisis. Our surpluses will exist once our policy objectives have been met, and we will not artificially generate surpluses by under funding key public services.

THE GOVERNMENT WILL REDUCE THE LEVEL OF NET CORE CROWN DEBT TO 20% OF GDP WITHIN FIVE YEARS OF TAKING OFFICE.

To give future generations more options, reducing government debt has to be a priority. By setting a target, provided that economic conditions allow, we will be able to make responsible debt reductions and invest in housing and infrastructure that strengthen our country and prepare us for future challenges.

THE GOVERNMENT WILL PRIORITISE INVESTMENTS TO ADDRESS THE LONG TERM FINANCIAL AND SUSTAINABILITY CHALLENGES FACING NEW ZEALAND.

The Government will prioritise responsible investments that enhance the long term wellbeing of New Zealanders - such as restarting contributions to the Super Fund. In addition we will invest in infrastructure to support our growing population, and reduce the long term fiscal and economic risks of climate change.

THE GOVERNMENT WILL TAKE A PRUDENT APPROACH TO ENSURE EXPENDITURE IS PHASED, CONTROLLED AND DIRECTED TO MAXIMISE ITS BENEFITS. THE GOVERNMENT WILL MAINTAIN ITS EXPENDITURE TO WITHIN THE RECENT HISTORICAL RANGE OF SPENDING TO GDP RATIO.

During the global financial crisis, Core Crown spending rose to 34% of GDP. However, for the last 20 years, Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend

THE GOVERNMENT WILL ENSURE A PROGRESSIVE TAXATION SYSTEM THAT IS FAIR, BALANCED, AND PROMOTES THE LONG TERM SUSTAINABILITY AND PRODUCTIVITY OF THE ECONOMY

Taxation is an important tool for rebalancing the economy and setting our country on a path to an environmentally and economically sustainable future. The Government will establish a group of independent experts to advise on how best to achieve this.

The parties also released a short Q&A on the announcement:

Why have we developed the Budget Responsibility Rules?

Fiscal policy is not an end in itself — it is a path to good economic management that improves the lives of New Zealanders, ensures we live within our means, strengthens the social fabric of our country, and makes sure we get the most efficient use of our resources.

For New Zealanders to have enduring quality of life, prosperity, and security, governments need to manage revenue and spending decisions carefully. Good fiscal management is a core part of what it means to be a good government.

Measuring our success in government

The credibility of our Budget Responsibility Rules requires a mechanism that makes the Government accountable. Independent oversight will provide the public with confidence that the Government is sticking to the rules.

We will establish a body independent of Ministers of the Crown who will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public, and will cost policies of opposition parties.

We expect to be held to account by the people of New Zealand. That is why it is important to have clear indicators of success, and independent oversight.

In government, we will develop a comprehensive set of measurements to assess our progress and policies, across a range of social, environmental and economic indicators.

We will report on our successes at the Budget and Half Year Fiscal and Economic Updates.