Brian Fallow looks at spending by our most recent two governments in real per capita terms and finds stark differences

By Brain Fallow*

Tax cuts versus spending. The divergent fiscal priorities the two main parties will take to the electorate in September have been on display in the Budget and the Opposition’s reaction to it. 

The Government has opted to apply the benefits of a period of above-trend real growth, a recovery in inflation and exceptionally favourable terms of trade primarily to boosting households’ disposable incomes, chiefly through adjustments to income tax thresholds. 

By April next year we will have had seven and a half years of bracket creep pushing an ever-growing share of household incomes into higher tax brackets. It is hard to quarrel with some unwinding of that passive or stealth tax increase. 

The adjustments over-correct the lowest threshold for inflation but fall short of doing so for middle one. It would have had to rise from $48,000 to $53,500 not $52,000. The top threshold, above which sit the one in five taxpayers who contribute 62% of the income tax take, is left unchanged. 

And while the increase in Working for Families tax credits will be helpful in the lower reaches of the income distribution, the abatement rate has also been raised. As a result a household with a sole breadwinner on the average wage and eligible for Working for Families would face an effective marginal tax rate which has risen to 55c in the dollar – or 67c if she is still paying off a student loan. Getting to keep only one in every three extra dollars earned is tough. 

Labour’s response has been that all those years of fiscal drag have also been accompanied by a tight-fisted rein on government spending, the cumulative effects of which leave any number of public services seriously underfunded. 

Why is the Government dishing out $1000 a year of tax cuts to those on higher incomes, they ask, when people are living in cars, and mental health is in crisis and [insert portfolio issue here]? 

The Government’s reply invariably takes the form: How can you talk of underfunding when we are spending [insert some nominal aggregate sum projected over the next four years]! 

A valuable contribution to the debate

But, especially at a time when the population is growing rapidly and inflation is no longer AWOL, it is real per capita measures of government spending that are more relevant.

So the time series tracking spending in real per capita terms, and the shifting shares of spending by the major classifications, which Toby Moore at Victoria University of Wellington and Derek Gill at the New Zealand Institute of Economic Research have compiled is a valuable contribution to the fiscal debate. 

Now that we have had a ninth Budget from the current Government it is possible to compare its record on this score with that of the previous Labour-led administration. 

The difference is stark. 

The Government’s operating spend in the coming year will be just 0.6% higher in real per capita terms than in the fiscal year just ending.

And it will be 3.5% lower than it was in fiscal 2009, the last year of Michael Cullen’s tenure as Finance Minister. 

That in turn was 24.5% higher than it had been in 2000, before his first Budget.

That point-to-point comparison and the difference between plus 24.5% and minus 3.5% is a bit unfair to National, however. 

The change of government coincided with the nastiest recession since the 1970s, which boosted welfare spending in Cullen’s last year and meant a correspondingly higher starting point for Bill English. 

It also ignores the fact that the peak year for government spending in real per capita terms, and measured against the size of the economy, was fiscal 2011 when the Christchurch earthquakes hit an economy in the feeble early stages of recovery. 

Looking instead at the average real per capita spending over the terms of the two Governments, the Vic/NZIER data indicates a decline of 11.7% between Labour and National. 

The declining trend in core Crown expenditure since the 2011 peak, both in real per capita terms and as a share of GDP, is even more stark when you consider that it has coincided with a relentless rise in the share of the Budget taken up by New Zealand Superannuation. 

In 2009 super accounted for 12% of the Budget; in the coming year it will be 17%. In real per capita terms super will cost the taxpayer 35.5% more in fiscal 2018 than it did when National took office, against a comparatively gentle 7.5% increase over Labour’s nine years. 

The effect is almost entirely demographic. The entitlement parameters have not changed over the 18 years we are looking at. 

For the biggest ticket item, health, the opposite applies. Real per capita health spending next year will be 4.6% higher than in 2009, but that in turn was 26.7% higher than in 2000. 

At least the health spend has increased in real per capita terms under the present Government and held its own as a share of the Budget. 

Spending on education, by contrast, will be 7.7% lower in real per capita terms in the coming year than it was in 2009. 

Welfare spending, which peaked in 2010 in real per capita terms as the recession flowed through to the labour market, will have fallen 22.5% by the coming year, the Budget forecasts.

The National Government’s aversion to debt prevails

The Government’s interest bill in real per capita terms continues to fall too and in the coming year will be the lowest since 2010. In dollar terms finance costs peaked at $3.8 billion in 2015. 

But even with 10-year bond yields trading well below 3% the National Government’s aversion to debt prevails. Finance Minister Steven Joyce has been emphasising that while the Budget forecasts growing surpluses in the operating balance before gains and losses, a jump in capital spending on infrastructure is set to keep net cashflow roughly in balance and the ratio of net debt to growing nominal GDP continuing to decline. 

Currently 23% of GDP (when the rich country average is 71%), National’s target is to drive it down to between 10 and 15% of GDP by the middle of the 2020s. 

Labour and the Greens have set a target of 20% in five years. 

The Treasury’s projections, which include National’s planned tax cuts next year, have Government revenue wobbling in a narrow range around 30% of GDP over the next 10 years, while spending continues to shrink from 28.8% of GDP now to 27.2% over the next five years. 

Labour and the Greens envisage a spending limit of 30% of GDP. 

So there is some gap between the spending and debt trajectories of National on the one hand and Labour and the Greens on the other. 

It will be interesting to see when Labour releases its alternative Budget whether the gap is enough to cover its preference for increased spending without cancelling National’s planned tax cuts, should New Zealanders vote for a change of Government.

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*Brian Fallow is a former long serving economics editor at The NZ Herald. This is the seventh article in an election year issues-based analytical series on economic policies he's writing for interest.co.nz.

His first article is here. 
His second article is here. 
His third article is here.
His fourth article is here.
His fifth article is here.
His sixth article is here.

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50 Comments

Well written article.

It would be nice to see a comparison per capita for the various categories as a percent of gdp for maximum comparability to minimize the effects of both inflation as well as population changes.

We are almost all better off financially since National took over 9 years ago than an ever before in our lifetime .

In our personal case , we paid off our mortgage when interest rates went from 10% to 4% , we now have savings , no debt , and no inflation to contend with.

Not everyone is in the same position as us , but you cant fault it , from our standpoint .

The only thing I dont like about National is their immigration policy , and the lack of action on Auckland's growth pains .

I doubt Labour would ( or could ) do anything different , except take away more of the money we have sweated and worked for .

Boatman - for a certain age group, the last 10 years has been brilliant. For the generations below you, well some would say its been a nightmare.....(either heavily in debt, or locked out the housing market and spending so much on rent its hard for them to save a deposit).

Your windfall is another persons loss in this zero sum game. The question I have, is how long is NZ going to operate with this 'every man for himself mindset?', not realising in the long run that it doesn't work...Ignorance is bliss, for a while...

Independant Observer, you state:

"Your windfall is another person's loss in this zero sum game"

I now understand why your posts are full of resentment and envy, you believe that if someone else is doing better it means that you must be doing worse, that the only way for you to get ahead is for another person to go backwards.
I'm sorry you see life this way

Yvii - clearly you're in need of a reality check on where we are at with zero sum.
Try this... its complicated but see if you can wrap your head round it
https://extranewsfeed.com/from-oilslick-to-tyranny-e35d04b31fc3
http://www.doomsteaddiner.net/blog/2017/06/04/dimming-bulb-3-collapse-ha...

Well, he/she isn't wrong. More expensive houses = FHBs can't afford to own their own home. Mass immigration = artificial wage stagnation. Property investors buying existing housing stock = less houses for OO and FHBs to purchase.

Maybe you could explain how National's policies (or lack of) for the last nine years haven't been a zero sum game?

I'm sorry you see life this way too Wildcard.
I prefer to believe that life is plentiful, that the better off I am, the more I can and indeed do, give to others, that we have more today than we did 50 years ago and still more than 100 years ago. I believe that, provided we have grown up in a peaceful country with decent schooling, we are the captains of our own ships.

To be honest, as soon as counterpoint moves away from solid and fundamental economics into "plentiful" and "opportunity" and "it's all about positive thinking" it really does start to sound like Amway multi-level marketing talk...

Coincidentally, that seems to be how property works in NZ right now.

Selling expensive houses to one another is a zero sum game Yvil. The bank shareholders are the only winners - as long as the excessive debt doesn't cause financial instability.

I might be a little resentful sitting on the sidelines, but I'm certainly not envious. Heck, if I were a Darklord taking money away a significant amount of a young family's pay check each week (a lot of whom were struggling) in the form of rent, I wouldn't be able to live with myself. I'd feel as guilty as hell and wouldn't be able to sleep at night. But hey thats just my take on things. If I had enough money to be mortgage free on my own home, I'd do that - there'd be no need to buy 2,3,4....rental properties. Thats just outright greed - especially when its causing great financial discomfort for others - and risking the financial stability of our banking system.

Every man for himself is not a mindset it's instinct. No progressives can change our instinct to gather as much as possible and win.

every man for himself usually got eaten by a pack of dogs.

Yes it exists in the primitive parts of the human brain, which might explain a few things.

Basically people who were in the market already benefited from the low interest rates that came about globally. It's hard to argue that National's policies drove global interest rates lower.

Yeah but they had the opportunity to benefit from the situation - imagine if we limited the debt creation for non-productive assets (such as housing) in the low interest rate environment. Of course we would have need to prevent foreigners from buying our houses with cheap money, inflating prices. But most kiwis would have paid down their debt - but instead we now find ourselves with more debt than before, even through interest rates are so low. We should have less debt, not more! It's counter-logical.

I don't understand why we don't have DTI coupled to interest rate drops (rates drop, DTI prevents excessive lending) - otherwise whats the point? Rates go lower, people get further in debt...why? No benefit, other than trying to mask some underlying deficiency in the current economic model we operate under.

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Boatman, people who have no mortgage, or rent to pay, will feel good because all the pressure has been on housing. You have done well. But your extrapolation onto almost 'all' is a bit of a stretch. I work with alot of immigrants, Dutch, Irish, german,British and American. All young professionals , all of them were very surprised at the lack of disposable income they have compared to back home. It is housing, and lower incomes. Remember national campaigned on housing affordability in 2007, if only it hadn't diverged so much since then. Frankly their policies have been disingenuous at best and cynical at worst.

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Yeah, I struggle to reconcile John Key's campaigning with his subsequent nine years' denying any crisis exists, without concluding that the man is simply a barefaced liar.

This lack of disposable income in NZ as compared to other countries has been around for decades. There has been a rather large increase in disposable incomes here as compared to 10 and 20 years ago. This is reflected in the decreasing number of emigrating kiwis. At present the numbers returning are roughly in balance with the numbers leaving the country (historically a rare occurrence). I remember around the turn of the century, there were many articles expressing grave concerns for the future of NZ due to the number of young kiwis leaving the country for greener pastures elsewhere. See here

I would also say I am better off than 9 years ago. But I wouldn't put any of that down to the government. At no point has National controlled the global economic market, or even the local interest rates. In fact outside of a rise in GST they have had zero impact on my personal finances.

The increase in GST has allowed increased business write offs on expenses. It's beneficial to business owners but not to anyone else. Broken regulations has also been a source of increased revenue for me, but that is at the expense of the economy and increased property prices. National are intent at making me better offm but I don't want their help as it is completely unethical with respect to the disregard of the well being of the country.

We are almost all better off financially since National took over 9 years ago than an ever before in our lifetime.

Hahahahaha. Oh Boatman, you're so funny. Could you please tell me how artificial wage suppression, rising inequality, rising cost of living, rising house prices, increasing homelessness and mass immigration makes Kiwis better off?

As for the money you have "sweated for," capital gains on the shares, equities, property and assets you own isn't due to work.

Wildcard , you have no idea how off the mark you are .

We are doing so well that we pay more in Tax each year than we earned each year , 10 years ago , (and thats a good thing ) .

Quite apart from material stuff we have accumulated , we donate more to charity than ever before , and we have sufficient personal savings to not be a burden on the State in our retirement years .

I started with nothing , no cars , no house , no family money , just an education provided for free by the State My first job paid just $83,62 per month when I started work and I went to night school for 3 hours each night when I started work to get qualified for my first job. It was a 15 hour day all up

We are now as a Nation , so well off you have no idea , just visit any country outside Australia , Canada or the US and you will realize how well we are doing .

These posts are full of resentment , refernces to a "zero sum game" , as if I have taken money from someone .

I see no evidence of wage suppression , you will always be paid what you are worth.

Our cost of living has been almost stagnant for the past 5 years ( I keep records of all household expenditure)

House price increases are a Western world phenomenon , just look at Sydney prices to get an idea of how out of control things are elsewhere

Homelessness is nowhere as bad are the hysterical crowd would have you believe . Not everyone can afford to live in Auckland , just as I could not afford to live in Tokyo or Geneva or Vancouver . There is housing available for the homeless , there are so many empty State houses in Huntly the Government is now forced to sell them because they are being vandalised .

The facts speak for themselves , we New Zealanders have never had it so good

Boatman,

I find it quite hard to accept that you really believe what you are writing. I am happy for you and your family-you have done well and are a productive member of society-so well done. However,much of what you write is nonsense.
How many other countries have you visited? It certainly can't include any of the Northern European countries,but let that pass. You clearly don't understand just how great the wealth divide has become in Auckland and how damaging that is for society. Nor do you seem to understand the inevitable effects of unrestrained immigration on wages. Your last sentence should be amended to read; "We,self-satisfied,smug home owning New Zealanders have never had it so good and how cares about those left behind".

"We are doing so well that we pay more in Tax each year than we earned each year , 10 years ago , (and thats a good thing) ."

Either a lie, blatantly misrepresenting the facts, or you really need to drop your ego and go and see a tax accountant.

Out of curiosity, why do you think it's impossible that Boatman's current tax bill is greater than his income of 10 years ago? It seems perfectly plausible to me.

Quite apart from material stuff we have accumulated , we donate more to charity than ever before , and we have sufficient personal savings to not be a burden on the State in our retirement years .

I assume you won't be accepting Superannuation then?

I started with nothing , no cars , no house , no family money , just an education provided for free by the State My first job paid just $83,62 per month when I started work and I went to night school for 3 hours each night when I started work to get qualified for my first job. It was a 15 hour day all up

I'm exactly the same; except I didn't get taxpayer funded education. What's your point?

We are now as a Nation , so well off you have no idea , just visit any country outside Australia , Canada or the US and you will realize how well we are doing .

We are not doing well. We are just doing better than some other countries.

These posts are full of resentment , refernces to a "zero sum game" , as if I have taken money from someone .

Well, yeah. Increasing house prices and rents benefit landlords and property investors at the expense of FHBs and renters. Businesses hire immigrants for cheap labour at the expense of qualified Kiwis. How is that not a zero sum game?

Our cost of living has been almost stagnant for the past 5 years ( I keep records of all household expenditure)

And? Clearly you don't pay rent or live pay cheque to pay cheque.

House price increases are a Western world phenomenon , just look at Sydney prices to get an idea of how out of control things are elsewhere

What's your point?

Homelessness is nowhere as bad are the hysterical crowd would have you believe . Not everyone can afford to live in Auckland , just as I could not afford to live in Tokyo or Geneva or Vancouver . There is housing available for the homeless , there are so many empty State houses in Huntly the Government is now forced to sell them because they are being vandalised .

So? Homelessness is still a problem that needs to be rectified, regardless of how bad it is. I fail to see how state houses in Huntly is relevant to homelessness. Are you insinuating shipping all the homeless in NZ to Huntly? Also, how is being unable to live in Geneva or Vancouver relevant?

An utterly myopic view. Are we such utter narcissists that we only think of our own situation.
The utter failure of successive Govts on housing leaves this generation very disadvantaged.

Low inflation and low interest rates are a world wide phenomenon, nothing to do with National.
Anyone, except property investors and speculators who thinks they are better off now is living in a fools paradise. Home owners have not increased their wealth from rising house prices, they will have to pay the same amount for their next house.
Nationals policy of massive immigration causing unaffordable homes and the motorways in Auckland becoming a carpark cannot be good for anyone except the oil companies.
The only way a country can genuinely prosper is by producing more and exporting, not by selling houses to each other at a higher and higher price!
Nobody really knows what Labour will be like in Government but National has had 9 years to improve our standard of living but only have increased the wealth of the very rich.
I do not trust National or Labour but Winston is the best of a bad bunch, as far as I am concerned.

Exactly - and I laugh when people think they've become rich from their houses...it's paper money. Sell your house and cash in then sure you've made a profit. But go and buy another house in the same area...oh opps I haven't made any money at all...!

And worse, if everyone tries to sell at the same time to cash up and take their profit, the housing market tanks. The only winners are those that managed to buy low sell high - then move to Gore and buy a mansion for a third the price and the great lifestyle...

This is like a gold rush for fools gold.

You house is not paper money, its a physical asset and short of buying Gold, which you would need alot of to make a house out of it to live in its been the best investment for the last 40 years in New Zealand. With your mortgage paid off your saving $600 a week on the North Shore on a 4 bedroom house. There is no point selling and buying another house the same area, you sell and buy a house in Tauranga and put half your money in the bank and retire well off, my partners parents just did that late last year at the peak of the market.

There will need to be enough people who can afford to buy the houses off old folk.

Will be interesting to see what happens if prices need to bear some relation to New Zealand incomes again.

"...they will have to pay the same amount for their next house." Maybe. Holding off for ( pick your favourite timeframe) could see a lower buy-back price, or a higher one, we won't know until we get there. But 'time' is the most valuable asset we all have, and if we use it wisely......

IMHO the political trends the world over, irrespective of party ideology that is sold to the masses, is that dependency is increased. Right wing expect people to pay their own way, left wing tax to keep poor. Both neglect infrastructure and services meaning that you're either having to wait in huge queues, or take out personal insurance at great cost, or effectively denied the service. Political parties the world over are looking after themselves and their mates at the expense of their electorates.

For once , I agree with you on something .. I am not really better off because of the large notional/paper increase in the value of my house.
Still do not get how you reconcile this ( largely correct ) statement with feeling robbed because you are not in that position yourself .

Looking at the government's Budget's figures over the past 15 years -once adjusted for inflation and population growth -indicates the government's intentions without the spin.

This is what this good article did. https://thespinoff.co.nz/politics/02-06-2017/reading-the-tea-leaves-what...

It concluded with the following.

"What is the take home message about the government’s intentions?

If we follow the money it is clear the government has no intention of increasing the overall public spend.
....... the decreased per capita spend in a number of critical policy areas – on low-income citizens under aged 65, housing, environment, climate, transport – tells us the government is not concerned (or concerned enough) about the future impact of such issues on Aotearoa New Zealand. Money indicates intentions; it seems the intention is to just ignore that looming iceberg."

That is indeed a good article. Have to disagree with you though. There is plenty of spin in the article you linked. For example, I like the "rents have risen exponentially since 2005"... well, maybe. The exponent used to fit the data is rather small, much smaller than the exponent for home prices. A bit of conclusion jumping involved, in multiple places in the article. The data, when provided, is good.

Rents have risen faster than wages or inflation for much of the last 8 years, that's why the government had to increase the accommodation supplement. But it is ambulance at the bottom of the cliff stuff.

Unlike areas like -defence, prisons and superannuation the government has not increased real public resources into addressing the housing crisis or dysfunctional transport systems. That was the take home message I took from the article.

Indeed, they "had to" increase the subsidy to property investors because they failed to manage the housing crisis they campaigned on. It's hard to manage something you suddenly stop believing exists once you gain power, I suppose.

You realise The Spinoff is funded by Auckland Council right?

A council run by.... an only Labour polly...

The list of reasons for John Key receiving his knighthood.

https://thestandard.org.nz/arise-sir-john/

Debt is like rust in a car.

On the surface it all still looks good and is probably saleable for top dollar to the average voter. Some argue a certain amount is okay and it doesn't affect the daily performance of the car. It is only when the vehicle has some kind of accident that things collapse much faster than you planned for and sometimes to a disastrous degree.

We need to recognize that most New Zealanders have never had it so good ................ ever .

40 years ago it was almost unheard of for a teenager to own a car , in fact many families did not own a car !

And you were lucky if you manged to save the deposit for a home before the age of 25 to 30

Wage rates are the highest they have ever been
Our currency is the strongest it has ever been
Tax rates are the lowest in living memory
Interest rates are the lowest in history
Employment is the highest it has ever been .
Our savings rate is now so high that soon we will not need Mrs Watanabe's saving to keep the Banks going

We buy more cars than ever before , more gadgets and shiny stuff than ever before.

Kiwis even drink more Lattes than ever before

What more could we ask for ?

I agree with some of that but not this part:

"Employment is the highest it has ever been ."

This is not true, prior to 1984, we had basically full employment.

40 years ago was 1977. I drove my own car to school and most of my friends had cars.

You were very wealthy then ?

Most people had to have foreign currency to buy a car , and used cars cost about 3 years wages , now you can get a banger for around $1,500 to 42,500 which is about 4 weeks on the minimum wage .

1977 - the year I was born...can't recall anything apart from crying everyday as a baby LOL

Same as Zach. Bought the car with money earned working after school.

I think you got your 1977s mixed up with your 1947s, I cannot remember anyone without a car, and ordinary everyday folk often had things like boats as well.
Wages highest they've ever been - well they need to be, but housing costs have outstripped them and other costs have risen as well, so for wages to have kept pace they need to be a few times higher than they are.
Currency strong - whatevs
Tax rates lowest in history - did you count GST which was non existent in 1977?
Interest rates are lowest - well, guess what interest rates do.
Employment highest its ever been - back in the 60s you could name every person on the dole and there was no such thing as zero hours, your job was pretty secure and paid enough to live off, wasn't too bad in 1977 in that respect either. The jobs we had actually supported us, unlike today where even people with jobs have to swallow their pride and seek welfare to get by.
Savings - that is because of Kiwisaver, without that we would still be pretty pathetic
More cars - well back in 77 we had only about 3.2million people, we did not have Jap imports, and our population increased by having babies, babies do not buy cars, now we increase our population by importing adults and guess what? They buy cars!
Kiwis drink more lattes???? - another so what

Pocketaces , I agree with some of what you say , particularly the working poor , its an oxymoron to have a job and not be able to feed yourself , but I do wonder what some of these folk do with their money .

Dont under-estimate the effects of a strong Kiwi$ either , it supresess the costs of imports like fuel and food ( during winter) and all the fancy gadgets we seem to like so much

However , I still reckon Kiwis for the most part have never had it as good as it is right now

As PA has pointed out, you don't really know what you are talking about Boatman.

You've fallen into the same trap you always do - assume because it was the case for you, it was the case for everyone.

I'll give the higher dollar thing, seeing as nowadays, as opposed to the seventies, we can barely feed ourselves, let alone clothe, provide vehicles, just about everything we buy now is imported. Once we had delicious Roxdale apricots, now we have insipid South African ones. Yes, we do indeed need a high dollar nowadays.