Scoop Election 08: edited by Gordon Campbell

Gordon Campbell On The Budget – And Petrobras

May 20th, 2011


Cartoon by
Trace Hodgson

While Deficit Phobia provides the rationale for the austerity and privatisation measures contained in this year’s Budget, the government’s stance is a curiously passive one, overall. The largely self-inflicted problems with the revenue base are being treated as essentially self correcting. Yes, there is a new payroll tax thinly disguised as an ‘increased employer contribution’ to Kiwisaver. Yet active policies to generate revenue and to stimulate export growth remain very few and far between. In the meantime, any hopes for improvement in unemployment – forecast optimistically to fall to 4,8 % in a couple of years – are being pinned entirely on the rebuild of Christchurch. Essentially, the revenue side of the equation has been set on autopilot.

Come 2014/15 though, we will allegedly be back in surplus and it will be morning again in New Zealand! Albeit a fairly grey morning with many frosty bits for public servants before the dawn, but – if you can bring yourself to have faith in English and the heroic Treasury forecasts for future growth – the good times are coming again oh, around election time 2014. As Scoop reported yesterday:
http://www.scoop.co.nz/stories/HL1105/S00175/sludge-report-194-bills-magic-deficit-elimination-budget.htm

“ The total tax take for the current year is now forecast to be $51.2 billion (down $1.3 billion on forecast in December). In the coming financial year Treasury expects this to grow to $55.2 billion, rising further to $59.9 billion in 2013 and $64 billion in 2014.

Maybe. If so, it will be due entirely to one-off and/or externally driven events such as the Rugby World Cup, the Christchurch rebuild, the high commodity prices on global markets, the favourable Transtasman exchange rate for New Zealand firms thanks to the high Aussie dollar…and the partial selldown of state energy companies and the reduction in the Crown stake in Air New Zealand.

Note the complete lack of active policies of structural change in that litany of measures, which will be entrusted with doing the bulk of the heavy lifting for the government over the next five years. ( And, as Bernard Hickey pointed out earlier this year, thesell off makes no sense. Because the dividends to government from those valuable, high performing assets that are being readied for the auction block are actually worth more than any borrowing costs for the debt the sell-off will retire. ) These measures will unfold alongside the usual ritual shrinkage of the public sector, which has already lost some 2,000 jobs over the first term of this government. If all the external factors line up obediently, the Key government may yet make its tinkering look like genius. If the externals head south though or underperform – or say, if the ongoing aftershocks delay the land remediation required before the Christchurch rebuild can proceed – there doesn’t seem to be a Plan B.

Take just one example of the smoke and mirrors involved. The sell-down of state energy companies and the reduction of the shareholding of Air NZ will – according to English – pay for one third of the spending on schools, health and government services envisaged over the next five years. Right. Afraid that these successful revenue assets will be sold off to foreigners and thus wreak further havoc on the current account deficit? Concerned that selling off state energy companies may open the door to even higher energy prices in future to satisfy the antsy new investors? Annoyed that nothing seems to have been learned from prior exercises in selling off the family silver ? Well, according to English, Kiwis will be ‘at the front of the queue’ when it comes to the asset sales intended.

Oh really? You might well ask how. Page 23 of the Investment Statement Supplement lists several specific ways to ensure that locals get first crack at buying back their own assets – which in the case of Air New Zealand, they’ve now paid for twice already. These means are listed as being :

  • + a priority allocation, pre-registration, and instalment receipts
  • + financial incentives, such as price discounts and loyalty shares and
  • + hard ownership restrictions, such as individual or total ownership caps or separate domestic shares.
  • That last option would be the safest way of trying to put and keep asset ownership in New Zealand hands, but it would almost certainly not be compatible with WTO trade rules that require equal treatment of foreign investors. No matter : “ No final decisions will be taken on the precise arrangements that will apply until the results of detailed scoping studies have been considered.” Uh-huh. So the $5-7 billion bounty on which one third of the social spending until 2016 is to be based, is hingeing on options for which the scoping study results are not yet in. And for which the modeling currently includes both an option to sell down to a 51% state stakeholding and an option to sell down to a 60% share. Clearly, what has already been flagged as a major issue for the election campaign in November is still very much a work in progress. And you wonder why Treasury forecasts routinely miss the mark by a country mile.

    The Kiwisaver changes are not as severe as first feared – but they do constitute a (less than onerous) payroll tax on employers, who have been given the green light to offset this against any wage increases sought by their employees in future. In which case, employees will eventually end up carrying the can for the government’s halving of its contributions to Kiwisaver.

    The changes to Working for Families are also of concern. Though the government had marketed its intentions beforehand as a rollback of non-essential access to WFF by the relatively wealthy, the new changes will start to bite on people on an annual wage of $36,350. Hardly the wealthy. The changes will also mean that any extra income earned will abate for some at a fierce effective marginal tax rate of 58 cents in the dollar. This, as David Farrar pointed out to English, will erode any incentive to earn more – and the change would be for little apparent purpose, given that such tinkering will by 2018, have reduced the cost of the scheme only from $2.8 billion to $2.6 billion.

    My concern is more that any reduction whatsoever in middle class access to WFF tax credits will only – so long as last year’s tax cuts remain firmly in place – further polarize the income disparities that have been created in this country. Last year, the tax cuts delivered a disproportionate share of the booty to the very top end of the income scale – and now, the cuts to middle class access to WFF families with a $70,000 income with one child will lose $20 a week) will claw back what few crumbs this hard pressed band of Kiwi battlers got from the tax cuts last year. In the process, the income gaps between an affluent elite, a depressed middle class and a pool of increasingly desperate poor will become worse than they already are.

    As Ganesh Nana of BERL consulting has already pointed out, there is nothing whatsoever here to help the export sector – that is, beyond English pointing to the favourable exchange rate we have lucked onto via a vis the Australian dollar. The most striking aspect of the Budget was not what it contained, but what it ignored. Government spending – and Crown debt – are not the country’s most pressing problem. (When overseas, Key boasts about our relatively low levels of government debt.) Largely thanks to Michael Cullen’s obsessive concentration on paying down government debt during the 2000s, and his seeming indifference to the mountain of debt being accumulated by bouseholds and the private sector, the real problems lie elsewhere. Similarly though, in this Budget, we have measures obsessively focused on keeping government debt well below 30% , while the portion of debt that really puts our credit rating at risk (and within the same basket case status as Greece) is left to sail on regardless. As Nana put it on Radio New Zealand this morning, the government is looking after its own debt – but who is looking after New Zealand?

    Par for the course. Much of the political debate on the Budget and the government’s revenue position steps quietly around the two elephants in the room – the unaffordable tax cuts and the unsustainable National Super scheme – lest they should wake up and trample all over the Prime Minister’s poll ratings. They tend to be treated as givens. Yet last year’s tax cuts seem more indefensible by the day. What genius thought that the depths of a recession would be a good time to cut income taxes, and rely on revenue from GST consumption to make up the difference ? That misfire is reflected in the $1.3 billion revision downwards since December, for the forecast tax take for this year alone. Brilliant.

    The basic unfairness has been restated this week by No Right Turn. It is a mantra worth repeating :

    76% of New Zealanders earning less than $48,000 a year, gained only 31% of the total – the exact opposite of what Key is claiming. Meanwhile, the 12% earning over $70,000 walked off with $1.6 billion a year, 43% of the total, while the top 2% of taxpayers, meaning Key and his rich mates, gained a staggering 11.5% of the total.

    On Radio New Zealand yesterday morning, Key sought to justify the measures contained in the Budget on the basis of intergenerational fairness. Taking him on his word then, the dominant role of National Superannuation in the public accounts has to be considered. Especially if, as promised the government carries through on its plans to crack down on beneficiaries if it is re-elected. In fact, as the Budget papers show, the growth in spending on the kinds of beneficiaries who are likely to be most in the firing line was actually neutral before the global recession hit (see page 79, Social Development Ministry Appropriations) The payments for the dole and for the Emergency Benefit payments had decreased, and this offset the rise in other benefits.

    However, during the same two years before the global recession arrived, the rise in National Superannuation costs had accounted for ALL of the $535 million growth in expenditure on benefits in those years. This situation is likely to continue, and worsen. During the nine years from 2006/07 until 2014/15, the numbers on National Super will rise by nearly a third, or some 150,000 people. Costs will rise steeply, in tandem. “Annual expenditure on [National Superannuation] will increase by 71% from $6,810 million to $11, 670 million during the 2006/07 to 2014/15 period.” Nearly two thirds of this rise will be due to the annual cost-of-living adjustments. Obviously, much more could be said about this unsustainable crowding out by National Superannuation of the needs of other beneficiaries. Yet plainly, a fairer distribution of the tax burden would avoid National Super recipients and those on other benefits being put in such head-on competition with each other. None of this has featured in the Budget analysis.

    Details aside, it is obvious what political role the Budget has been prepped to play. On one hand, it provides a platform for further cuts to public services and programmes. It does so without being scary enough in election year to disqualify the government’s ability to win a broad mandate inNovember – for whatever it may have in mind for its second term, in unison with the Brash-led Act Party. At the Budget lockup, English explicitly cited the Budget as a positioning tool that placed National in between the alleged’ borrow and spend’ inclinations of Labour and the wholesale slashing of government spending being advocated by Act.

    For now though, it is essentially a matter of doing as little as possible to rock the electoral boat. Long ago in David Copperfield, Charles Dickens had Mr Micawber express the limited worldview that underpins this Budget :

    Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

    What could be done to influence this equation ? Like Bill English, Mr Micawber felt sure that something would turn up.

    Petrobras in Peril

    The plans by Petrobras for deepwater oil and gas exploration off East Cape have run into protest action mounted for a variety of reasons – the lack of proper consultation with local iwi, the potential for pollution, the lack of an adequate royalty stream for New Zealanders from this exploitation of our natural resources etc etc. In the end though, what may save us is Petrobras itself choosing to pull the plug. Judging by this report the company is substantially over-committed. Brazilian Finance Minister Guido Mantega has asked Petrobras to adopt a “more realistic” investment plan and focus on efficiency – which will reportedly require the state-controlled oil company to trim” excess” from its five-year investment plan – and allow the company to grow in a “less aggressive” in future, according to one of its board members. Part of this aggressive expansion programme has involved the simultaneous pursuit of drilling rights in deepwater locations around the world. Such as the adventure off East Cape.

    Petrobras Chief Financial Officer Almir Barbassa said yesterday the company may reduce spending as it revises a $224 billion investment plan..
    Petrobras’s board asked the company on May 13 to cut investments by $35 billion after it presented a $260 billion 2011-2015 business plan, Rio de Janeiro-based O Globo newspaper reported….

    A $35 billion cutback programme could well affect a marginal exploration like the one in New Zealand. (Apparently, the level of investor concern about Petrobras’ expansion programme has seen a fall in its share value well above the average recorded on the Brazilian share market this year.)So, keep these internal problems in mind if Petrobras does in fact, finally pull out of its East Cape operations. If it does, the government will be trying its best to pin the blame on Greenpeace and local Maori.

    ENDS

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    1. 4 Responses to “Gordon Campbell On The Budget – And Petrobras”

    2. By Joe Blow on May 21, 2011 | Reply

      Noone’s commented on this article yet? Was the budget really that bland? I guess it was…

      Still I like your juxtaposition of beneficiaries and superannuants Gordon. It’s a worthy issue. Maybe that’s why everyone’s gone quiet. An issue that is too unpopular to contemplate…

    3. By Nigel Gregory on May 26, 2011 | Reply

      As an expat Canadian living in Ontario at the time
      I remember well the Reagan presidency of the ’80′s.
      The National governments policies of today remind me of those years.
      As I see it the U.S. lowered taxes for the wealthy and increased borrowings while implementing policies to raise unemployment and offshore labour to lower wages and “increase” productivity. Admittedly the US had the Soviet Bear to deal with but nevertheless the economic wreckage of the Reagan years is with them to this day.
      The budget deficit exploded and the real US economy never recovered (notwithstanding the housing ponzi economy) and now the situation is dire. I believe we are seeing the death throes of the U.S Dollar reserve standard.
      Back to N.Z. and we are counting on false forecasts to make a ridiculous budget balance. Unemployment is high. Wealth remains largely untaxed and we are borrowing upwards of 300M week to fill the gap.
      Joe Blow asks why no one has commented yet. I have tried but find myself despairing of what to say. Basically we have “What’s mine is mine and stuff the rest” policies.
      Depressing…..
      Cheers, Nigel

    4. By Joe Blow on May 26, 2011 | Reply

      @ Nigel

      Thanks for commenting Nigel. One thing though. Unlike the 1980s NZ is not in huge public debt yet. The private sector is in far more debt. The government is right to be alarmed at the forecasts even if their own tax cuts have played a part in the projections, but this issue should be about how we deal with the projections not about throwing up our hands in horror and blindly accepting the current government’s agenda like we’re already back to the 80s already… Chin up! There’s still room for a fight over what’s to be done. If not this term, then the following term when Key and English’s rosey economic future turns up turds…

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