Budget 2019: What are the Ardern government’s much-talked about Budget Responsibility Rules, and why doesn’t it have to stick to them?
When the Labour government came to power in 2017 it set itself five rules of engagement for handling the country’s money. The Budget Responsibility Rules are self-imposed and do not have any legal standing, so if it decides to break them it will face political flak but no greater consequences.
Labour and the Greens campaigned on introducing the rules and the coalition has been true to its word in adhering to them thus far. But the game of politics is known for movable goalposts and finance minister Grant Robertson himself has pointed out that the rules are not set in stone. Not quite two-thirds of the way into its first term it has already begun tinkering with them.
Here are are Labour’s five not-so golden Budget Responsibility Rules and their current state of play.
Rule 1: Surpluses
This concerns a little thing called OBEGAL, and no, it’s not the name of a hobbit. It stands for operating balance before gains and losses, or in other words the government’s surplus. Barring acts of God or major economic crises, Labour has promised to deliver an OBEGAL surplus every year until 2022 (assuming of course it wins the 2020 election). The numbers do move around, however. The surplus for the year to June 2018 was a much better than expected $5.5 billion, against Labour policy plans worth $2.5b, and this was partly because a lot of that spending hadn’t kicked in yet. It has forecast a surplus of $1.75b for this year compared with its estimates of an extra $3.2b in spending. We’ll find out more about how the numbers stack up in tomorrow’s budget.
Rule 2: Government debt
Proving the adage that rules are made to be broken, the Ardern government has just put a crack in this one. When it came into office in 2017 it promised to reduce net core Crown debt to 20% of GDP within five years. Government debt is forecast to be around 20.9% of GDP this year so it’s in the ballpark, but now Labour has announced it will relax its own rule after 2022. From then it will move to a target range of 15% to 25% of GDP. The government says Treasury has advised it that a range as opposed to a single target is a better way to manage debt, and projections out to 2022 show debt will sit just under 20% by then anyway.
Rule 3: Pensions, infrastructure and climate
This one lumps a whole lot of stuff in together. The government says it will prioritise responsible investments that enhance the long-term wellbeing of New Zealanders, such as restarting contributions to the Super Fund. It also says it will invest in infrastructure to support our growing population, and reduce the economic risks of climate change including delivering an all gases, all sectors emissions trading scheme. It’s working on this, with its zero carbon amendment bill passing its first reading in parliament this month.
of the Spinoff’s first book!Find Out More
Rule 4: Spending
Here it promises a prudent approach to expenditure, keeping it under 30% of GDP. But it’s reviewing this too. Finance minister Grant Robertson has recently said it will “take another look” at this figure, because when the rules were created it didn’t have tomorrow’s Wellbeing Budget in mind. “We now have a budget process where we are looking at a wider set of indicators of success, not just looking at GDP growth,” he says. “We’re looking at the success of people, and how they go in education and health, our environment and the strength of our communities. All of those things mean we have to take a step back and say ‘do these rules still work for the kind of budgets that we’re producing?'”
Rule 5: Tax
The jury is well and truly out on this one. Here Labour promises to ensure a progressive tax system that is fair, balanced and promotes the long-term sustainability of the economy. This included setting up the Tax Working Group, with its recommendations for creating better balance between taxing assets, wealth, income and consumption. We all know how that turned out. The outcry over its proposed capital gains tax was so fierce that Labour has backed away from ever introducing a CGT on its watch. However the government has said there is more than one way to create fairness in a tax system, so watch this space.
All of The Spinoff’s coverage of Budget 2019 is made possible thanks to the support of Grant Thornton. Learn more about our partnerships here.
This content is brought to you by Grant Thornton New Zealand – a national team of business advisors who are committed to unlocking the potential for growth in their people, clients and communities.