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Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

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Page 1: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Budget 2011

Paul DalzielProfessor of Economics

AERU, Lincoln University

Page 2: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Introduction

• I make six points in this opening comment.– We are living in hard times.– We know why times are hard.– We know how to cope with hard times.– These ways of coping are our responses.– So, what is in the Budget?– Welfare reform.

Page 3: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

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NZ$

Bill

ions

(199

5/96

) S.A

. Per

Qua

rter Real GDP

Point 1: We are living in hard times

Page 4: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 1: We are living in hard times

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-11

NZ$

Bill

ions

(199

5/96

) S.A

. Per

Qua

rter

Real GDP

Trend

3.6 per cent per annum

Page 5: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 1: We are living in hard times

1,000

1,200

1,400

1,600

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-11

Thou

sand

s, S.

A. P

er Q

uart

er

Employed

Page 6: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 1: We are living in hard times

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Per C

ent o

f Lab

our F

orce

, S.A

. Per

Qua

rter

Unemployment

Page 7: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 2: We know why times are hard

This is a slide from Dr Alan Bollard’s address to the Employment Summit Conference in 2009. THE RESERVE BANK OF NEW ZEALAND

The biggest destruction of global wealth ever?

$3 trillionLost output

$4 trillionHousing

$30 trillionEquity Markets

$2 trillionCredit-related losses

Value loss (est. $US)

Page 8: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 3: We know how to cope

Hard times are not unusual and we have learned how to cope when times are hard:

• Fiscal Policy – increase public debt

• Monetary Policy – lower interest rates

• Social Security – unemployment benefits and public support for families

Page 9: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

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-199

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-201

1

NZ$

Bill

ions

Total Government securities on issue

Public Debt

Page 10: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Interest Rates

Page 11: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Number of Main Benefits

0

100,000

200,000

300,000

400,000

500,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

March Data Each Year

Number on all Main Benefits

Page 12: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 4: These are our responses

These responses are not something the government does to us.

These are mechanisms we have created over the years which the government (in our representative democracy) controls on our behalf.

Page 13: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 5: So what is in the Budget?

Minister Bill English comments that: “The fallout from the global financial crisis of two years ago is gradually receding.”

Consequently, the Budget lays the foundations for how the government intends to phase out the higher debt levels that were accumulated to get us through the worst of the crisis.

Page 14: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 5: So what is in the Budget?

These foundations are important because a large part of the initial fiscal response were in the form of tax cuts.

Tax cuts by their nature favour higher-income households, so that if the removal of the stimulus is in the form of expenditure cuts the overall result will be a further redistribution of income from lower to high income households.

Page 15: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 5: So what is in the Budget?

• Changes to KiwiSaver

• Phasing in more targeted Working for Families

• Tighter criteria for Student Loans

• $5.2 billion cutbacks in public services over 5 years

• Offset by $4 billion in new spending (mostly in health and education) over 5 years

Page 16: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 5: So what is in the Budget?

• Investment in transport, electricity transmission and ultra-fast broadband

• Social infrastructure investment in schools, hospitals, housing and student loans

• Funded in part by the partial privatisation of energy SOEs and Air New Zealand

Page 17: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Evaluation of the Budget

• It is a cautious budget, fitting firmly within the National Party’s manifesto three years ago.

• It represents a shift away from government involvement in favour of private involvement.

• It is likely to reinforce growing inequalities in New Zealand’s income distribution.

• There is some recognition of the need for investment in social infrastructure.

Page 18: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Point 6: Welfare Reform

• I want to finish by talking briefly about an issue that was not mentioned at all in the Budget speech – welfare reform.

• The government set up the Welfare Working Group last year, and the Budget’s background papers make one reference to the Group’s recommendations:

Page 19: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Welfare Reform

“On 22 February 2011 the Welfare Working Group made 43 recommendations to the Government on options to reduce long-term benefit dependency. Ministers have directed officials to develop advice for consideration. Many of the recommendations would result in large up-front costs if adopted. The Government will respond to the Welfare Working Group’s report later in 2011.”

Page 20: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Motives for Welfare Reform

I think it is fair to say that the Welfare Working Group reports were based on two considerations:

• Trends in beneficiary numbers were said to be unsustainable.

• People ‘choosing’ to be on benefits were said not to understand that paid employment is the way for their family to escape poverty.

Page 21: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Number of Main Benefits

0

100,000

200,000

300,000

400,000

500,000

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

Number on all Main Benefits

Page 22: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Employment Ratios in the OECD

0

10

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40

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70

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90

TUR

POL

HUN

ITA

ISR

SVK

MEX BE

LG

RC KOR

LUX

FRA

ESP

CZE

OEC

DSV

NBR

ACH

LRU

SPR

TIR

LES

TDE

UFI

NJP

NAU

TUS

AG

BR AUS

CAN

NLD

NZL

SWE

NOR

DNK

CHE

ISL

Average 2006-08 Average 1995-97 or first available period

Page 23: Budget 2011 Paul Dalziel Professor of Economics AERU, Lincoln University

Welfare Reform

• I think the foundations of the Welfare Working Group’s analysis were misconceived.

• I am very anxious at how the recommendations will be received by the government.

• This is a case, I think, where we need to insist that social security is our response to hard times and not the government’s to throw away.