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Budget 2011
Paul DalzielProfessor 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.
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NZ$
Bill
ion
s (1
99
5/9
6)
S.A
. P
er
Qu
arte
r
Real GDP
Point 1: We are living in hard times
Point 1: We are living in hard times
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-11
NZ$
Bill
ion
s (1
99
5/9
6)
S.A
. P
er
Qu
arte
r Real GDP
Trend
3.6 per cent per annum
Point 1: We are living in hard times
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2,400
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Tho
usa
nd
s, S
.A. P
er Q
uar
ter
Employed
Point 1: We are living in hard times
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Per
Cen
t o
f La
bo
ur
Forc
e, S
.A. P
er Q
uar
ter
Unemployment
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. $US)
Point 3: We know how to cope
Hard times are not unusual and we have learned how to cope when times are hard:
• Fiscal Policy – increase public debt
• Monetary Policy – lower interest rates
• Social Security – unemployment benefits and public support for families
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60
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-199
3
Ma
r-19
94
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-199
5
Ma
r-19
96
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-199
7
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-199
8
Ma
r-19
99
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-200
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01
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-201
0
Ma
r-20
11
NZ$
Bill
ion
s
Total Government securities on issue
Public Debt
Interest Rates
Number of Main Benefits
0
100,000
200,000
300,000
400,000
500,000
1999
2000
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2008
2009
2010
2011
March Data Each Year
Number on all Main Benefits
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.
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.
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.
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
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
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.
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:
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.”
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.
Number of Main Benefits
0
100,000
200,000
300,000
400,000
500,000
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98
/99
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99
/00
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00
/01
20
01
/02
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02
/03
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/04
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/05
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/06
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/07
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/11
Number on all Main Benefits
Employment Ratios in the OECD
0
10
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30
40
50
60
70
80
90
TU
RP
OL
HU
NIT
AIS
RS
VK
ME
XB
EL
GR
CK
OR
LUX
FR
AE
SP
CZ
EO
EC
DS
VN
BR
AC
HL
RU
SP
RT
IRL
ES
TD
EU
FIN
JPN
AU
TU
SA
GB
RA
US
CA
NN
LDN
ZL
SW
EN
OR
DN
KC
HE
ISL
Average 2006-08 Average 1995-97 or first available period
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.