Budget 2021: Brian Fallow – Grant Robertson plays it down the middle despite opportunity to invest


Grant Robertson has delivered a fiscally conservative Budget.

He is about midway between the skinflint and the spendthrift ends of the spectrum.

That may seem an odd conclusion when he has increased Government spending, forecast deficits for the next five years and is willing to see net debt climb from the equivalent of 33 per cent of gross domestic product now to a peak of 48 per cent in 2022/23 before gradually declining — possible shocks permitting — to around 36 per cent by the end of the decade.

That may not sound like fiscal prudence, especially when wholesale interest rates are rising as international financial markets worry that central banks are too sanguine about the risk of persistent inflation.

After all, a measure like net debt to nominal GDP (a proxy for the tax base) is meaningless without taking account of the interest rates the Government pays on its debt.

What matters more is not the level of the debt, but the size of the interest bill taxpayers have to service, i.e. the Crown’s finance costs.

The Budget forecasts have the interest bill requiring around 3c of your tax dollar over the next six years. Last year it was 4.4c; the year before, 5c. It will fall from 2.8c this year to 2.5c next year and is not projected to get back to pre-Covid levels until 2028.

So when Robertson talks about the need to balance the Government’s spending priorities with keeping a lid on public debt, it is evidently a pretty heavy lid he has in mind.

It is still a low level of debt by international standards, while interest rates are very low in comparison with the levels of the past.

Compared with the half-year update last December, the Treasury has revised down the expected track for net debt even with increased spending on benefit rates.

It reflects data, including the tax take, which confirm that we have had the desired V-shaped recovery.

That’s V for “vindication”, of the central policy last year that the best public health response would also be the best economic response.

But it’s also V for “vulnerable”, in a world where the pandemic still rages and the virus is mutating. Taiwan’s recent outbreak should remind the Government that it needs to maintain the border defences against the battering ram of vested interests demanding reopening.

The recovery is uneven, with tourism struggling while construction booms.

But so far, so not so bad at all.

Offsetting the more cheerful outlook for deficits and debt, the Treasury has also had to revise upward what was a pretty saggy outlook for the weighted average interest rate it faces, by about 50 basis points on average over the rest of the decade.

Over the five years pre-Covid, the average interest rate on the Crown’s debt was 3.6 per cent. The latest modelling revises the expected interest rate from 1.5 per cent this year to 1 per cent for the next couple of years before creeping back up to 2.6 per cent by the end of the decade. Past Finance Ministers would be envious.

The net effect of these updates to what is arguably the most relevant financial measure of fiscal prudence — the size of the taxpayer’s interest bill — is that the outlook is on the concave side of flat.

The debt level might be going up but the cost of servicing it is not, relative to the size of the economy, or as a share of your tax dollar.

“It is also important to take into account the real interest costs of public debt relative to the size of the economy, which is calculated as the rate of interest paid on government debt adjusted for inflation,” the Budget says.

The effective real interest rate on government debt has been trending downwards since the 1980s and since the onset of Covid-19 has been negative.

So is Robertson keeping too heavy a lid on debt?

He has given himself more room to manoeuvre by quietly dropping — for the time being at least — the “fiscal anchor” of a quantified target for net debt.

And he has called for a more mature national discussion on public debt.

That needs to happen. Such a discussion should take account of the road not taken, on counterfactuals and the opportunity costs of being hung up on a purely financial measure of fiscal rectitude like net debt to GDP.

How high a price are we paying for years of underinvestment in infrastructure? Or in social housing as well?

How high will be the future cost, social and fiscal, of tolerating a situation where one-eighth of the nation’s youth are not employed or undertaking any education or training either, but are instead treated as some sort of inevitable waste stream?

On infrastructure, Robertson points to the $57 billion earmarked for it over the next four years, including a $4b boost to $12b in the capital allowance that is yet to be allocated.

And to the problem that too many businesses see skills as something to import rather than to impart, the Budget has earmarked an additional $280 million for vocational education.

Robertson has emphasised that this Budget should be seen as the first in a series of three, that it cannot address all the issues we face in one year.

Given the fiscal caution that was on display this time, we can only hope so.

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