Budget 2023 could have been a return to ‘business-as-usual’ for the government. A post-covid downsizing to refocus from crisis management to the core business of government. It wasn’t. Instead, it baked-in big government, failed to plan for the future and committed the country to years of investment that shockingly doesn’t account for population growth.
Prioritising the Elderly over the Young
One of the only notable announcements from Budget 2023 was the expansion of funding for 20 hours of free Early Childhood Education (ECE) for two-year olds. At a cost of $1.2Billion, this is a significant investment that will enable a lot more families to afford to become two-income households again and get the child caring parent back to work at least part-time. This should hopefully give parents a quicker pathway to reconnecting with their careers, reduce worker shortages and give children a solid start in life. Unfortunately, it appears that that’s where the good news ends for children and education.
The budget reaffirms a strange and backwards trend, an ever-increasing investment in the elderly with under-investment in the young. With an aging population, we’re always going to need to spend more on superannuation, especially without meaningful reform. But in order for that to be sustainable, we need a smarter and more productive economy, one built on a foundation of strong education.
Budget 2023 sets us on a path for a 21% increase in superannuation costs from $17.8 Billion in 2022 to $21.6 Billion in 2024. At the same time, operational funding for education is set to increase just 7.8% from $18 Billion to $19.4 Billion. Now that may seem like a lot. $1.4 Billion is a lot of money. There’s just one major problem, that 7.8% budgeted increase is less than forecast inflation over the period. So the education system will be expected, yet again, to do more with less, while superannuation continues to be funded to keep pace with inflation and increasing eligibility.
The State of Our Future Workforce
The state of our future workforce is dependent on the education system we invest in today. As a society, we are best served by an education system that is funded to provide the high calibre of education we need to survive in a highly competitive, technical and connected world.
Unfortunately, the long term forecasts for below-inflation investment in education risks our future workforce being one that is ill-equipped to be engaged in the jobs of the future. The basics we learn in primary and secondary school are essential, not optional, foundations for the tertiary education that will give us the skills to take our place in the modern economy.
We need a well educated, productive workforce of the future to ensure we’re able to support any type of funded retirement in the future. Budget 2023 misses the mark here and potentially sets us up for some very hard decisions in the future.
Unsustainable Levels of Big Government
While some government departments, like education, will be funded increasingly below inflation, the overall trend is for increases in core government spending to out-strip inflation annually. In 2023, government spending will be up 12.6% with inflation sitting at 6.8%. In 2024, government spending will be up 10.1% with inflation forecast to be 4.2%. So where is the extra money going?
Let’s use education as a continued example. Above, we mentioned the operational funding for education. This is the front-line, ‘classrooms and teachers’ budget. But that’s not all the money spent by the Ministry of Education, the rest is ‘departmental expenses’. The departmental expenses are the back office, the bureaucrats. For education, these back office costs have gone from $1.3 Billion to $2.2 Billion, an almost 70% increase.
The back office is growing faster than the front-line. Essentially, more for managers managing, less for teachers teaching. This is a trend repeated across government. The effect of this is already becoming apparent. Services are struggling to meet demand, results are increasingly poor but costs continue to rise year after year.
To meet the promised government spending reductions that will help us all to see lower interest rates, lower inflation and lower cost of living, the back-office needs to go on a diet. So far there have only been promises of future diets, no actual diet plan. As a result, we can expect higher interest rates for longer, higher inflation for longer and more tax likely more tax pressures on everyone.
For now, the government is going to have to borrow more to keep funding an increasingly bloated bureaucracy. In just the short-term, its looking like they’ll need to borrow an extra $46 Billion to cover costs not funded by taxation.
The Cost of Ballooning Debt
Net core crown debts was $57 Billion in 2018. In 2024, this is expected to be $179 Billion. The government quite rightly thinks this giant number is a bit scary. So they redefine their debt to be less the assets held in the NZ Super Fund. The billions held here “offset” a huge slice of the debt. However, that’s a bit misleading as those funds can’t exactly be used to repay the debt.
Adding an average of $20 Billion a year on the credit card has been pretty easy to do when the cost of that money has been quite low. Record low interest rates for your house also mean record low interest rates for the government debt. But just as your mortgage rates are on the up, so too is the cost of the governments borrowing.
As a bit of education themed perspective, the interest payments on government debts are expected to increase to more than the operating budget for education in primary and secondary schools.
Investing and carrying debt isn’t a bad thing, as long as its for the right reasons. We get a clear return on investment from things like better roads (less deaths, less hospital care and cheaper maintenance). The same is true for better hospitals and schools. Its much harder to see the return on investment when we’re borrowing just to pay wages. Especially when those wages are overwhelmingly not front-line, not supporting service delivery or better outcomes.
A Spending Diet & Return To Surplus?
In order to achieve the government’s planned return to surplus, the budget shows that this is only with forecast cuts to education and law and order spending. In a current environment with falling educational performance and a crime spree that’s making many small businesses un-insurable, this seems like a bit of a fantasy.
There are only two ways anyone can go from deficit to surplus. You either earn more, or spend less. We’ve seen annual proof of above-inflation spending increases with no reasonable spending diet in sight. So that just leaves the option of earning (taxing) more.
What Could the Future Hold?
We’ve been reassured that at some point, the government will go on a diet. It’ll contract spending and be more fiscally responsible, i.e not living beyond its means. While we wait for that to eventuate,
Budget 2023 has firmly entrenched the trend for bigger government. The near future will have to hold tax changes to make this sustainable. The current size of the government is simply not sustainable on the tax base it currently has. The change to the Trust tax rate raises just $350 million dollars annually. The extra costs added in just this one budget amount to more than $9 billion. Someone is going to have to pick up the tab eventually. As always it’ll be the taxpayer that’s left with the bill.
We’ll have to keep an eye now on the election policies of all the parties in the lead-up to this years election. The current government have already laid the groundwork with their recent investigations and reports for a raft of new taxes. Will we see any more detail on these? Or will we see some plans for smarter investment, cost cutting and fiscal restraint? Time will tell.