Is A Budget Surplus A Sensible Target?

The government is to be congratulated on achieving a fiscal surplus – even if, as the commentators point out, it is likely to be short-lived. They have finally succeeded, for the first time in seven years, in hitting a target which they, at least, evidently see as important.

But, does it really deserve the importance given to it, and has it not been achieved at a greater cost than is justified?

The public discussion about “the deficit” is bedevilled by misunderstanding. Most people, and many commentators, fail to distinguish between the government’s accounts and the country’s. When they are told that we have eliminated “the deficit”, they take that to mean that the country is back in the black. If only that were true!

The truth is that we continue to live well beyond our means, and are likely to do so to an even greater degree in the coming years – hence our perennial need to borrow from overseas and to sell our assets to foreign owners so that we can finance a living standard we have not earned. A government that poses as a prudent manager of our economy has done nothing to change this rake’s progress.

The deficit the government have focussed on, however, is not the country’s, but their own; and, while cutting public spending may seem like good housekeeping, it has made the economy as a whole smaller and less efficient than it could and should have been.

The priority given to reducing its own expenditure means that important public services – the police, armed forces, health, education, biosecurity at our borders – have been denied the resources they need. Valuable voluntary organisations are forced to close down for want of proper funding. The public service is weakened as public servants lose their jobs and are replaced by consultants.

State-owned organisations – like ACC, Air New Zealand, TVNZ – are compelled to make ever larger profits to swell the government’s coffers, even at the expense of failing to meet their proper purposes. The private management of prisons and other services is encouraged so that the expenditure can be taken off the government’s books. New taxes are surreptitiously introduced, including most recently higher charges to those leaving and entering the country.

Most importantly, lower government spending, targeted in isolation, simply means a lower level of demand and economic activity in the economy as a whole. The reduced level of economic activity explains why, for example, our unemployment rate remains so high, growth is slowing, Bill English kept missing his deficit target for so long, and further government deficits – as tax revenues fall – seem inevitable.

A smaller and weaker economy inevitably has greater difficulty in paying its way, so that the country’s deficit – the one that really matters – is almost certain to get worse. And, in a kind of vicious circle, a larger overseas deficit means in turn that a government deficit becomes harder to avoid.

That is because the overseas deficit is accounted for – as a matter of accounting identities -by the deficits of the two sectors of the domestic economy – the public and private – taken together. A larger overseas deficit makes it inevitable that the combined deficits of the two sectors will also get larger; if the attempt is made to reduce government’s deficit while the overseas deficit is growing, it is equally inevitable that the private sector deficit must grow even faster.

So, if the economic case for targeting government finance in isolation from the rest of the economy is not convincing, why is it being done? The answer is that it is seen by the government as politically desirable to achieve a smaller role for government, whatever the economic consequences.

And that makes it all the more surprising that the government’s opponents have also committed themselves to achieving a surplus if elected to government. Their reason for doing so is presumably to maintain “credibility” with a public that is conditioned to see a “surplus” as a good thing; yet, even when viewed in isolation from the rest of the economy, a government surplus simply means that the government takes more out of the economy, by way of taxes, than it is putting in – not necessarily what the economy needs or the taxpayer would welcome.

None of this means that governments should not insist on value for money and efficiency in the public sector. Nor should it preclude a sensible distinction between the government’s current spending and what it invests for the future, where – as anyone with a mortgage will tell you – borrowing to build a future asset is perfectly sensible and where the government is generally able to borrow at a lower rate than the private sector can.

But it does mean that government spending is an important and valuable element in our overall economy and to cut it back for purely ideological reasons is likely to make us all poorer. We should not forget that the best and surest way to eliminate the government’s deficit is to get the rest of the economy working properly. Cutting public spending – in isolation from anything else – runs directly counter to that goal.

Bryan Gould

15 October 2015