When Bill English unveils his Budget tomorrow, he will no doubt confound the sceptics who ridiculed his claims to get the government’s books back into balance by 2014/15. The indications are that he will achieve that objective and he deserves considerable credit for that.
But New Zealand faces three big challenges. I fear the Budget will do nothing to address any of them.
First, we face an over-heating residential property market. We know the risks. The Governor of the Reserve Bank has warned that, if the over-heating continues, he will be forced to push up interest rates to cool things down, with further damage to the export sector through a still higher exchange rate. Last Friday’s Accord between the Government and the Auckland Council will actually make things worse in the short-term, by providing strong stimulus to the Auckland construction sector. And even in the longer term, the Accord won’t help much unless it frees up more land than the areas currently envisaged in the Unitary Plan. With land now selling at $500,000 for 500 square metres – the equivalent of $8 million per hectare – no amount of improving the price of plasterboard will deflate the housing bubble. So the Budget should make it clear that the Government intends to force the Auckland Council to abolish the Rural Urban Boundary.
Second, we face a serious problem with very slow productivity growth. It’s been slow for a number of years, and there is no sign of any improvement. Until productivity improves markedly, New Zealand incomes will continue to drift down against those in other developed countries, such as Australia. There’s no silver bullet, but two policy changes would make a marked difference: radically reduce the corporate tax rate (at 28% our corporate tax rate is now well above the global average) and flag the intention to speed up the announced plan to reform the RMA.
And third, while the Budget may be in balance in 2014/15, all the signs are that we face serious longer-term fiscal challenges because of the ageing of our population. The sooner we acknowledge the inevitability of making a change to the age of eligibility for New Zealand Superannuation, the easier it will be for New Zealanders to prepare for this change. The Budget should announce that, starting from 2018, the age of eligibility will rise from 65 to 67 by 2024, and be indexed to life expectancy after that.
Copyright © 2024 Don Brash.