Has Jacinda Ardern signed the death warrant of our welfare state?
Budget 2020 spells certain doom for New Zealand’s long-standing welfare state
So far, most commentators on the right have drawn the conclusion that Budget 2020 means an inevitable increase in future rates of taxation[1]. When the annual costs of debt servicing rise, additional money for core services must come from somewhere, right? I can’t and don’t rule out higher taxes, but they will not be the only solution or even much more than a relative sideshow. A significant reduction in welfare transfers and core social services is guaranteed. I have two reasons.
First, taxes can only be levied on wealth and value-generating activity that exists. The economic recovery assumptions in Budget 2020 are rosier than is justified by the poor quality of the planned (well, mostly unplanned) economic response. This allows the current government to paint a picture where future governments can avoid making a choice between increased rates of taxation or cuts to welfare and services. However, future governments will have to make that that choice and they’ll have to face the fact that higher rates of taxation in a weak economy just make it weaker. Putting up taxes in the next decade will be the economic equivalent of forcing an anaemic to donate blood. It is unlikely that future governments will think that increased taxes are a good idea, no matter what their political stripe.
Second, and most crucially, future governments will not be allowed to increase taxes whether they want to or not. The electorate always wants to see fiscal responsibility before supporting higher rates of taxation and its opinion as to what constitutes fiscal responsibility is highly contextually variable. To a great extent, with welfare being the single greatest item of government expenditure, it depends on the social license of the welfare system. In short, anything that corrodes the public’s willingness to pay for welfare corrodes their willingness to pay more tax.
And the social license of the welfare system will surely corrode under the direction set by Labour’s budget. The strongest welfare system is the one with the fewest in it. The fewer people drawing on that support, the less that individual taxpayers feel excessively burdened and the more they remain supportive of welfare arrangements. But excessive and untargeted spending drives dependency, not recovery. Dependency will rise and stay high for too long. We’re moving into a period where the proportion of the country on welfare will be higher than ever before while the economic engine that drives compassion will be weaker than in memory.
Our “compassionate capitalist” system not only depends on capitalism to fund its compassionate acts — as in my first point — but also to create the conditions that allow people to fulfil their desire to be compassionate. The overburdened safety net of the near future will look like an existential problem to those holding it up at the edges, no matter how strongly they care for those in the net.
Simply put, future taxpayers will be paying so much for the welfare and services of 2020 they will be neither willing nor able to fund the welfare and services of their own time. Budget 2020 contains too much borrowing for too much ineffective spending that’ll leave too little in the larder.
It almost didn’t get to this point. Grant Robertson gets it. Everything he’s done as Minister of Finance until now has shown that he gets it. But understanding fiscal responsibility is different from being able to deliver it. On one hand — as part of a govt that interprets “let’s do this” as spending announcements — there has only been so much he has been able to do to responsibly guard the purse strings and Covid-19 has overwhelmed even his own resolve. The need for some loosening of the purse strings has been used as an excuse to turn the purse inside out and dump its contents on the floor. On the other hand, there’s no level of spending that’s fiscally responsible if it’s poor targeted and poorly managed and that has been his government’s weakness since Day 1.
The last time Labour saw fiscal responsibility they called it neglect. It wasn’t. National threaded the needle by borrowing just enough to get through the GFC, spending it well, and protecting welfare and core services when moving back to surplus. With the benefit of hindsight, some criticisms can be made but threading the needle is not easy and it took significant political skill to achieve it. This time, there’s no hole through which to thread the needle. The spending is too high for too long. The spending is too untargeted. The ability of the current government to deliver good results from the spending is too low. So, core services won’t be spared no matter how skilful the government of the time. There will be neglect by compulsion, not choice. Not just welfare but health and education too.
Lest this sound like a threat, it’s not. It’s a sad realisation made sadder by recognition that too few share it. Jacinda has signed the death warrant of the welfare state and the victims are cheering her on.
References
[1] For example, “How big will the tax hikes be?”, Kiwiblog, 18/5/2020
