Budget 2022: What this year's Budget means for the boardroom
The goose that keeps laying the golden egg is the economy
Viewed from a holistic or governance perspective, Budget 2022 highlights some interesting nuances:
An amplified political overhang that has grown with time as budgets look to convert long term strategy and investment choices into manageable soundbites to garner political support over the short to medium term.
Playing to that audience is difficult at the best of times, harder in harder times. Exacerbating matters is that distilling facts from rhetoric is becoming increasingly challenging, particularly when the focus is on immediate winners and losers, spotlighting polarised views often critical at the lack of instantaneous gratification, even where that gratification is unrealistically held. Lost in the narrative is that there is no magic wand, irrespective of the government of the day.
Putting this into context, it’s the fifth budget of a centre-left government, whose followship is being challenged by COVID-19, recent economic headwinds and visible political opposition. A by-product of the economic headwinds being an immediate inflationary cost to households, to be augmented by material increases in borrowing costs at a time when asset values have softened. Depending how quickly this “economic cycle” washes through, where and when housing finds its equilibrium, these challenges could get materially harder by the next election.
It’s only natural then with this context, that annual budgets morph more into the political arena; consistent with the political imperative flowing from the paraphrased quote of James Carville pertaining to the 1992 US election given the then prevailing recession – “it’s the economy, stupid”– that helped unseat the inaugural Bush presidency in favour of Bill Clinton. Or as my colleague in Australia commented in relation to their recent election year budget, “If you've got a pulse and a vote, then you've got some money”.
Quantity not quality also challenges the public narrative, where success and failure seem to be defined by the quantity of expenditure earmarked to areas in an absolute, sometimes abstract, and yet to be defined way, rather than the quality of the outputs that result – outputs that often are never referred to.
Making matters worse is that this is at a time when the Government, its agencies, and the economy, are subject to capacity constraints.
Budget does mean what it means. While we live in a world of limited resources that need to be rationed and prioritised in an orderly fashion, consistent with the word “budget”, successive Governments have softened this reality.
This has resulted in the Government shouldering a greater responsibility for the wellbeing of a greater number, whether in terms of required support or more in the nature of redistribution.
At the redistributive level, entitlement comes into play, as well as an unhealthy divisive narrative. Entitlement being a dangerous position as larger groups within society live and consume ahead of their personal means, that will likely only accelerate under any centrist government (as part of garnering popular support).
The upshot being a growing level of dependency that creates its own risks, particularly around sustainable resilience, that also fuels divisive sentiments as the reality of rationing falls away.
Ironically, the current rationing debate is also at a time when it is of real relevance, given the increased leverage from managing through the global pandemic, that followed having to address similar issues post the GFC and the Canterbury seismic events.
Accepting that we have been there before (high debt levels), there is no real expectation or narrative that belts need to be tightened to repay that spending over the near term; that mortgage future generations and increases the risks around future shocks.
The art of deflection shapes budget narratives, with the current context being one where success has many parents while failure is an orphan.
Externalities take centre stage when things aren’t quite where we want them to be, including in Budget 2022.
The obvious current ones being COVID-19, the war in Europe and resulting supply chain challenges. Also drawn into the spotlight are the extent of our trading relationships with China and the risks that this poses, exacerbated by the fragility of the global economic environment, that is ironically also amplified by the current lockdowns in China.
The goose that keeps laying the golden eggs is the New Zealand economy, and is given the usual passing mention, that continues to insulate successive governments by showing resilience, notwithstanding the level of support it’s given or shocks it endures.
Budget 2022 positively reinforces that point as surpluses are expected within the foreseeable future that suggest the economy and spending are coming back into equilibrium in the near term; accepting the debt overhang.
The extent to which the economy’s trajectory is driven by government initiatives will always be a moot point, but the Government support of the economy during the lockdowns has undoubtedly supported its resilience, so credit where credit is due, but obviously at a material cost, that in cases was not well targeted.
Divisiveness and inequality grow, which is not really addressed in Budget 2022.
Recent examples of divisiveness include at one end of the spectrum, the occupation of Parliament by a cross section of disenfranchised individuals and groups. At the other end, the rise of groups like “Tyre Extinguishers” that feel that "SUVs are killing us and are taking action accordingly [as it’s] “time for citizens to defend themselves and make it impossible to own these killer vehicles in NZ's urban areas".
And in terms of inequality, the greatest challenge is how to sustainably support those most in need. A goal that has eluded successive Governments, notwithstanding the extent that they would have liked to achieve in this area; with the narrative now turning to higher levels of taxation including a taxation on wealth as a means to an end.
Tax is unlikely to be either effective in dealing with inequality or reduce the divisiveness emerging in society, but rather a convenient political scapegoat or target. Left unaddressed, this divisiveness will be our Achilles' heel, directly impacting the social cohesion required for long run success.
So where to from here? My sense is that Budget 2022 is part of a narrative that suggests that we will continue to oscillate from a policy and fiscal perspective around the centre.
As long as the backdrop remains an economy that can quickly return to equilibrium (and in fact does), the political reality of a budget process is that it increasingly looks to garner support from a material centre voting bloc that wishes to receive more from the same or a lesser contribution, with election cycles drawing policy back to that centre view if it deviates far from it.
A positive with this view, is that we are likely to know what to expect and be able to manage through it.
What’s more concerning is the increasing divisiveness within society and how that is sought to be resolved, which is far from clear from Budget 2022.