Distributive policy

The “fiscal policy statement” can reveal what the government really thinks

This is a repost of a article originally published on pundit.co.nz. It’s here with permission.

The parliamentary year opens on Tuesday, February 8, with the Prime Minister delivering a statement to the House that reviews public affairs and outlines the government’s legislative and other policy intentions for the coming year. It has a wider scope and is less detailed than the 2022 Fiscal policy statementa 33-page document made public at the end of December by the Minister of Finance with the Semi-annual economic and financial update.

This Fiscal policy statement begins with the “four capitals” of the Treasury.

  • Human capital: our employees and our skills;
  • Natural capital: Our environment;
  • Social capital: our connections;
  • Financial and physical capital: our built and financial assets.

It is an attempt by the OECD to extend the narrow growth model of the economy to a broader notion of well-being. Okay, but what strikes this economist is that the distribution of well-being does not appear in the framework. Indeed, the term “inequality” is not used throughout Fiscal policy statement document except in the titles of some references. The government seems to be ignoring a major concern of many of its friends.

I have worked in the field of distributional economics, of which inequality is a part, for six decades. It has been at the center of my research program and it is essential for understanding how an economy works. It has been hard work because most economists avoid the field of research because they find it too difficult, or they think it is irrelevant, or because they think it involves only value judgments. Yet as soon as they begin to discuss public policy issues or even many practical analytical problems, they begin to address distributional economics and they bring related value judgments to their discussion.

For example, the OECD’s third capital includes ‘trust in institutions’ and ‘social cohesion’. Generally, societies characterized by high economic inequality have low trust and low social cohesion. You may not be surprised by such a finding, but you are entitled to wonder how a society can seek trust and cohesion without taking into account inequalities. In particular, thirty years ago, a national government deliberately increased economic inequality; probably social cohesion and trust have dropped.

I said New Zealand has higher inequality than before. Very often, it is difficult to trace changes in inequality – many who pontificate on the subject do not fully understand the complex analytical underpinnings of measurement – ​​but in this case, I am convinced that economic inequality has increased significantly. (In my In stormy seas I have argued that the increase radically changed the political economy of New Zealand; this is a more tentative conclusion, although no one has yet disputed it.)

However, the prism of the distributional economy identifies some concerns of governments regarding inequalities. For example, there are some mentions of child welfare in the budget policy statement. This is perhaps not surprising given that the Prime Minister is the minister responsible for reducing child poverty. (While the Fiscal policy statement is in the name of the Minister of Finance, it is discussed intensively by Cabinet Ministers.) It is not understood that a major reduction in poverty is an important priority for the 2022 budget, even if the achievement of the objective government to halve the child poverty rate would greatly reduce inequality.

There is a practical reason for this. Reducing child poverty is fiscally expensive. Remember those measures from thirty years ago that increased inequality, doubling child poverty. They involved major tax cuts for those at the top. The government wants to halve the child poverty rate. These measures will have to be largely reversed to do so. This means higher taxes, especially for those in the middle and upper end of the income distribution. However, the minister responsible for child poverty reduction has ruled out raising tax rates. How she expects to square the circle is unclear. It is a task for mañana.

Of course, there is no hint in the Fiscal policy statement that the 2022 budget will increase tax rates; there are plenty of hints that if they were to be increased, the government has a long list of worthy purposes to spend any extra revenue on. Child poverty is not high on this list.

Let me end by emphasizing that the above analysis does not say that we should reduce child poverty or that we should increase tax rates. I have my personal view on these issues, but the presentation here is analytical, ‘if’ leading to ‘then’. It describes the logic involved in implementing the Child Poverty Reduction Act.

Once the distributional economy is mastered, the conclusion is not difficult. I would like to think that somewhere in the Treasury there is a document that explores this. I imagine the Treasury secretary who saw it go white, toned it down and showed it to the finance minister, who also went white and left it in his inbox while he thought in the 2022 budget.

Brian Easton, independent researcher, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a repost of a article originally published on pundit.co.nz. It’s here with permission.