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Govt spending cap could lead to 'all sorts of games' - economist

Published: 9:15AM Friday April 27, 2012 Source: ONE News

  • The Beehive in Wellington (Source: Thinkstock)
    The Beehive in Wellington - Source: Thinkstock

An economist says the Government's spending cap policy is a step in the wrong direction and may not result in significant change.

As part of the Government's confidence and supply deal with Act, it agreed to introduce a spending limit for the Public Finance Act - something Act leader John Banks says is a "long-believed" policy the party has fought for.

One provision of the deal is that if the spending cap is exceeded, the Minister of Finance will have to explain to Parliament the reasons why.

Act says it will force politicians to be accountable for big spend ups.

However, Bill Rosenberg, an economist with the Council of Trade Unions, told TV ONE's Breakfast show the answer in tough economic times is to spend more.

"During times like a recession, like the global financial crisis that we've had, that's exactly what governments around the world have done - they've (governments) all increased in size," he said.

Rosenberg said other governments have increased spending to keep their economies going.

He said the latest policy coming from the Government-Act partnership is a "mistaken idea" that a government's value can be judged by size.

"If you look at a country like Denmark, that many people in New Zealand like to look at as one that's highly productive, produces high-value goods very well, it's government spending is over 50% of GDP," he said.

Rosenberg said New Zealand's Government spending is 40% of GDP, and to say Denmark's spending is too high is "simply a silly idea".

"All sorts of games"

Under the spending cap policy, any government could play "all sorts of games", Rosenberg told Breakfast.

According to Rosenberg, because the policy controls operating expenses, it could move spending into capital; because it restrains central government, it could move responsibilities to local government.

"It could use what are called tax credits - rather than spending. So it could increase the credits it gives to people. So for example the independent earner tax credit, which costs about 200 billion dollars a year - wouldn't be counted under this."

Furthermore, Rosenberg said it does not control what the Government does with revenue from taxes.

"So a Government under these rules could cut taxes, as this Government has done, and increase the deficit - while still controlling spending. So it doesn't actually solve that debt problem for a Government that's willing to make quite substantial tax cuts," he said.

He said the policy could lead to "very little significant change" to Government spending.