Labour’s alternative budget

Ok, I haven’t seen an actual alternative budget – but given they are the main opposition I’ll turn what they have said into one, so that I can give them the same airtime as others.  We have already discussed Act, Libertarians, and National – and I aim to get something on the Greens out by week end.

So judging by this speech here, post Budget

Labour will take a different approach
to savings,
to exports
to foreign investment,
to monetary policy, and
to support for research and development, and innovation and skills.

How are these policies different – and what trade-offs are involved.  That is what we will discuss here.

At least from this speech, it appears that Labour’s policies are very close to Nationals – the parties have both moved towards each other.  However, there are two primary differences:

  1. Labour wants more words in the Reserve Bank Act,
  2. Labour wants more state involvement regarding savings, spillovers, and exports.

Furthermore, the primary reason for the first difference is because of how the Labour party believes it will impact on the second issue.

In the same way National stated that they want to rebalance the economy and increase savings, Labour differs in so far as it wants to do the same thing.

Wait, what?!?!

It sounds strange doesn’t it.  Both main parties seem to talk the same talk deep down – “New Zealand needs more savings, more exports, blah”.  However, implicitly neither party is targeting a sole focus on these issues, this is just how both parties have chosen to frame their policies.

Essentially, Labour wants marginally more state involvement in the allocation of savings and production/exports – but both parties agree that the country has found itself in a situation where there is something funny with the incentives to save/borrow/work.

So how are they different

Overall, if Labour released an alternative budget it would involve more government spending than the National budget – and as a result it would have to involve higher taxes.

My impression from the speech is that Labour believes there are areas with “positive externalities” in the economy – where the government can improve outcomes by investing.  Examples of this are R&D spending and tertiary education/skills training.

Now it is important to keep all this in mind when stripping back the rhetoric – Labour’s justification for higher government spending is based on mainly on efficiency in the post-Budget speech.  As a result, the only reason they really have a different budget to National is because they believe in larger spillovers from investment in skills and technology [on that note, link].

Savings, exports, and monetary policy

On these three issues it is really unclear exactly how Labour does differ.  There is a difference between stating “we wish we had more savings, we wish we made more stuff, we wish monetary policy would give us stuff” and actually having policies that could deal with the inherent trade-offs in society.

Furthermore, each of these issues isn’t really a target in itself – it is a means to an end.  The decision to save is a personal one based on the the value of future and current consumption and the rate of return on savings.  If we think that this rate of return is different from where it should be then the policy should really look at that market failure rather than savings per see right?

On exports, we are sending stuff overseas and we get paid for it – paid so that we can buy stuff.  Exporters face the market price for goods, we would again need a market failure before we could really justify intervention.  One example of this is “spillovers” once again.

On monetary policy, it is important to note that “all these other countries with multiple targets” effectively still just target inflation in the typical sense (things are a bit funkier when we have a supply shock, but central banks know this) – they just have to add fluff to their statements so politicians are happy.  The main risk from changing their statements is that it reduces transparency and accountability, and to be fair I can’t see any benefit … at all.

Their discussion on prudential policy is fair, but it isn’t clear how they want to do it.  They seemed to have broadened their outlook from this period.

As a result, I only see actual changes in policy through “spillover externality” targeting – so essentially Labour is aiming for a specific type of higher government spending than National.

Conclusion

To reiterate what I think is a major point of interest though:  Labour has a different view of the efficiency trade-offs in society than National.  This is an issue that could actually be tackled by research!!!  It is not an equity issue – the two main parties actually differ in their belief regarding allocation issues.  I think that is pretty interesting.

This difference leads Labour to believe we need a higher level of government spending (and thereby taxes) even if the inherent “welfare function” that the two main parties are looking at is the same.