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In the wash-up from Budget 2023, a trenchant debate has ranged over whether the bigger-spending-than-expected document will bump up interest rates.
The slavish political focus on interest rates and inflation, however, has obscured a different conversation about New Zealand’s economy more generally. How it is performing and what opportunities it is generating. Basically, the role of the state and how big it has become.
It was brought into sharp relief on Sunday with the announcement of a substantial Government subsidy to New Zealand Steel to pay for half of a new furnace at Glenbrook Steel Mill in south Auckland. The primary reason given was to help the climate; a secondary reason was to keep a big manufacturer in New Zealand.
The first thing to note after Budget 2023 is that, since Covid-19, government as a share of the economy – at least under Labour’s policy settings – has nestled at a level substantially higher than it was in 2019, at the last Budget update before Covid-19.
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It is now running at about 32% of GDP, up from 28%. While that level is lower than the temporary highs of the Covid-19 pandemic, it is still elevated.
“In recognition of the need to be fiscally sustainable over the forecast period, spending is forecast to decline as a percentage of GDP to close to the long run average,” Finance Minister Grant Robertson said on Friday.
The long run average it may be, but before Covid-19, 2013 was the last year for which the figure was 30% or above.
The upshot is simply that government is a more important, and bigger, player in the economy than it has been for some time.
The justification for all this is “investment”. In other words, Labour wants to entrench an overall higher level of government spending on things it thinks the public wants and New Zealanders need: from infrastructure to more money for climate change, and to lifting the living standards of beneficiaries and those on state payments.
Sunday’s massive announcement illustrated just how much the political landscape has changed over the past three decades.
The Prime Minister, Chris Hipkins, revealed that taxpayers would give $140 million to New Zealand Steel for a new electric arc furnace. The news was packaged up as a big win for the climate (it is a single massive project that will contribute 5% to New Zealand’s emissions cuts).
“Partnering on this project with New Zealand Steel makes sense because it delivers such huge benefits for our environment,’’ Hipkins said. ‘’Without Government investment this wouldn’t have happened, so it’s fantastic to see what working together can deliver.”
The GIDI fund recycles revenue the Government gathers from the emissions trading scheme and then recycles it back into climate-related measures.
The Greens argue that this means “taxpayers” don’t pay for it, but NZU unit holders. However, it is widely accepted that the incidence on the ETS falls on consumers through higher prices.
Hipkins and Energy Minister Megan Woods also framed it as a big win for manufacturing jobs, for keeping manufacturing in New Zealand and, of course, for the climate. Woods led the full explanation of just how good she believed the deal was.
“Our partnership with NZ Steel shows we can tackle the challenge of decarbonising even our hardest-to- abate and largest-emitting industries. This investment would not happen without government support.
“Steel is critical to our economy for manufacturing and construction,’’ Woods said. ‘’Lower carbon steel production at Glenbrook has massive wins for our materials supply chain. It also helps retain a significant local source of employment.
“We are proving once again that decarbonisation does not mean de-industrialisation. It demonstrates how the transition to a low emissions economy can not only be good for the climate, but also a win for minimising waste, retaining jobs and improving New Zealand’s economic resilience.’’
That may well be true. Operating in a carbon-constrained economy, New Zealand Steel may have struggled to be profitable as time went on. In global companies, the internal rate of return required for new capital expenditure (in items such as furnaces, for example) can be high to ensure that capital is profitably employed.
James Shaw, the Minister for Climate Change and Greens co-leader, was more direct: this was a way of getting emissions down.
“Melting scrap steel using electricity, instead of converting iron sands into steel using coal, will substantially reduce the emissions generated from NZ Steel’s current activities,’’ he said on Sunday.
‘’It will also build a more circular, resilient economy. This will put New Zealand in a much better position to meet its climate target of net zero carbon by 2050.’’
New Zealand Steel is a very big company, about 1% of the economy. Yet Bluescope Steel, its Australian parent company, made A$2.7 billion profit after tax in 2022.
New Zealand taxpayers will shell out $140 million to get the furnace built.
The Government has not tried to hide this, but make a virtue of it. All of the media releases put out by the companies involved – New Zealand Steel and Contact Energy – said investment in the new furnace would not have happened without the Government tipping in $140m.
Curiously, releases from the Council of Trade Unions and the Sustainable Business Council (SBC) reflected the same sentiment.
Once upon a time what would have been cast as rent-seeking is now considered valuable co-investment from the government.
“This is a significant announcement which will have a huge impact on Aotearoa New Zealand’s ability to deliver emissions reductions,’’ Sustainable Business Council executive director Mike Burrell says. ‘’It is great to see NZ Steel, an SBC member, leading the way on decarbonisation in partnership with the Government.”
It also sets up a simple question for Labour to ask National: this is $140 million to get rid of 800,000 tonnes of emissions in one fell swoop. How else are you going to do that?
The timing of the deal – after the Budget – while self-explanatory, is also interesting, coming two years after Robertson called Rio TInto’s bluff and refused to give it more subsidies to continue operating. At the time it was expected the smelter would close down in August 2021. Then it was extended to 2024. The plant is still operating.
The grant money for New Zealand Steel has come out of the Government Investment in Decarbonising Industry fund (known as the GIDI fund). The fund was trenchantly opposed by the National Party when it was announced as part of the Government’s first Emissions Reduction Plan a year ago, with National lambasting it as corporate welfare. ACT also opposes it.
The fund is worth some $650 million to subsidise the replacement of boilers and the like in industrial premises around the country.
“The taxpayer shouldn’t be subsidising these big corporates to make emissions reductions,’’ National leader Christopher Luxon said in May last year. ‘’The corporates should be able to do that right now – they need to get on with and get with the programme, not wait for taxpayer money to subsidise them.”
He said there were plenty of price signals through the emissions trading scheme with more money.
“There is no need for corporate welfare going on. We have an ETS scheme which sends messages and signals very clearly to businesses.”
Labour, however, thinks that this big post-Budget announcement is just the sort of thing voters want the Government to do: hit the sweet spot of supporting industry and helping the climate.
Labour also thinks that it suits both it as a party and the politics of the day. While casting this as sensible, it hopes to pin National as being an inflexible ideologue.
Of course the previous National government was not immune from a bit of corporate welfare: film subsidies go straight from New Zealand taxpayers to attract global film companies. There was the deal with Sky City casino for a convention centre. And much besides.
In last Thursday’s Budget there was also money to the gaming industry, amid concerns that it, as well as all of its talent, would be lured to Australia by big subsidies, grants and help to get companies off the ground.
There is a constant tension between governments deciding they will help a sector and the concern that global players are just taking the piss, and expert at extracting taxpayer money with the promises of jobs, production and prosperity.
In fact, even the free prescriptions unveiled in the Budget had a bit of a business welfare scheme about it. Community pharmacies were finding they were struggling against the big Australian Chemist Warehouse and the like, which were not charging for prescriptions at all, instead using this as a loss-leader to get people into their stores.
Then there is the Clean Car discount, a subsidy paid to people wanting to buy an electric car, which is funded by jacking up taxes on the importation of combustion engines. And although the subsidy is paid to the person who buys the car, it is really a subsidy for car producers – the consumer is just the pass-through agent.
This, as much as anything else, will be one of the battlegrounds upon which the October election will be fought.
While Luxon has stalled in his quest to become prime minister, getting bogged down in the public polls over the last couple of months, in a speech last week he provided a revealing line when he talked about the relationship between business and government.
“The Government is so keen to intervene and set new rules that major companies increasingly look to Wellington for direction, before developing their own investment plans,’’ he said in a pre-Budget speech.
“It’s created an unhealthy dependent relationship that is depressing the spark and innovation for which Kiwis have historically been famous.”
Labour fundamentally believes differently. While it certainly does not believe taxpayers should be subsidising for-profit pursuits as a matter of course, it increasingly has fewer qualms about applying those subsidies.
It also has formed a view – through its emission reductions plans and the way the Climate Change Commission is set up – that subsidies and corporate welfare (or “co-investment” in the Government’s nomenclature) is acceptable in the pursuit of higher goals. In this case, cutting emissions.
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