July 23, 2009 8:23am by David Farrar

Fallow on Government Spending

The government is a large part of the non-tradeables sector, which over the past five years has grown by 15 per cent. The tradeables sector, said Whitehead, where the country earns its living as a trading nation, contracted by 10 per cent.

Even without the global recession, this was going to catch up with us.

“In other words the public sector has to raise its productivity – provide more for every dollar spent – and grow more slowly than the private and export sectors, to rebalance the economy.”

This is key. The Government sector should not grow faster than the private sector. The private sector funds the Government sector.

Easier said than done, one suspects, but they will need to all the same. The budget allowance for new spending has been slashed and as debt mounts a growing share of revenue will be pre-empted by higher interest costs.

And this is worth remembering. Every daft proposal by Labour to borrow and spend means greater financing costs for the next decade or two. That means either less spending in other areas or tax increases.

The bottom-line arithmetic is that, even with serious fiscal restraint, chronic deficits and mounting debt will be part of the legacy of this recession. All else being equal, this represents upside risk to interest rates.

It will also make it much harder to accomplish the kind of tax reform that the economy needs.

Significant structural changes to the tax system are a lot easier to accomplish in the context of fiscal surpluses, to lessen the extent to which it is an exercise in robbing Peter to pay Paul.

I regard the Cullen years as a horrific wasted opportunity to reform the tax system. The massive surpluses allowed options that just do not exist anymore.

But there are some good signs. Not a lot of money, but it is about the culture. The Dom Post reports: