A spending cap

The Herald reports:

Prime Minister John Key has swiftly shot down speculation that next month’s Budget would include an announcement on some form of legislated cap on Government spending.

This is a pity. I am definitely fan of a cap on spending as a percentage of GDP.

“We have our own self-imposed cap,” he said referring to the $1.1 billion limit on new spending announced last year.

And that is a useful discipline, but I think there is a difference between a cap on new spending and a target for how large the state’s portion of the economy should be.

The Act Party favours a legislated cap which would freeze government spending in real per capita terms, that is, only allow spending to increase in line with inflation and population growth unless over-ridden by a public referendum.

Again I think this is a worthwhile policy. Only allowing inflation and population adjustments might be a bit too restrictive, but one could set it as a maximum increase in real per capita terms of 1% a year for example.

The 2025 taskforce chaired by Don Brash recommended legislation requiring the Government to set a medium-term target for its operating spending either in real per capita terms or as a share of GDP.

And such a requirement would force transparency from parties on their spending plans. I want to have parties tell us their desired share of GDP for the state. National might say 30%, Labour 35% and ACT 25%, and one can make an informed choice about which policy you prefer.

Key said he did not support measures limiting something to a specified share of GDP.

Many governments had responded to the global financial crisis over the past 12 to 18 months by increasing their spending as a percentage of the economy. “If they are talking about something different, we could look at that.”

The PM’s concern seems to be that such a legislated cap would remove the ability of a Government to respond to a recession. But I think one can deal with that issue by having the cap as a medium term target, with the legislative requirement being to report progress against it – not to be illegal to ever exceed it.

Key does not seem to have ruled out a cap, if it leaves the Government with some flexibility. I think that is achievable and would encourage National to work towards that.