It’s the Economy, Stupid: the Election Was Not About the Economy. Why?

Listener: 8 October, 2005.

Keywords: Macroeconomics & Money;

In a few months, the 2005 election debate may be forgotten, as we focus on the real economic issues that were hardly addressed during it. The most salient include:

1. The Current Account Deficit: we are working (and holidaying) for 11 months and spending for 12. Private foreign debt is high and growing. If there are ructions in the world financial system, New Zealand will suffer because of the private debt and deficit overload. (The good news is the low government debt may help us to manage the crisis.)

2. The oil price spike, mainly arising from the shortage of refining capacity: we don’t know how long or how damaging it is to the world economy, but it is impacting on ours.

3. Inflation: low unemployment, cost pressures and the oil price spike add to the problem.

4. The growth path: we have to move from a low productivity growth/labour-extensive growth strategy to a high productivity one because the sources of additional labour are running out. (One of the sillier episodes was a group of politicians saying on TV that we needed more economic growth, as if the aspiration would magically produce the desired outcome. I did not hear a single practical policy discussion, although there was the usual cant of ideology unsupported by facts.)

I have summarised each briefly because, I promise you, commentators and this column will be repeatedly coming back to them once the election partying is over.

Regrettably, as a result of the election we have to add a fifth concern, exacerbating the others.

5. Fiscal stability: election promises of tax cuts and spending will be hard to meet.

One estimate had National promising a net increase of $4.5 billion a year in spending, three years out. That is a big fiscal injection of about three percent of GDP.

Labour retaliated, according to this estimate, with $1.2 billion pa extra cuts and spending. Both estimates could be contested – they seem a bit low to me – but even Labour will have difficulty keeping to its promises without knocking the economy off course into more inflation, a bigger current account deficit and lower sustainable growth. Expect a vigorous version of the usual post-election government expenditure review.

National went into the election with the most impressive finance team of politicians ever: Reserve Banker Don Brash,merchant banker John Key and ex-Treasury official and previous Minister of Finance Bill English. And yet they ended up with an excessively expansionary – many would say irresponsible – fiscal package (unless they had some secret plan to cut spending, which they hotly denied).

Had you doubts of this assessment, consider their last announced policy, the temporary tax reduction on petrol. It was an attempt to curry public favour, without addressing the real problem of the oil price spike, by shifting it onto the fiscal deficit. Who does such brazen cynicism remind you of? Rob Muldoon of course. And yet the three are not economic Muldoonists.

Perhaps the New Right believed its own propaganda, that its measures of the 80s and 90s had put the economy onto a golden path (albeit one that was some 20 percent lower than when they started). So instead of arguing that we had serious economic challenges and National had the men to address them, they assumed everything was satisfactory and the issue was about spending any future gains.

My doubts about such gains were confirmed by one statistic. In the six Labour years, real income rose about 21.5 percent and real private consumption by 25.7 percent. (Real government spending rose about 22.2 percent.) The figures mean that private consumption is already outstripping what we were earning. That’s the reason that the current account looks so shaky. And yet – and yet – National was offering a further three percent boost.

It was, of course, not in Labour’s interests to tell you that despite the excellent economic performance, we still face challenges. It went into the election on “you’ve never had it so good” slogan, and came out with “and it’s going to be even better”. Well, yes, we have never had it so good. But to get better is going to require some hard work, beginning with more fiscal discipline.