Come Budget day, expect some wailing and gnashing of teeth.
Listener: 16 May, 2009.
Keywords: Macroeconomics & Money;
We are in the recessionary equivalent of a phoney war. The economy is certainly in a recession – it began in early 2008 and is already one of our longest postwar ones. We may be able to see signs of it ending – some forecasters have been promising this for almost a year. But we know long recessions have spurious recoveries that give the unwary a glimmer of hope before lapsing into gloom again.
What is beyond doubt is that unemployment has risen by about a quarter in the past year; that means the demand for labour is not rising as fast as people are moving into the workforce. There is no sign of this imbalance reversing, with forecasters expecting unemployment to roughly double in about a year’s time. Why the complacency? One reason is that so far the recession has been milder than it is likely to become. A second is that some of the big overseas economies are in dire trouble, but the world recession is feeding only sluggishly through to New Zealand. The only sector having obvious difficulties is international tourism, and even that is sheltered by the many current tourists who booked before the world recession became evident. In the next round of bookings, there will be fewer of them.
But perhaps the main reason for the complacency lies in the peculiarities of our public commentary on the economy.
What struck me last year was how the economic account on which the 2008 election centred was so out of kilter with what was happening. It was like a family having a dispute over who should put logs on the drawing-room fire while ignoring that the west wing was ablaze.
The framework of the election debate was based on the benign world economy before August 2007 and a belief that a (largely self-induced) New Zealand recession could be quickly remedied with an appropriate fiscal stimulus. From September 2008, following the major trauma in the US and other financial centres, such a view became untenable. But it was too late for electioneering politicians to change their stories.
As soon as the incoming National Government was briefed after the election, it realised the state of the economy was very different from the one on which it had campaigned. Both the minister of finance and the prime minister have cautiously tried to warn us, but the inertia of the conventional wisdom continues to favour the out-of-touch election scenario. Even the Job Summit was 2007 thinking.
I expect the public complacency to end on May 28, when the Budget will have to not only set out the economic and fiscal challenges the economy faces – these are already available in public documents – but also respond to them.
The sobering news is that further government borrowing is limited – too few international lenders are willing to come up with the dosh. And as I explained in my March 28 column, there is a longterm structural imbalance, so that after the recession, government spending will still vastly exceed revenue, generating, in the minister’s words, “decades of debt”. Nobody expects foreign lenders to fund the Government for decades, so the Budget has to tell us what the Government is going to do about reducing the need to borrow – and that means cutting spending and/or increasing taxes.
Even if the Government tried to fudge this issue (which it so far hasn’t done), the credit agencies and expert commentators would draw attention to any sham, causing our credit rating and ease of borrowing offshore to plunge.
So, on Budget day the public is likely to be told tough decisions have to be made. I can guess what some of them will be. Whenever I do the calculations, I conclude there have to be some cuts and deferments that will be very harsh on someone or other. These people will be indignant and angry on Budget night and after. The phoney war will be over.