Listener: 9 June, 2012.
Keywords: Macroeconomics & Money;
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity
Despite the media extravaganza that still surrounds them, government Budgets are no longer the major economic statement of the year. The Government now has so many opportunities at other times, and its no-surprises approach means much is dribbled to the media in advance. The Budget has also returned to the old approach of being primarily a fiscal statement about what is happening to government revenue and spending. It contains little economic strategy, reflecting the dearth of debate on the economy. On Budget night I was reading WB Yeats’s poem The Second Coming, whose lines open this column.
Let me try to guess the Government’s economic strategy – or part of it. For about 20 years, ministers of finance – from Ruth Richardson to Michael Cullen – ran a Budget surplus (the Government collected more money than it spent) and used it to pay down net core Crown debt. This was not much above 5% of the annual gross domestic product (GDP) at the time of the 2008 election. But the world was going into a long recession, which the new National Government tried to cushion us from by cutting taxes in 2009. That markedly increased the Budget deficit, and the debt rose quickly; it is expected to peak at over 30% of GDP in 2015.
Public debt is not high by international standards. However, the Government thinks it should go no higher, arguing that past ministers of finance reduced government debt to enable us to withstand major external shocks, especially as there may be another one soon. New Zealand’s private external debt is uncomfortably high, so we may not have the public reserves to bail out the private sector next time. Plus the world economy is growing much more slowly and, therefore, so is New Zealand’s. This means public spending has to slow down, too – no easy matter and complicated by National’s political preference for spending less and reducing income tax rates. (Had Labour stayed in office, it would have had to slow spending, too, but perhaps not as much because it is not so predisposed to cut tax rates.)
And so we had the “zero Budget” in which there was a very strong restraint on government spending (plus some fiddling on the revenue side) aimed at reducing the Budget deficit and getting spending on a lower track. That always means someone is worse off – a boon to media trying to hype a boring Budget. Because the focus is on getting the fiscal position into balance, not much attention was given to the growth of the economy. The Budget statement says the economy has been growing recently but at a slower rate than the population.
As you might expect in a long recession, the economy is bumping along a bottom and is likely to keep doing so until the world economy starts expanding – probably some years away. In these circumstances, it seems to me that more attention should be given to redirecting the economy to better-quality consumption and fairer distribution within the constraint of broadly stagnant production.
The Fiscal Strategy Report says a “steady pace of expansion in activity” is expected. The next sentence lists the underpinnings of growth as:
“the rebuilding of Christchurch” (it has been repeatedly delayed; in any case, since when have earthquakes been good for an economy and should we pray for more of them?);
“historically high terms of trade” (wool, log and milk prices are falling sharply);
“and the strength of our key trading partners, including Australia” (the Prime Minister said the New Zealand economy is better off than Australia’s).
“and China” (whose property bubble appears to have burst, so its economy may be on a downer).
There is no mention of the downside of the debt crisis and stagnation in Europe. It is sobering that what happens in the Greek parliament may have more impact on New Zealand’s economic prospects than what happens in ours.