• The Wrong Target

    What the media described as a “back to black” budget was greeted in some quarters as though it was a test match victory. Beyond the headline, however, little attempt was made to help the public understand what the budget was all about.

    For many people, the prospect of “getting back to surplus” was enough to assure them that all is well. Few would ask whose surplus we were actually talking about, whether it was or should be the prime goal of policy, what price we might have to pay to achieve it, and whether its achievement – when it happens – would have helped or hindered the resolution of our long-term problems.

    Many, for example, would not distinguish the government’s position from the country’s; still fewer would understand that a government surplus could actually mean that the country’s indebtedness gets worse. All other things being equal, it would be nice to have the government’s books in balance, but the debt we should really be worried about is the amount we owe to overseas lenders – and that is going up, not down.

    A government surplus, after all, means only that it takes more from us in tax than it spends on services and that is just one part of the overall picture; and sadly, its decision that its own accounts should take precedence over the country’s has meant that we are much slower in coming out of recession than we should be. Those looking for work but without jobs (of whom there are many more than revealed by the statistics), the families in poverty, the children going to school hungry, the families crowded into substandard housing, are all paying the price for an ideologically driven focus on reducing the size of government.

    That slow escape from recession has meant that we have again spent several years failing to make proper use of our productive resources – and we are a poorer country as a result. And the focus on the government’s books has of course played its own part in directly creating unemployment, as public servants have been thrown out of work and sent to join the dole queue.

    Even more importantly, the rundown of public services – the inevitable corollary of the constant cuts – means that in all sorts of areas, like biosecurity and safety at work, we are less well equipped to build an efficient economy; it is only occasionally, when PSA arrives or a Pike River disaster occurs, that we see in stark terms a price that is usually unseen but is actually being paid day by day and across the board.

    Even in those areas where the government has found it necessary to acknowledge public concern, the theme that business, not government, must provide the solution remains dominant. Affordable housing, the government contends, is best provided if local government and community are shunted out of the way and developers are given free rein. The best way of securing an Auckland convention centre is to sell long-term concessions to a casino operator. Prospecting for oil and minerals will attract private investment if civil rights and environmental protections are scrapped.

    If the price we pay for balancing the government’s books is that the country’s trade account goes into deeper deficit and the private sector continues to consume rather than save, there can be only one outcome – the country’s sizeable debt owed to foreigners will go on getting bigger.

    That likely outcome is a recipe for a vicious circle of higher interest rates to persuade foreigners to lend to us, an even more overvalued dollar, more asset sales to overseas buyers to help close the gap between what we spend and what we earn, less national wealth so that we are more dependent on foreign capital to “invest in” (for which read “own”) our productive base and – as interest payments on our borrowings and profits exported overseas take their toll on our balance of payments – the need to undertake yet more borrowing to start the cycle all over again.

    These prospects are not fanciful; it is precisely such fears that prompted both the IMF on their recent visit and the credit rating agency Standard and Poors last week to make their own damning judgment of the government’s strategy. However careful their language, neither of these agencies – historically predisposed as both are to “responsible”, not to say conservative, policies – could conceal their alarm at what are now emerging as the prospects for our economy.

    While the government and our media are focused on the sideshow of a prospective government surplus, the wider economy is belatedly coming out of recession by making a headlong dash back to all our familiar problems writ large. Little wonder that informed observers (including our own Reserve Bank) are alarmed at the overheating Auckland housing market and at the impact of an overvalued currency on our weakening productive sector and growing trade deficit.

    “Back to black”, in other words, was a snap judgment on a budget that, by again ignoring the important elements in our economy in favour of an ideological predilection for reducing the role and responsibilities of government, has compounded rather than resolved our real problems.

    Bryan Gould

    18 May 2013

    This article was published in the NZ Herald on 24 May