• By On 14 May 2011 In New Zealand Politics Tags ,

    The Mark-Time Budget

    The fact that this week’s budget will do no more than mark time should come as no surprise. We now have getting on for three years’ experience of a government whose idea of managing the economy is simply to wait to see what turns up.

    Some of what has turned up has not been very helpful. The Christchurch earthquakes, in particular, plus the collapse of a couple of dozen finance companies, have not made things any easier. The government, of course, has seized on these factors to explain why their do-nothing policy has not produced better results.

    But other developments have been very advantageous. World commodity prices – and prices for our commodities in particular – have soared to record levels. Our major export markets – Australia and China – have been the two economies that have best been able to shrug off the global recession. Our Australian-owned banks, while having to grapple with the higher cost of international borrowing, have ensured that we have been largely insulated against the global financial crisis.

    And, as independent agencies like the IMF and Standard and Poor’s have made clear, (and has been conveniently ignored by media who prefer to focus for their own reasons on the government’s deficit) our public finances are – both historically and comparatively – in a reasonably healthy state, reflecting the prudent management and repayment of public debt carried out by earlier Finance Ministers.

    These factors should surely have meant that we, too, like our two major trading partners, were able to rebound from recession and resume a rate of growth that would restore something like full employment and – with higher tax revenues – achieve an immediate improvement in the government’s accounts. But, disappointingly, having fallen into recession before most other countries, we are still bumping along on the bottom.

    Economies are robust things. You can kick them, neglect them, starve them, but sooner or later their natural buoyancy will bring about a recovery of sorts. But that recovery will be longer delayed, and will be from a lower base and less strong and sustainable than it should have been.

    The failure to get the economy moving is in other words not a cost-free dereliction of duty. Over a three-year period, the failure to move forward could well have cost us up to $20 billion in lost national income and will mean that growth, when it does resume, will be from a lower base and on a lower trajectory – penalising us for years to come.

    Many remain without work, many more are worse off, our public services are underfunded, our investment in our future is undermined, our ability to protect our environment is weakened, all because recession continues to hold us in its grip.

    We can ill afford such a loss. Little wonder that Australian living standards continue to outpace ours (as the current disparity in the value of our respective currencies makes clear) and that the exodus across the Tasman is again gathering pace.

    One does not need to support Act to have some sympathy with Don Brash when, faced with government by inertia, he accuses the Prime Minister of taking no action to grapple with our problems – which is not to say that the good doctor’s prescriptions would not make matters a good deal worse.

    We may be grateful that the Prime Minister declines to follow Don Brash’s advice but why does he not bestir himself of his own accord? It is partly a matter of political calculation. The Prime Minister no doubt reasons that he continues to do well in the opinion polls without doing anything, so why take the risk?

    But it is also a matter of experience and temperament. Many voters will have concluded, when John Key became Prime Minister, that the economy was in safe hands. A self-made millionaire would certainly know a thing or two about what makes the economy tick.

    But experience in the frenetic and short-term world of the foreign currency trader – a world of snap judgments and overnight deals – is not necessarily the best preparation for managing a whole economy at the macro level over a long period. That requires something very different.

    And John Key has another characteristic, which he shares with my former colleague, Tony Blair. His basic pitch to the electorate is that he is a nice guy who can be trusted to take the pain out of politics – and, to some degree, the politics out of politics. A winning smile and a telegenic personality – both possessed in large measure by both Blair and Key – will get you a long way; but that advantage is put at risk when hard decisions have to be made and people are disappointed.

    We need a budget this week that faces the tough issues, that sets us on course to save and invest, to reduce our national indebtedness, and to improve the competitiveness of our productive sector – and to use the comparative strength of the government’s finances to help us achieve these goals. It seems unlikely that we will get it.

    Bryan Gould

    14 May 2011

    This article was published in the NZ Herald on 17 May

  • By On 28 May 2009 In New Zealand Politics Tags , , ,

    A Standard and Poor Budget

    We may never know what passed between Standard and Poor’s and our Finance Minister on the eve of the budget. And only time will tell whether the “primary focus” of the budget was – as the Prime Minister claimed – the avoidance of a credit rating downgrade and whether, in the long run, that goal was achieved. But the episode does raise a number of interesting questions.

    Eyebrows were understandably raised at the explicit acknowledgment that the government’s budget strategy has been shaped by the need to please an overseas credit rating agency. How did we, as a sovereign country, become so powerless to decide our own destiny?

    We don’t have to look far for the answers. After decades of poor economic performance and – as a consequence – of living beyond our means, we are now one of the world’s most indebted countries. On some measures, only Iceland had a greater overseas debt in proportionate terms than we have – and we know what has happened to Iceland.

    The size of our debt means that we are dangerously dependent on the willingness of others to lend to us. In times of plentiful and relatively cheap credit, borrowing (at a price) was not a problem. But the global crisis has changed all that. Credit is now in short supply and countries like New Zealand, with substantial deficits to finance, will have to pay an interest rate premium to borrow – if they are able to borrow at all.

    The level of interest we must pay will depend crucially on our credit rating – and that is why the government is so concerned about the view taken of us by Standard and Poor’s. According to the Treasury, a downgrade would cost the country $600 million and interest rates could rise across the board by 1.5%.

    But is this all as stark as it seems? Are the threats of a credit downgrade and its consequences as serious as they sound, and – even if they were – would they be a price worth paying for gains that are even more important?

    We should note, first, that the Treasury and others have been very relaxed over a long period about interest rates that have been much higher and more damaging to our economy than anything currently contemplated. And we should also note that many of the more frightening Treasury forecasts of the likely level of government debt seem to be simple extrapolations of the short-term and recession-induced deterioration in the government’s financial position, and to pay little attention to the beneficial impact of an effective counter-recessionary strategy. And no one – least of all Standard and Poor’s – could overlook the fact that our government’s financial position is, by both our own historical standards and in terms of international comparisons, reassuringly strong.

    Let us assume, in other words, that the credit rating agencies are not lacking in intelligence and know their own business. The government may be obsessed by the projected level of government debt but Standard and Poor’s know that the government’s relatively healthy debt position is only a small part of the real problem – the huge amounts that we as a country (and that includes all of us, banks, businesses, individuals as well as the government) have to borrow overseas if we are to keep our heads above water.

    That is the real issue of credit-worthiness – not the government’s debt but the country’s indebtedness. That can be corrected only if we reverse the long-term failure of economic policy and performance and it will only get worse if we fail to use the spending power of government to rescue us from recession. That, surely, is what a credit rating agency should be focusing on.

    The best and quickest way, after all, of bringing both the government’s debt and the country’s borrowing requirement down to manageable levels is to make the recession as short and as shallow as possible. The buoyant tax revenues produced by a recovering economy will quickly bring the deficit down, and repay the $600 million supposed cost of a credit downgrade (if it should happen) several times over. Just how rapidly that can happen can be seen from how fast the government’s finances travelled in the opposite direction once the recession struck.

    No one would welcome a credit downgrade. No one can cavil at the government’s insistence on value for money in public spending. But our over-riding goal should surely be recovery from recession. In giving priority to a temporary increase in government debt as we face the worst recession in generations, we may be taking our eye off the ball. There is a bigger game in town, and that is the health of the economy as a whole.

    Bryan Gould

    28 May 2009

    This revised version of an earlier piece was published in the New Zealand Herald on 1 June.

  • By On 15 May 2009 In New Zealand Politics Tags , , ,

    The Country Not The Government Should Be The Budget Priority

    Even as they prepare their annual budgets, governments don’t always enjoy the freedom of action they would like. The intervention of outside agencies like the IMF is all too familiar to many governments whose economies have run into the buffers, and even at the best of times New Zealand governments have been content to hand over major decisions about the economy to an “independent” (for which read “unaccountable”) bank.

    In terms of democratic accountability, however, we seem to be plumbing new depths in this country with the tacit acknowledgment that the government’s budget strategy is being shaped by the view taken of us by a mid-level desk officer in an overseas credit rating agency. How did we, as a sovereign country, become so powerless to decide our own destiny? Why, at a time when the economic crisis has called into question so much of what was the prevailing orthodoxy, are we still so dependent on the opinions of bean-counters who are focused on only one small part of our economic landscape?

    We don’t have to look far for the answers. After decades of poor economic performance and – as a consequence – of living beyond our means, we are now one of the world’s most indebted countries. On some measures, only Iceland had a greater overseas debt in proportionate terms than we have – and we know what has happened to Iceland.

    The size of our debt means that we are dangerously dependent on the willingness of others to lend to us. In times of plentiful and relatively cheap credit, borrowing was not a problem, though even then the high interest rates we had to offer crippled our productive economy. But the global crisis has changed all that. Credit is now in short supply and countries like New Zealand, with huge debt to finance, will have to pay an interest rate premium to borrow – if they are able to borrow at all.

    The level of interest will depend crucially on our credit rating – and because our debt is proportionately so big, the cost of even a small hike in interest rates as a consequence of a credit rate downgrade will be damagingly high. That is why the government is so concerned about the view taken of us by Standard and Poor’s, and why this month’s budget will be framed to please them.

    This, then, is the long-term outcome of the economic policy we have pursued for twenty-five years – that our government feels that it must dance to the tune of a credit rating agency rather than address the worst recession in living memory with the policies that stand the best chance of bringing it to an early end.

    There is, however, a mystery at the heart of the government’s acceptance that it must toe the credit rating line. The focal point of economic strategy appears to be the over-riding priority given to the size of the government’s debt. The scope for stimulating the economy through, for example, investing in much-needed infrastructure (which most commentators agree is the best way to deal with a recession) is said to be greatly constrained by a government debt that threatens to shoot into the stratosphere within a few years if public spending limits are relaxed.

    But is this really the case? Let us leave to one side the argument I have advanced on other occasions – that stimulus now through public spending is the best way of reducing government debt in the medium to longer term. Let us instead register that even pessimistic projections of how far and fast the deficit might grow would still leave government debt at levels that in both our own historic terms and in terms of international comparisons would be comparatively low.

    It is not government debt that is the problem. Careful management over the past decade has left the government’s finances in pretty good shape. We can afford, more than most countries, to allow the government deficit to grow a bit, if that is the price to pay for prudent investment in our economic future and for getting on top of the recession quickly.

    Our real problem is not the government and the role that it might play in putting in place a counter-recessionary stimulus package. The underlying problem is the country’s indebtedness – what banks, businesses, individuals as well as the government need to borrow to fund our failure to pay our way. That problem is a function of the long-term failure of economic policy and performance – and it will only get worse if we fail to use the power of government to rescue us from recession.

    This is a time for keeping our eyes firmly on the ball. There is a bigger game in town, in other words, than the government’s debt and the risk of a credit rating downgrade. The budget strategy should focus on the country’s accounts, not just the government’s. The best way of looking after the latter is to get the former right.

    Bryan Gould

    15 May 2009

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