Travelling Further Down A No-Exit Road
By the time of the 2008 election, New Zealand had already been mired in our own home-grown recession for nearly a year. A response that would get the economy moving again quickly was clearly needed.
That urgency was reinforced by the global financial crisis that shook the world in the later part of 2008. Our Australian-owned banking system was mercifully affected only mildly by the turmoil, but the increased recessionary pressures across the economy as a whole made it all the more imperative that our new government should act decisively.
We waited in vain for that decisive action. Apart from a largely abortive “jobs summit” in early 2009, the government seemed content to sit out the crisis, waiting for others to bring the recession to an end – and this, despite the buoyancy of our main export markets and a rise to record levels in our main commodity prices.
The government’s main preoccupation was not –so it seemed – to get the unemployed back to work, so that incomes, purchasing power and demand would rise. They focused instead on government debt – surprisingly since, at just 23.4% of GDP, New Zealand’s government debt was one of the three or four lowest in the OECD.
They asserted that – successful though the Labour government had been in bringing that percentage down – it was now their main focus to get it down further. Only in that way, they believed, would confidence return, recovery from recession be achieved, a credit downgrade be avoided, and interest rates be held at low levels.
In expressing such faith in what the Nobel prize-winning economist, Paul Krugman, calls the “confidence fairy”, our government was following down a track mapped out by the leaders of other Western countries – those same leaders who had presided over the global financial crisis in the first place.
Let’s be clear. Manageable levels of government debt are clearly desirable. The question is not whether that should be the goal, or at least one of them, but rather whether the government’s chosen method of achieving the goal has been effective.
Three years later, how have we done? Did the “confidence fairy” appear and work her magic? The answer is sadly disappointing.
Despite the priority they had, the government’s finances remain in a parlous state. As Brian Gaynor pointed out recently, the government’s cumulative deficit over three years will rise to $35.5 billion, compared to a surplus of $35.6 billion under the Labour government. As a result, government debt will rise to 37.7% of GDP. Why has this happened?
The answer is really a matter of common sense. The main drag on government finances is the loss of revenue in an economy that refuses to grow out of recession – and, as this week’s figures show, still does. You don’t solve that problem by slowing the economy still further, by cutting what could have been a sensible investment in getting the economy moving again.
The government, in other words, backed the wrong horse. If they had concentrated on getting people back to work, so that they earned and spent more, the economy would not only have been more buoyant, but so too would government revenues. The deficit may have been higher in the short term, as the investment in our future was made, but it would not have been so persistently high now and over the longer term. Cutting government deficits does not promote recovery; it is the other way round.
Not only has the government failed to control its own deficits and debt. It has also increased the country’s debt, with the result that we have suffered the credit downgrades the government warned against, while the interest rates we pay to overseas lenders will rise.
It is cold comfort to know that we have not been alone in making these mistakes. In many other Western countries, the expected appearance, in response to austerity and cutbacks, of the “confidence fairy” has not materialised. The Conservatives in Britain, the eurozone’s leaders, the Republicans in the United States, have all pinned their hopes on austerity – and, as those hopes have been dashed, their only self-defeating remedy is to inflict yet more pain.
The “confidence fairy” seems unimpressed by more blood-letting, to which the nearest analogy is the use of leeches by medieval doctors to bleed their sick patients.
We may feel sorry for the Greeks or Italians, but we have suffered the same dead-end policies that they have had to endure – albeit, given the size of the eurozone economy, on a smaller scale.
We, too, have been driven by ideological tunnel vision down a one-way, no-exit road, unable to go forward or back – not a comfortable situation with a second recession bearing down on us.
And, in case the we try to blame our lamentable performance on the global financial crisis or the Christchurch earthquake, let’s be clear that our government blew its best chance of pulling us out of recession well before the full impact of those factors was felt – a point not depending on hindsight but made by me and others at the time.
If the exodus across the Tasman is to be stemmed, we surely cannot afford another wasted three years.
Bryan Gould
5 December 2011
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