• The Government’s Economic Report Card

    As we enter the fifth year of this government’s term, and the sixth year of bumping along on the recessionary bottom, we now know enough to make an informed judgment of the government’s stewardship of the economy.

    The usual economic indicators do not paint a pretty picture. Unemployment remains stubbornly high, manufacturing is weaker, the balance of trade is deteriorating, overseas borrowing is on the rise, the government deficit remains a problem, and poverty is increasing.

    There is one bright spot, however – productivity. Not productivity in the usual sense of greater output per worker, which is still stuck at relatively low levels, reflecting no doubt equally low levels of investment and skill training; but the government has been remarkably productive in conjuring up excuses to explain our poor performance.

    The first and main excuse is the “global economic situation”, which should certainly be a cause for some concern from a global viewpoint. But, paradoxically, the travails of the global economy have so far had little impact on us.

    That is for a number of reasons. First, the global financial crisis left our Australian-owned banks virtually unscathed and they are still able to borrow with relative ease and at reasonable rates. We have quite simply avoided the huge burden imposed on other economies of having to re-build the credit-worthiness of their banking systems.

    Secondly, our two major export markets and trading partners have been China and Australia, both of which (despite a recent Australian slow-down) have motored on through the global recession and maintained a pretty satisfactory rate of growth and therefore appetite for our goods.

    Thirdly, and as a corollary of the second point, global commodity prices – particularly for our primary products – have been at high levels and have paid us (pace the overvalued dollar) a good return.

    While future uncertainty (largely generated by the Germans who insist on imposing on the euro-zone a harsher version of the same policies as we have had to suffer here) is never helpful, there is actually little in the international situation to explain why we continue to bump along on the bottom.

    But the government has a second ready-made excuse – the Christchurch earthquake. No one would have wished such a disaster upon us, but as an excuse for poor economic performance it suffers some limitations. Indeed, while it certainly means that we have to invest in re-building our asset base, it is also – often in the same breath – touted correctly as a major boost to the level of economic activity; without it, and the investment it necessitates, we would be in even deeper doldrums.

    The truth is that the government’s excuses offer a convenient story to tell, but the real reasons for our sluggish performance lie elsewhere – at the government’s doorstep. High unemployment, manufacturing’s decline, and growing poverty, are a direct consequence of the priorities they have adopted.

    The first mistake was the momentous decision to focus on the government’s own deficit, as though it arose somehow in isolation from the rest of the economy. By adopting this priority, the government ensured that other pressing problems – like unemployment, the country’s overseas borrowing, manufacturing’s difficulties – would remain unaddressed and get worse; and – paradoxically – the decision also ensured that the government deficit (made worse by the tax cuts given to top earners) would be more difficult to deal with.
    The surest way to get the deficit down, after all, would be to get the economy moving again, so that less is paid out in unemployment benefits and more is paid in tax revenues by workers, consumers and businesses.

    The government’s decision not only means that these issues are left neglected; by cutting spending, and trying to drive wages downwards, so that there is less money in people’s pockets, they have unwittingly done their bit towards creating a smaller and weaker economy overall.

    Worse, they have made no attempt to counter or correct the real problems that have made life difficult for us over recent decades. They continue to preside over a policy that encourages the value of the dollar to rise, so that New Zealand workers are priced out of jobs and New Zealand goods are priced out of international markets.

    They continue to focus on inflation (to the exclusion of problems like unemployment) and to use the single instrument of interest rates to deal with it, whatever the consequences for the real economy.

    Alarmingly, they are content to “solve” our growing economy-wide indebtedness by selling off assets and allowing the control and income streams from our most important productive industries to pass into foreign hands – a certain recipe in the longer term for worsening our balance of payments, increasing our need to borrow, and losing control of our own economic destiny.

    Even when the long-delayed recovery from recession does materialise, in other words, we will be heading straight back to the same old – but this time intensified – weaknesses. But, when these long-term failures do their inevitable damage, someone else will have to carry the can; this government will be long gone. It’s hard to think of a better definition of short-termism.

    Bryan Gould
    29 December 2012