• Zero Budget, Zero Ambition

    The budget, Bill English tells us, will provide a further step towards a strong long-term economy. That step is certainly needed, since there is precious little evidence of economic strength, long-term or short-term, at present.

    In recent weeks, we have seen unemployment on the rise again, manufacturing output fall back, retail activity stalling, the trade deficit worsening, and GDP figures revised downwards. It is increasingly clear that we have wasted the chance we were offered by buoyant export markets and record commodity prices of pulling ourselves conclusively out of recession. Instead, we have at best bounced along the bottom for nearly four years and, at worst, have left our long-term problems unresolved and getting worse.

    As a result, Kiwis are voting with their feet. Record numbers are responding to unemployment, low wages, reduced public services and poor prospects by crossing the Tasman in search of a better life. Far from closing the gap with Australia, this government has seen us fall further and faster behind.

    Will the budget turn this around? Will the “strong long-term economy” at last materialise? Not if the constant drip-feeding of pre-budget announcements is anything to go by.

    Over recent weeks, prescription charges have been raised, student loan repayments made more onerous, class sizes increased, our diplomatic service decimated, our border security jeopardised, public service broadcasting abandoned, police numbers cut, jobs lost across the public service, help for first-time home buyers slashed, and 0800 numbers substituted for real help with benefits, legal advice, and housing problems.

    It is hard to see how any of this is likely to build a stronger economy, let alone a healthier society. We are told that the cuts – all part of a “zero” budget – are necessary to reduce “the deficit”. But even that limited objective is made more difficult to achieve by constant cutbacks. The reason that “the deficit” is so persistent is that a sluggish economy does not generate the tax revenue that would help to bring it down.

    Dealing with “the deficit” is in any case much more difficult than it should be because the government recklessly gave billions in tax cuts to the wealthy. Having failed to cover the cost of that misplaced generosity through the increase in GST, it must now scrape the bottom of the barrel to find extra funding to pay for the shortfall.

    And that is to say nothing of the fact that constant talk of “the deficit” is misleading in the extreme. The deficit we should be concerned about is not the gap in the government’s finances which – thanks to the prudence of Michael Cullen – are by international standards in reasonably good shape.

    Our real deficit is the amount we continue to borrow as a country from overseas lenders. It is that burden that is actually being made worse by the government’s failure to address our real economic problems and to get the economy moving.

    The Prime Minister has tried to conceal this truth by constantly raising the spectre of the Greek meltdown. If the government does not cut its spending, he says, we could face the same fate as the Greeks. This contention is so ridiculous as to be laughable.

    The Greek problem is the result of a combination of two huge mistakes by Europe’s leaders – mistakes that some of us have warned against for – in my case – many years. The first mistake was to encourage Greece to join a single currency that would impose conditions they simply could not live with.

    By the time that became absolutely apparent it was too late. Confident in the guarantee supposedly provided by membership of the euro, the Greece ran up huge debts which the burdens of euro membership meant they could never hope to repay. There is a dreadful symmetry in the fact that the price for this wilful blindness to economic reality is now being paid, not just by the debtor Greeks, but also by the creditor nations and banks who are equally culpable.

    The second mistake was to insist, as a dwindling band of ideologues continues to do, that the remedy for Greece and the rest of the increasingly recession-ridden euro zone is austerity. We now see (and so does President Obama), not only how hugely damaging this supposed remedy is for the hapless Greeks, but how quickly it is dragging Spain and Ireland, Italy and Portugal, into the same black hole.

    And let there be no doubt. Our own government is making those same mistakes, albeit on a smaller scale. They, too, deny the importance of the exchange rate (as euro membership forced the Greeks to do) in determining the competitiveness needed to improve our economic performance.

    And the emphasis quite unnecessarily placed by the budget on cutbacks is further evidence that, just as in Europe, our government’s watchword is austerity, which may be a sensible way to run a business, but – as all evidence shows –is the wrong response for a country. Like Europe’s leaders, our government stubbornly refuses to learn the lessons of the Great Depression. Can we really be content with an economic outlook about which the best that can be said is that it is “Greek-lite”?

    Bryan Gould

    19 May 2012

    This article was published in the NZ Herald on 23 May.

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