The Government’s response to the recession so far has been to curl up in a ball and hope it will go away. Incredibly, while the economy is shrinking, the Government is destimulating it further by cutting public services.
The excuse they give is that if the Government doesn’t reduce its borrowing, the credit ratings agencies will downgrade our rating, meaning raising new debt will be (slightly) more expensive. That’s the wrong way to go we should be spending more, even if it means a temporary downgrade.
Sure, in an ideal situation we wouldn’t run a fiscal policy that put our credit rating at risk and we would be accumulating net financial assets, not running up more debt. But the situation is far from ideal. Least bad options have to be chosen and the least bad option is to borrow now to get the economy moving again rather than letting it shrink more.
Of course, if we’re going to borrow, we should only do so to spend wisely – not for frivolities like tax cuts. We should spend the money building better, more sustainable infrastructure – the spending will help us out of the recession and the infrastructure will help us grow faster.
The credit ratings agencies look at debt/GDP ratio, so if they see we’re not borrowing irresponsibly, that we have a plan to bring deficits down in the medium term and the debt we are taking on now will boost our GDP then they are unlikely to downgrade our credit rating. Likewise, if the Government presents no plan to grow the economy that could lead to a downgrade.
Even if they downgrade us, spending is still the best option. Other countries (like Ireland) have opted for a slight increase to the cost of borrowing because the other path, the one Bill English seems determined to take us down with his ideological opportunism, is a kind of death spiral – ‘oh no, the economy is shrinking, debt to GDP to is rising, must cut spending, oh no that’s destimulatory, the economy’s shrinking, must cut back more… save me Superman!’
Yeah, we would save a few tens of millions a year on interest payments from avoiding a temporary credit downgrade but the recession will be longer and deeper and the costs for New Zealand’s economy and society will be greater.
Ultimately, the credit downgrade is just a bogeyman. The real reason the Government is cutting public services is ideological.