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Don’t fear the reaper

Written By: - Date published: 12:05 pm, April 27th, 2009 - 19 comments
Categories: budget 2009, economy, national/act government - Tags:

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.

19 comments on “Don’t fear the reaper”

  1. lprent 1

    The one that I find totally ludicrous is that they are currently talking about cutting WINZ staff. It is hard to see a more fundamental denial than that – what do they think is happening to employment? That it is rising?

    • Chess Player 1.1

      Well, let’s think about it…

      When unemployment was falling, the number of staff at WINZ increased, so presumably now that unemployment is rising, the number of staff at WINZ should decrease.

      Or is it just that the number of staff at WINZ should always be increasing?

  2. BLiP 2

    Classic Tory strategy – eeeek, there’s a depression coming, quick get rid of social welfare and access to justice before the people realise they need it.

  3. rave 3

    Cutting public spending is not Tory ideology, its capitalists acting in their class interests when their system goes into crisis. The ideology kicks in when they try to get us to agree to pay for their bonuses out of our pockets in order to save “the system”. It is too big to fail, they say. TINA. Bullshit! But that alternative is not Keynesianism.

    Why should they stimulate consumption to restore profits when they can restore profits directly by massive global theft of workers future taxes and real wages eroded by inflation? Who needs job schemes for the poor when they can have job schemes for the rich called bailouts?

    I say the system is too sick to survive. I object to having my blood transfused into its rotten veins in the name of keeping Zombie capitalism and all of its bloodsucking banskers alive.

    The French workers are telling us something. Sarkozy is bailing like mad but the workers answer to closures and layoffs are occupations and bossnapping, not praying to the image of Keynes.

    As one ex PM said, “There could be a revolution” – version 2.0
    http://www.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=10568861

    • BLiP 3.1

      I stand corrected. Thank you.

    • The Baron 3.2

      Wow, and what a revolution it will be. Kidnapping people because they were the boss sounds awfully similar to other revolutions… Cambodia anyone? Next stop, the killing fields… nice glasses.

      You know why there won’t be a revolution? Because everyone knows that the previous revolutions have been utter nightmares once they got started. Why would this one be any different to the “great” socialist experiments of the 20th century?

      • Ag 3.2.1

        So some French workers detaining their bosses is comparable to a mass forced evacuation of all urban areas, the slaughter of intellectuals, and making everyone live and work on farms?

        I can tell you one thing. A New Zealand revolution wouldn’t result in the slaughter of intellectuals, because the National Party doesn’t have any.

  4. vto 4

    It constantly amaxes me how so many people consider the state’s finances to be more important than an individual household’s finances. Evidenced by those who continually call for increasing taxes to improve the govts coffers when times are bad. At the expense of the taxpayer.

    To me it is the most arse-about philosophy about.

    • Ag 4.1

      It constantly amaxes me how so many people consider the state’s finances to be more important than an individual household’s finances.

      It amazes me how many people don’t. What are you smoking, seriously?

      • vto 4.1.1

        That is a clever argument you put forward Mrs Ag.

        What you advocate is like the King in his counting house at the top of the slowly deteriorating castle demanding bricks from the lower levels to keep his own bricks looking like new.

        Dumbo.

  5. The Baron 5

    This is all well and good Eddie, but a better fiscal strategy would be to do all that spending without taking on all that debt.

    Unfortunately, Cullen botched that option with the massive spend up that was Budget 08, and the decade of deficits that he left for the national government.

    Your cries of responsible government are hollow when you compare it to that act of outright economic sabotage, done by a man who was more interested in keeping the baubles of power than actually doing the right thing for the economy and the country.

    For shame Eddie. If anyone is to blame for this current mess, and for any resulting downgrade, its the guy who was at the helm for 9 years – not the guy who has only had it for 6 months!

    • r0b 5.1

      Unfortunately, Cullen botched that option with the massive spend up that was Budget 08, and the decade of deficits that he left for the national government.

      Uh huh. And yet according to Treasury, the IMF, and oh even National, Cullen and Labour left our economy well placed to face the current crisis.

      If anyone is to blame for this current mess, and for any resulting downgrade, its the guy who was at the helm for 9 years – not the guy who has only had it for 6 months!

      The guy at the helm for 9 years left us well placed. The guy there for 6 months went on holiday, ignored consensus and advice, and is now trying to ignore the problem. Key can’t be blamed for the crisis, he can be blamed for his totally inadequate, in fact non existent response.

      • BLiP 5.1.1

        Its more Farrar shit stirring that’s contributing to this example of ignorance amongst the punters. This time casting blame for National’s promise breaking in relation to the tax cuts . . . like they ever intended n handing them out.

      • ak 5.1.2

        Not quite non-existent r0b – the first sound-bite out of Biketrack Boy the other night was “the public’s not blaming National for this global problem”

        “It wasn’t me mum!” No Johnny, as you say, it’s all the fault of that big bad Uncle Sam. That’s right, the freedom-loving home and embodiment of your “less regulation” Tory ideology.

        Expect a lot more of this cowardly Pilatesque PR hand-washing as the worry lines deepen – backed up by the press of course (and I see their granny organ is now running pieces by Timmy Ellis and wait for it….Michele Cabiling! Regular standardistas will recognise these paragons of impartial analysis…)

    • sean 5.2

      yeah, Cullen should never have made the biggest element of new spending in his 2008 budget – the tax cuts. The governemnt’s finances would be in much better condition if we hadn’t had two reounds of tax cuts in six months.

      I’m still trying to see the part where Eddie blames English for the state of the Government’s finances. I think it’s the response that’s being criticised.

  6. Greg 7

    Ah, the old trap.

    Attack the person, not the argument.

    For the record ‘that bozo’ is widely recognised as one of the best economists in the world at this time. His textbooks practically make him the Samuelson of modern economics.

    And there’s also one or two other economists that agree with him.

  7. Nick C 8

    “Of course, if we’re going to borrow, we should only do so to spend wisely – not for frivolities like tax cuts.”

    This pretty much sums you guys up for me. Why on earth would we let people keep more of their own money and spend it on what they want when we can spend it on what politicans think people want? I cant imagine.

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