The latest Treasury economic forecasts are out and, in a continuing pattern, they not only make worse reading than the previous updates but they are already out of date. We are now looking at gross government debt rising from less to 20% to 30% or as much as 40% by 2013. Unemployment could rise above 7% from its current level below 4%.
We are one small country caught in a global storm. Although we went into recession earlier than most other countries, we have entered the storm in better shape than just about any other country with a balanced budget, a decade of strong growth behind us, record low unemployment, and a government with net financial assets for the first time. (ironically, the high inflation and higher interest rates we had also come in handy – other countries are facing the far worse condition of deflation and have already reduced their official interest rates as low as they can go, they have pushed the monetary policy level to maximum without success).
The causes of this crisis are not domestic, our domestic situation is better than most, which makes attempts to blame the last government for the crisis all the more pathetic. However, the way we react domestically will have some bearing on how badly the crisis hurts ordinary New Zealanders.
Right now the National/ACT government is ramming through under urgency a series of hastily written laws (most only a page or two long) dealing with minutiae that National themselves claim won’t change anything but are merely symbolic. How much better it would have been if National/ACT would have shown the same sense of urgency towards developing an economic stimulus program combining sustainable infrastructure spending, skills training, and job creation as they have shown in relaxing energy efficiency standards for lightbulbs.
From Bill English’s comments on these latest updates, it seems he is most concerned about the size of the deficit the government is projected to run. That is the wrong focus. During the growth period we ran large surpluses and used them to pay down our debt, now is the time to run deficits. If we attempt to reduce the deficit significantly (and tax cuts for the rich don’t help) we will have to cut government spending on health, education, benefits, and superannuation, as English did when he was Finance Minister during our last recession. As it did then, that course of action would only make things worse by further reducing employment and cutting people’s incomes. What’s worse we would feel the long-term effects in worse education and heath outcomes.
I’m hoping that English’s instinct to slash public services and hope the economy will fix itself will be over-ruled by Key who, if he really is a pragmatist, will see that we need a proactive government willing to spend and lead the economy out of recession. But I fear my hope is in vain.