No, National shouldn’t have balanced the books.

Written By: - Date published: 9:30 am, August 28th, 2015 - 34 comments
Categories: bill english, debt / deficit, Economy, national, tax, unemployment - Tags: , , ,

Simon Louisson recently made a post on the Standard about National’s profligacy, and all of the debt they have racked up.

Yes, National was profligate. Yes, Bill English’s budgets did run six consecutive deficits. Yes, nominal government debt has nearly quadrupled. Yes, New Zealand’s debt-to-GDP ratio has nearly tripled.

No, National should not have balanced the books. No, Bill English, should not have attempted to pay off the debt he racked up.

Let’s face it: the economy was in recession for quite a while due to the GFC. And sure, it was – on paper – growing again by 2010, around two years after going into recession. But the economy wasn’t back to normal by then – we were not operating at capacity. Unemployment peaked at around 170,000 in 2012. This was two years after the recession officially ended. Keep in mind that in 2007, only 70,000 people were unemployed. At the time of writing this, about 140,000 people are still unemployed. Of course, the labour force has expanded quite a bit so we can look at the overall unemployment rate: it’s around 5.9 percent. If we look at the period from 1999 to 2008 where there was solid growth each year, the unemployment rate was, on average, below five percent. We’re much closer to that number now.

Should National have attempted to balance the books by 2012, when unemployment peaked, four years after the GFC began? Based on the numbers, as any good Keynesian would, I’m going to have to say no. As far as debt as a percentage of GDP goes, we’re still in a pretty good position. We have one of the lowest debt-to-GDP ratios in the OECD, and we are far below the average. Greece has a debt-to-GDP ratio of nearly 180 percent. We shouldn’t make up a crisis where none exists.

This brings me to profligacy. National can’t escape all of the blame. They were profligate. National handed the top ten percent a big tax cut – from 38 to 33 percent. They also reduced taxes on the lower brackets which, again, as any good Keynesian would say, was justified as tax cuts for low- and middle- income people stimulate the economy. But cutting taxes for the wealthy – partially compensated by a GST rise – is not just bad for the economy, it was bad for the budget.

Deficits and debt are not the problem. What National did do wrong, though, was increase the deficit and debt by cutting taxes for the wealthy when there was no reason to, it was not good for the economy based on any form of Keynesian logic, and it increased debt. Perhaps if they hadn’t done that, we could have instead borrowed to stimulate and diversify the economy via investment in new industries, or perhaps, we could have borrowed less and seen the books balance a year ago.

National’s economic mismanagement is the problem – not the fact that Bill English hasn’t produced a surplus yet.

Michael

34 comments on “No, National shouldn’t have balanced the books. ”

  1. Colonial Rawshark 1

    Michael is spot on correct here. I would go further and say that NZ Govt should be producing a govt surplus until we run a consistent current account surplus.

    Otherwise all the government will be doing is sucking more money out of the economy than it spends back in. Over a couple of years this will inevitably lead to a (deeper) recession.

    The only thing I would say Michael did not mention is the level of PRIVATE debt held by NZ. That level is high, and dangerous. Governments can always manage debt better and more cheaply than the private sector.

    • Colonial Viper 1.1

      I would go further and say that NZ Govt should NOT be producing a govt surplus until we run a consistent current account surplus.

      Argh corrected now

    • lprent 1.2

      I have several difficulties with this analysis. Most of them relate to the changes in society since 1936 when Keynes was doing his economic analysis.

      Firstly, looking at the unemployment stats in gross isn’t useful anymore. Employees transition from job to job, from career to career, and town to town a lot more frequently than they did back in the 1930s. Just being employed in the same place for more than a five years is becoming quite rare because employees now get their major pay increases by moving.

      So you need to look at what is important in the employment stats for actual capacity. Not the transient unemployment while people are looking for work for a couple of months (it usually takes a month to start getting interviews).

      The statistical focus need to be on longer term unemployed (>3 months) and those who could work but have stopped looking. In other words, a measure based on the details of the household survey rather than gross stats.

      My bet would be that if we looked at such a measure that the effective medium-long term unemployment rate worth worrying about would be quite small over the last 3-4 years. In 2010 it would have been pretty high, but now I’d be surprised if it is more than 2% and, except among the younger workers, mainly of people who really have little chance of getting work. We have returned to having a lot of transient unemployment in areas where there are jobs, and longer term unemployment in areas without jobs.

      Secondly, there is a demographic nightmare looming in the future. Quite simply the whole population and especially the workforce is getting older. The Keynesian solutions were predicated on the need to get an increasing workforce involved in being productive and paying taxes. But the workforce size appears to be almost stagnant these days, and would be without the immigration that is currently sustaining it. We are losing older people to retirement.

      This means that, in practice, our economy won’t bounce back as fast in the taxation side as it once did during the middle of last century.

      Increasingly, as any employer will tell you, the constraint isn’t about getting people for jobs. It is getting the people with the right skills who are ready for a particular job or are worthwhile training for a particular job.

      When we have a downturn in businesses these days, employers drop staff with replaceable skills and guard those with hard to replace skills. That means that when they start hiring they are still constrained by the same skill shortages that they had prior to the downturn in their business. It simply isn’t worth throwing unskilled people at jobs because that means that you wind up using skilled people to train them for about 3-6 months – an incredibly costly exercise.

      Effectively the only soak for new employment is new startup businesses who will take the risk of training new people because they can’t attract valued skilled employees. But that is a targeted strategy rather than a macro-economic one that a wider Keynesian macro-economic strategy demands. And of course National hasn’t been doing it because that isn’t their constituency.

      Quite simply pouring money out on a macro-economic untargeted strategy has very limited effectiveness these days in boosting the economy. Raising debt by the government to put people in employment via infrastructure projects (the classic favorite) doesn’t raise the real skill levels sufficiently to be effective long term. It just gives people limited skills in transient jobs, while making it harder to do the same thing in the looming next downturn.

      Raising debt for starting new industry sectors that (unlike dairy) have jobs is a far more effective proposition. Raising debt for training kids has a massive return into the future.

      Raising debt to just give people unskilled work with limited economic value simply limits how much we can do the other effective strategies into the future.

      • Colonial Viper 1.2.1

        New start up businesses with only a few employees don’t have the time or the funds or the experienced personnel to spare to train new people up.

        What is going on of course is that NZ businesses, which chronically under invest in staff any way, have simply been hiring older more experienced more reliable workers ahead of young workers. Even for shelf stacking jobs.

        Firstly, looking at the unemployment stats in gross isn’t useful anymore. Employees transition from job to job, from career to career, and town to town a lot more frequently than they did back in the 1930s. Just being employed in the same place for more than a five years is becoming quite rare because employees now get their major pay increases by moving.

        What this says is that our old established system of counting the unemployed becomes increasingly useless as more employment is of a precarious and unstable nature.

        Society needs to be able to provide work and income of a nature which enables people to start forming households.

        If you did paid work for a single hour in the last month, I bet they don’t count you as “unemployed.”

  2. greywarshark 2

    My comment on debt that would follow on from CRs from an earlier post. Still useful, still relevant, and will be to the unforeseeable future.
    http://thestandard.org.nz/guest-post-how-the-left-should-respond-to-financial-crises/#comment-1063587

    This was relating to Paul’s comment at –
    http://thestandard.org.nz/open-mike-27082015/#comment-1063305

  3. Aaron 3

    Yes, yes, yes. Finally someone talking sense about the economy.

    The level of economic debate in this country is staggeringly poor so I have to congratulate anyone trying to address this.

    For anyone interested in hearing from an economist who makes sense can I suggest people google Steve Keen – one of the few who wasn’t surprised by the GFC.

  4. Stuart Munro 4

    I think that this argument is over-reliant on the validity of statistics we know to be seriously flawed. The unemployment numbers do not reflect the real situation of massive underemployment and WINZ hazing to promote suicide and UE benefit avoidance.

    When the next left government takes power it ought to collect more sophisticated numbers – probably the ones that reflect that 40% or more of the working age population is not working – most of whom would prefer to.

    That said, having been frankly murderously antisocial this government has no excuse whatsoever for their pathetic budgetary performance. If we have to have vicious and unprincipled neo-liberals in power occasionally the least we can require of them is that they not run up Grecian levels of debt.

    This government is a failure on every level.

    • greywarshark 4.1

      Yes that term – WINZ hazing is apt.
      https://en.wikipedia.org/wiki/Hazing
      Hazing is seen in many different types of social groups, including gangs, sports teams, schools, military units, and fraternities and sororities. The initiation rites can range from relatively benign pranks, to protracted patterns of behavior that rise to the level of abuse or criminal misconduct.

      Perhaps it would be more straightforward for understanding of the realities of dealing with WINZ and the awfulness of it to have regular hazing street theatre?
      Or it could be satisfying for contorted minds in the I’m all right belt, to turn up on a volunteer basis to form a hazing passage outside or inside the WINZ lobby, where they beat people unsuccessful in getting jobs with those sponge thumpers. Apparently in organised authoritarian systems, two lines are formed and the unsatisfactory person runs between while everyone takes a hit at him or her.

      Then there is the business of shaving your hair off. Some men, often police, like the skinhead look but it still isn’t in for women. So shaming as in post WW2 could carry out hazing like that.

      At present the naicer people can pretend that they don’t know what’s going on and hide the fact that they don’t care about others’ treatment. Let’s have it all out in the open. Stocks anyone and not the floral scented ones?

  5. Murray 5

    The Keynesian v monetarist debate has been buried under a neo-liberal smoke screen. It needs to be reinstated.

  6. Deadsmurf 6

    Following the GFC the government should run deficits until the economy is growing. Grant Robertson shouldn’t be attacking the English on this point, rather he should be attacking English for the complete lack of a plan.

    The tax cuts were structured wrong. The increase in GST hurt those on the lowest incomes the hardest, and reduced their overall spending and impacted negatively on aggregate demand.

    The positive drivers in the economy are from migration and the Canterbury rebuild (which is peaking).

    The Investment part of GDP is far too narrow in just roads. There is nothing that increases the productive capacity in the economy.

    The Reserve Bank operates under settings that fight inflation that is a battle from the 1980s. Employment needs to be included in their settings.

    Access to higher education should be widened, what Joyce is doing in this sector is criminal.

    English is so far out of whack with mainstream economics it is frightening.

  7. dukeofurl 7

    When did ‘balancing the books’ become a sign the cash flow was positive.

    If you are concentrating on borrowing, which happens for two reasons, not enough cash and old debt comes due to be paid in full ( unlike mortgages which are mostly payment of interest and borrowed capital over the period)

    2015/16 Domestic Bond Programme Set at $8.0 Billion

    $6.8 bill of that is NEW debt. And its $1 bill higher than its earlier forecast.
    Throw all those forecasts out the window as its all changed in last month.
    In addition there are short term Treasury Bills, essentially more borrowing to even out cash flow in the shorter term

    http://www.nzdmo.govt.nz/publications/mediastatements/debtprogramme/2015-05-21/

    For a look at all the borrowing in one page, will tell you immediately there is no balancing of books- its just become a marketing term

    http://www.rbnz.govt.nz/statistics/tables/d1/

  8. greywarshark 8

    A song about balancing the books should be the first thing that school children do at school each morning. The regimented children should sing a sweet little ditty about how we’re going to balance the books,. As they do so they will all walk around in a circle while they balance the last of their schoolbooks on their heads.

    Then they will go inside and study using their advanced technology which clever people are working on, at a different level, to replace the jobs they would have done when they got out of school.

  9. maui 9

    Logically I thought Labour paying off debt from 2000-08 was a good thing to do in good times. I don’t see the logic behind National not paying off debt when our economy has remained fairly strong over the last 5 years.

    • Glenn 9.1

      I remember going to a family function mid 2008 where my SIL from my first marriage ranted and raved to all and sundry about how evil Michael Cullen was operating a surplus while “those that had worked hard and got ahead” should be having their tax reduced.
      Unfortunately Key gave her what she wanted and she was rewarded for her devotion.

    • Colonial Viper 9.2

      the only reason the economy has been ok for the top 50% in the last few years is that English has been deficit spending into NZ to the tune of $50M per week. Now you suggest he should have been net removing money from the economy instead???

      That is austerity that would have crushed the economy and made life much less tolerable for the bottom 50%.

      • Stuart Munro 9.2.1

        It is a monetarist fiction that government spending is somewhat equal – this is manifestly untrue. $26 million spent on women’s refuges, food in schools or in fact less austere welfare policies will achieve a great deal more than subsidizing the gross and profligate corruption of the flag panel, US apartments or flying sheep.

        My friend in Korea used to cost benefit everything – they had more time than money – and the results were pretty good. Hard work though – Gnat MPs would never do anything like that. Bill English spends money so poorly that redirecting it might indeed not materially affect the economy.

        The obvious example would be replacing Bill with a rubber chicken. It is austere, and the $2:50 goes offshore. But it’s more intelligent than Bill, and less corrupt. A rubber chicken wouldn’t have collapsed Solid Energy, played dirty pool with SCF, or lost $101 billion dollars. The direct savings, if redirected to areas that enjoy a spending multiplier (the classics are childrens’ health or education) could have a worthwhile positive effect.

  10. infused 10

    The GST change knocked on businesses for another year. While the GFC technically finished earlier, businesses I believe only really got back on track last year – now we look like we are heading back there.

    • ropata 10.1

      Small businesses maybe. The 1% are having an amazing time. Big Aussie banks, telcos and power companies are making record profits. Fletchers and other property magnates are keeping quiet about their massive tax free capital gains as well.

  11. Simon Louisson 11

    I argue that governments can’t indefinitely keep running budget deficits, particularly when a country is running continuous and substantial current account deficits which are essentially an increase in private sector debt. Such policy results in ever increasing interest payments or selling off more and more assets so we do indeed become tenants in our own country. While our government debt may be low by OECD standards, our international debt position is high, more than our GDP, which is why the international credit rating agencies are twitchy. The consequence of high private sector debt is that more and more of our assets are owned by foreigners.

    I accept that when you are faced with an event such as the Global Financial Crisis, it is desirable to run a deficit, but if you accept that continuous budget deficits and increasing government debt is not sustainable, then you have to question National’s economic management. The idea of the automatic stabiliser is that you run surpluses and save when the economy is strong and deficits in poor times. The economy has been growing at 1.5% or better for each of the last five years — at 3.3% in the year to March 2015 which is considered by the Reserve Bank as faster than its sustainable growth rate (ie without creating inflation). During the Labour government, under Michael Cullen’s stewardship, the government racked up numerous and sometimes substantial surpluses and copped considerable flack for not cutting taxes, but that was what allowed the country to survive the GFC in reasonable shape.
    Both of us agree Bill English was irresponsible to cut tax personal taxes in 2009, especially as the cuts most benefitted those in the top tax bracket, and therefore it had least effect in stimulating the economy and added considerably to the $50 billion his government has accumulated.
    The failure of National to get the unemployment rate below 5.0 at any time during their seven years in office is evidence of English’s economic mismanagement. The jobless rate of 5.9% is unacceptable after five years of economic growth, especially when you consider the stimulus provided by the $50 billion of debt built up in achieving that economic growth, plus the stimulus of spending EQC’s store of funds.

    We are currently taking in a net 60,000 of long term migrants, of which I accept a good number are students. Britain this week announced it had record immigration of 330,000 for the year and that is causing ructions. Given their population is 14 times New Zealand’s we should maybe question our level of immigration, looking at such things as why dairy farm workers are coming from such places as the Philippines and Sri Lanka.

  12. Murray 12

    In 1975 when Keynesian economic theory was replaced by monetarist economic theory I said it was a very bad mistake. I have seen no reason to change that opinion since. I am glad to see this issue debated on the Fabian Web . I hope it is very deeply examined. I question the term neo-liberal that dominates today’s economic debate. l suspect that term was instigated by the monetarist lobby as a smoke screen in which to bury the Keynesian v monetarist debate. Whether or not the change of name was initiated by the monetarist lobby or not it certainly played into their hands. What is named neo-liberal today contains every single facet of the monetarist argument with only two or three miner but reprehensible additions. The unacceptably high levels of unemployment, all the recessions and the global credit crisis that have plagued world economies since the return of monetarist economic management around 1975 would have occurred with or without the neo-liberal additions to the monetarist management.
    When the left cheerfully but foolishly went along with that inappropriate change of name I suspect there would have been those on the right would have been laughing all the way to the ballot box.
    The question that should have been placed before voters in the last election should have been “Was the replacing of Keynesian economic management with a return to monetarist economic management around 1975 a monumental economic blunder and the answer to that question is, yes it was.
    The inappropriate, un-necessary and misleading change of name from monetarist to neo-liberal effectively shielded voters from the main question that should have influenced their votes. I suspect that over 80% of those who voted in the last election would see no connection between the name Keynesian and the word monetarism and our economic problems.
    I believe it was Milton Friedman who attached the word monetarism or monetarist to the economic theory. There are many on the left who would prefer not to give Milton Friedman credit for anything but credit where credit is due. The word monetarism is derived from the word money and it fits the theory perfectly. Monetarist economic theory evolved in the world of established money and it evolved under the influence of established money for the sole benefit of established money with total and cynical disregard for the pain inflicted on any other section of the community.

  13. Murray 13

    The following statement is near the beginning of chapter 7 in the publication by John Maynard Keynes “The general Theory of Employment Interest and Money” “But since for the community as a whole the increase or decrease in the aggregate creditor position is always exactly equal to the increase or decrease in the aggregate debtor position”.
    Analysis of that statement reveals it to mean the same thing as the following statement “For the community as a whole saving is and must remain exactly equal to debt.
    Keynes repudiated much of what he said in that publication shortly after it was published and I agree that much of it needed repudiating but not all of it. I believe the statement or a statement equal to the same thing as “Saving is and must remain exactly equal to debt” was still part of his post general theory argument as I believe that statement is essential to an understanding of the economy and by any honest judgement the economy performed better during the Keynesian period of economic management than under the monetarist economic management that preceded and followed it.

  14. Murray 14

    Further to my statement “For the community as a whole saving is and must remain equal to debt I present the following companion statement “Saving is equal to investment”
    That statement is taught as a very important economic truth in most universities and the theoretical underpinning of monetarist argument is founded on a corruption of that statement. They claim that as saving is equal to investment more saving will promote and or enable more investment and therefore more production. To reveal the fallacy of that claim we must first define in this context the meaning of the word investment.
    Investment in production is the financing the debt that is the cost of production. By this definition of investment the financing of consumer debt must be investment in consumption. Total investment must then be the sum of investment in production plus investment in consumption.
    It should now be obvious that for investment to be equal to investment in production as suggested by the monetarist argument there would have to be zero investment in consumption (zero consumer debt) and that is impossible in any real economy. The monetarist argument that as investment is equal to saving more saving will lead to or enable more productive investment is economic hogwash.
    There will no doubt be those who will complain that they define investment as only money invested in industry. They are of course entitled to define investment in any way they choose but if investment is defined as only money invested in industry then by that definition investment can’t possibly be equal to saving so the theoretical underpinning of the monetarist argument will still be economic hogwash.
    Saving is equal to total investment therefore more saving must equal more total investment but more saving is not equal to productive investment and more saving will neither enable nor promote more productive investment.

  15. Murray 15

    Michael corrects the persistent but erroneous claim by the monetarist lobby that a budget deficit is always the personification of economic evil, except of course when that budget deficit is created by John Key. It is part of the post general theory Keynesian argument that a budget deficit coupled with measures to address the cause of a recessed economy is an effective answer to a recessed economy however a budget deficit without measures to address the cause of a recessed economy is in fact quite dangerous.
    The national party’s budget deficit was created by a multi-millionaire prime minister giving tax cuts to his wealthy mates and that very definitely does not address the cause of a recessed economy, it does in fact aggravate the cause of a recessed economy. I believe our prime minister is reported to have suggested that balancing the budget is now more difficult than landing a 747 on a pin head. He should know as he has tried in vain to balance a budget deficit that was created while aggravating the cause of a recessed economy.
    An effective method to counter the cause of a recessed economy when in combination with a budget deficit is to impose a progressive tax on wealthy rentiers. No, I have not got my Keynesian economic theory confused with my Thomas Piketty economic theory. Both theories complement each other. They start from a different point and take a different path but they arrive at the substantially the same conclusion.
    When I saw DR. Geoff Bertram’s comments re Thomas Piketty’s book on the Fabian web it came to me as a shining light in a great sea of darkness.

  16. Murray 16

    Getting old, that’s my excuse. In my argument re saving being equal to investment I incorrectly made the following statement. For investment to be equal to investment… I should have said “For saving to be equal investment…

  17. Murray 17

    I thank you for your comment AD. Michael twice referred in a positive way to Keynes in his reply to Louisson. I believe the issue of monetarist V Keynes is grossly under debated on the Fabian Web. Those who refer the global credit crisis in the past tense are making a very bad mistake. We have not yet felt the pain. When that pain finally hits us I dare to hope that it will finally trigger the end of monetarist economic theory obscenity and we will then return to Keynesian economic management. A great deal of the Fabian debate is then going to look pretty irrelevant.

  18. Murray 18

    I have never seen the Simon Louisson post that Michael responded to and I suspect that post is necessary to understanding Michael’s response. I have re-read Michael’s response and concluded that he was not defending the Keynesian budget deficit response to recession as I first supposed. Now my on balance judgement is that Michael was claiming that this government’s budget deficit could be justified from Keynesian economic theory. If that was the point of his response I believe he is wrong. Keynesian economic theory does not justify this government’s response to a recessed economy.
    Keynesian post general theory does recommend a budget deficit response to a recessed economy but only if that deficit is coupled to measures to correct the cause of a recessed economy. This government’s budget deficit was coupled to a multi-millionaire prime minister giving tax cuts to his wealthy mates and that aggravates the cause of a recessed economy.
    John key is reported to have said that balancing the budget is now more difficult than landing a 747 on a pin head. That is the end result of a budget deficit response to a recessed economy without measures to correct the cause of the recessed economy and it is exactly what the post Keynesian general theory claims would happen.

  19. Murray 19

    29 August 10.17 am.
    Except as an answer to past economic mismanagement budget deficits should always be avoided but to suggest that a conservative government should correct a budget deficit when unemployment is far too high is inviting disaster. A conservative government would likely respond to that suggestion by imposing the lunacy of economic austerity.
    This budget deficit could be quickly brought back to surplus with money obtained by imposing a progressive tax on wealthy rentiers but this government is unlikely to do that. Conservative governments, especially those with multi-millionaire prime ministers are not noted for increasing taxes on their wealthy mates.

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