I have to say that writing that title made me wonder about the topsy turvey world. I don’t agree with people from New Zealand Initiative often. Mostly I just growl. But Oliver Hartwich who is the Initiative’s Executive Director wrote a paywalled piece in The Australian “Christopher Luxon’s challenge for NZ economy: fiscal discipline or tax cuts“.
I don’t subscribe to The Australian for the obvious reasons1. So I have to go by what Richard Harmon at Politik2 has quoted in his news letter.
Hartwich’s commentary said: “The New Zealand government now faces the urgent task of getting public finances back on track. The first step is to curb spending. Tax cuts at this juncture would only make the
necessary fiscal consolidation more challenging. They would complicate efforts to bring inflation under control. Luxon must therefore choose between restoring fiscal discipline and delivering on an election
promise.”
And: “The lesson for Luxon is clear: in tough economic times, responsible leadership means making difficult decisions in the best interests of the country, even if they may not be politically
convenient.“With New Zealand’s inflation still running at around 5 per cent and the economy operating near capacity, a fiscal stimulus in the form of tax cuts risks exacerbating inflationary pressures. As the Truss debacle demonstrates, attempting to stimulate the economy with borrowed money in a supply-constrained, inflationary environment can be disastrous.
POLITIKToday March 27, 2024 THE NATS LOSE ANOTHER SUPPORTER OVER THE TAX CUTS
This isn’t exactly news, but there has been a chorus of opinions from in recent weeks from the right and centre in recent weeks about the economic stupidity of going on with tax cuts in a full-blown recession that has been obvious since early year. Tax cuts that will happen while the government is simultaneously planning on :-
Recessions always cause tax takes to drop significantly. Tax cuts will always reduce the amount of money that the government has to spend or to pay down debt.
Sure, they simulate the economy a bit in a very short term way. But since most of the benefit will be to those on higher incomes (usually like me), the effect is mostly straight inflationary and has few economic benefits. It will just increase demand for non-productive luxury goods and services in a economy in a market that is already constrained in capacity and having price inflation.
Buying excessively expensive property or imported vehicles or gadgets doesn’t do much to increase the capacity or productivity of the economy – and right now that is where most of the projected tax cuts will be spent.
And if they are spent on basics like rentals and food, they will just put more price pressure on a constrained capacity – increasing price inflation.
Restructuring and infrastructure may have positive longer term effects but they seldom give little immediate economic benefit. They just cost a lot in the short to medium term.
This appears to be obvious to anyone who isn’t living in the warm post-election flush of joy at sitting on the government benches. Yesterdays Politik Today (links are to paywalled NZ Herald opinion pieces)…
The Government is up against it over the cuts just about every way it turns. Commentators like Fran O’Sullivan, Matthew Hooton, and Liam Dann have all argued that the cuts should be at least be postponed or moderated, if not scrapped altogether.
At the same time, the CTU economist and former economic advisor to Grant Robertson, Craig Renney, is saying the fiscal hole created by the cuts is growing.
Meanwhile, the Prime Minister has said he agrees with the International Monetary Fund that New Zealand is facing a structural fiscal deficit that will open up within the next few years.
POLITIKToday March 26, 2024 WILLIS IS NOT FOR TURNING
Sure, we badly need to upgrade a lot of our infrastructure. The lack of patch maintenance during the pandemic and extreme weather from climate shifts last year really highlighted that. Plus now the massive influx of inwards migration at the start and after the pandemic response has ended. We really need to upgrade stressed and already ageing and overloaded infrastructural base. That has largely been left inadequately fallow during the ever increasing inwards migration flood since the mid 2000s. Most of it was actually built 50-80 years ago for a much smaller population, and was definitely not designed for the kind of weather we had last year, which will happen more frequently.
But doing that while also reducing the government’s tax take while in a recession and with the government policies accentuating the depth of the recession is simply stupid. Anyone can see that – even people who don’t think long-term.
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