Standard and Poor’s shock move to downgrade our credit rating caused markets to plunge late yesterday. Bill English’s reaction, predictably, is to pretend nothing is wrong. John Key says it’s about debt, even as he borrows for tax cuts. But let’s look at what S&P says is wrong with us:
“The outlook revision on the foreign currency ratings reflect our recognition of the risks stemming from New Zealand’s projected widening external imbalances in the context of the country’s weakened fiscal flexibility,”
In English, that says the government has got itself in a bind by cutting taxes so much (without cutting spending as much). Even if the Treasury’s rosy scenario comes true, to stop running deficits by the middle of the decade the government is going to have to keep its budgets so tight for so long into the future that it can’t afford to implement new policies to encourage private savings. This was confirmed when English told the Savings Working Group that there would be no new money for any of their proposals.
And how did the budgets get so tight? The main driver is the recession, to be sure but an orgy of three rounds of tax cuts in 24 months, the last two directed mostly at the rich, has saddled the country with billions of extra debt. Rather than encouraging savings, the Nats have actually borrowed more to give the elite massive income tax cuts (remember Key’s campaign slogan: New Zealand doesn’t have a debt problem, it has a growth problem? – well he sure sorted that, now we’ve got both). Borrowing for tax cuts is a policy that’s almost custom designed to push up our indebtedness both from the government issuing debt and the wealthy spending their tax cuts on imports and overseas travel.
“New Zealand’s vulnerability to external shocks, arising from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality.”
The fact that S&P is even talking about shocks tells us that those at the very heart of the capitalist system know it is broken and we’re still in a period when things are going to go wrong big time. S&P is saying that by taking away our trade barriers when no-one else did and letting our manufacturing base go overseas, instead turning to dairy and tourism for an income, we’ve exposed ourselves to problems in the international economy. We’re too globalised, too exposed to what is happening in the rest of the world.
S&P is conceding what the Left has been saying for years: if we want to choose our own future, we have to be more economically self-sufficient.
Phil Goff has raised the contributions to the Cullen Fund again. We know that Key and English’s move to suspend contributions to the Fund will be one of the biggest mistakes in New Zealand economic history – Treasury says it will cost $8 billion in a decade. Already the country’s net debt is $150 million worse than it would be if the contributions had continued. Key and English are costing us $10 million a month and its getting worse.
It’s clear that Key and English have no plan (and it’s not clear that Goff has much of one). But just as bad is that the Nats seem to be unable to accept there is a problem.