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Spin-busting: ‘A growth problem, not a debt problem’

Written By: - Date published: 10:42 am, August 4th, 2008 - 28 comments
Categories: economy, national, spin - Tags:

To justify borrowing for tax cuts, National’s new line is that New Zealand has ‘a growth problem, not a debt problem’. Untrue.


(source)
New Zealand’s growth has been faster in recent years than trend, faster than it was under National, and faster than growth in our major trade partners.

We are in a shallow recession right now but that’s because a) we’ve grown so quickly in the last 8 years that there is little spare capacity for growth in the economy and b) the world is experiencing the beginning of peak oil, that has put petrol prices to record prices, hamstringing the global economy, including New Zealand.

Moreover, National’s borrowing plan would not break us out of the present recession. It’s not roads we are short on; it’s invesmtnet in workers’ skills, a low-carbon transport infrastructure, and more private sector investment in private businesses that are needed. With our economy still basically at full capacity, all National’s borrowing will do is cause inflation.

We don’t have a growth problem: New Zealand has grown as fast as it could for the last decade leading to record-low unemployment and record high wage increases. National’s borrowing would not increase growth (more investment by private business in their capital would help, but business owners continue to prioritise profits over investment). So, we’re left with the real reason for National’s debt plan – to pay for tax cuts.

28 comments on “Spin-busting: ‘A growth problem, not a debt problem’ ”

  1. outofbed 1

    Alternatively of course, National could reduce those extra borrowing costs by further sales of state assets – such as Kiwibank or TVNZ in its second term – as the bills start mounting. In other words, the future sale of Kiwibank will not have been due to any shortcomings in performance on its part ultimately, it will have been required to pay for National’s election bribes during 2008. Cut taxes now, and strip mine state assets later yes, it will be interesting to watch Key trying to defend the indefensible over the course of this election campaign.

    this nails it
    http://election08.scoop.co.nz/gordon-campbell-on-national%E2%80%99s-economic-vision/

  2. Draco TB 2

    Yep, Nationals plan seems to be:
    1.) Cut taxes
    2.) Borrow to fund the tax cuts
    3.) Sell off assets to keep the incoming cash flow so they can cut taxes even more
    4.) Pauperize and bankrupt NZ

  3. vto 3

    If labour is responsible for the growth then labour is responsible for this current ‘shallow recession’, as you call it (but try being realistic and cll it what it is, namely the start of a massive meltdown. good one labour).

  4. vto. you’re smarter than this, you can do better.

    Just because government can influence the economy does not mean that every thing that happens to the economy is due to the Government (note – I didn’t say in the article that our above trend gorwth over the last decade was due in whole or in part to the Laobur-led Govts). You have to be able to point to cause and effect in each instance.

    Likewise, some borrowing can be good if done at the right times for the right reasons, but that doesn’t mean that I’ve boxed myself into supporting any borrowing at any time.

    Just because when it rains my head gets wet does not mean that if my head is wet it must be raining.

    As to the recession, I see us coming out of this with less than 1% of GDP loss – that’s what the experts are predicting too. However, in the medium term the global economy is in for a rocky ride from peak oil and we can expect signficant periods of larger recession.

  5. vto 5

    It has always got to me that pretty much through the entire term of this labour govt Cullen and Clark have consistently crowed about how their good deeds have resulted in the recent economic growth. Everybody knows that the recent growth was due to two things – the previous policies put in place during the nineties and before – and the healthy world economy.

    So if Cullen claims responsibility for that, which he has for a long time, then he is also responsible for this meltdown. (of course, he is in fact responsible for zip all, but he is the one who has claimed it)

    Re the meltdown, I wager the meltdown will be significantly greater than 1%. Did you notice the building consent stats last week? At the same level as January 2001 – don’t know if you were around then but those were dire times. And then seasonally adjusted those stats and the consents are at I think a 32 year low.

    And when are we allowed to start talking about a run on one of the big banks?

  6. SweeetD 6

    If our growth has been so wonderful, how come we are dropping down the OECD scale? Once upon a time HC had a dream to get NZ into the top half of the OECD. NZ does have a growth problem, pretty graphs do not change this.

    [we’re not in the top half of the OECD because we fell so far behind in the 1980s and 1990s, even a decade of fast growth has not been enough to close the gap. We’ve dropped one place in OECD rankings because Greece (or is it Korea?) is also growing fast and over took us but we are both closing on the higher ranked OECD countries. Even if we did have a growth problem, National has no solution to it. SP]

  7. rave 7

    Key is Bush lite crude.
    Infrastructure to slash and burn oil won by wars for oil.
    Big boys toys destroy lives.

  8. vto 8

    Ah yes Sweeeetd I keep forgetting about that. Back into the top half of the OECD it was. But we have in fact gone the other way – the reason? Sweet f a in the way of growth-promoting policies. This govt has squandered an amazing opportunity. They have just sat on their arse (when it comes to economic matters) and gorged themselves.

    The government is rich and the people are poor.

  9. Quoth the Raven 9

    So according to you vto National can’t be blamed for the slow growth, high unemployment, slow wage growth, higher level of poverty and two years of recession when it was in power and Labour can’t be responsible for the strong economic growth that New Zealand has had since they’ve been in power but the shallow period of growth we’re in now is solely down to Labour. How? Vto do you take LSD, like everyday?

  10. Felix 10

    The government is rich and the people are poor.

    Funny how I never hear poor people saying that.

    Perhaps it’s because what you actually mean is “the govt redistributes the wealth of the country to ensure that the poor are not so poor”

    Nah, you’re probably right, the govt collects money to make itself “rich”.

  11. vto 11

    LSD looks like your prerogative QtR … “the shallow period of growth we’re in now”. There is no growth now QtR. It is actually contracting.

    And I din’t say what you said I said. Cullen, I said, is the one who has claimed it all for himself. He is the one who claims the good but blames other for the bad. Duh. That was the point of the point.

  12. Quoth the Raven 12

    My mistake vto I should’ve said negative growth and you did say Cullen is not to blame for for this meltdown. Maybe I have been taking LSD today. Anyway remember when I pointed out that Bernard Hickey had written this about Labour’s last budget:
    Whatever happened to their mantra that they wouldn’t pay for tax cuts by running up debts? Their (quite powerful) argument that it wasn’t right for National to pay for tax cuts with debt is now dead as the proverbial. Their rebuttal that the debt is only paying for infrastructure is, strictly speaking, true, but debt wouldn’t have to be raised without the tax cuts. There’s no getting away from this. They are raiding the Reserve Bank’s cookie jar and borrowing from foreigners for an irresponsible spending and tax cutting budget.

    I was wondering whether Hickey would be critical of National’s plans. After saying that you’d be sure he would be. Well, he’s come out defending National’s plans, hypocracy anyone?

  13. vto 13

    QtR the hypocrisy is as thick as cowshed shit in both camps on various matters. It seems to be an unfortunate political reality.

    Re borrowing to pay for tax cuts – well people aren’t silly. The govt budget is pretty much a household budget. As long as you’ve got any debt then the argument can so very easily be made that the debt could be for anything in the budget. If you go out and pay cash for a wide screen telly and then borrow for a house then clearly the house debt could be written up as telly debt. The debt can be applied anywhere.

    So it is with this issue – are the borrowings for tax cuts? or infrastructure? or kiwisaver? or the Cullen fund? Or for students free loans? The list goes on.

    But I think there is a little difference in that when you borrow to pay for a house you do so because there is no other realistic way for the vast majority of people to buy a house. And imo it is similar with certain larger items in the national interest. eg. infrastructure.

    And another related matter – imo it is unfair to require this generation to use its cash for infrastructure that spans generations. Sure, obviously it would be fantastic to leave our grandkids etc a debt free set of amazing infrastructure, but we aint rich enough to do that (unless Southland becomes the next Arabian Peninsula). And there is a limit to how much one generation should be required to undergo hardship for the following generations.

  14. lprent 14

    vto: Actually I agree. What I disagree on is what they want to raise debt on. If it spans generations then there should be a fairly high expectation that it will in fact benefit future generations.

    Obviously I’m reasonably sensitive about this because I’m in the generation that the previous John Key (Sir Robert Muldoon) used that argument on my parents. Consequently I’ve not only had to help pay for restructuring the useless command economy he left, but also the debt. This was debt to pay for infrastructure that would ensure that my generation would be wealthy enough to pay for easily (right – like that happened). The infrastructure was to be paid for by debt, and that meant that muldoon could pay for SMP’s for his constituency – the rural community.

    Does this sound familiar… Translate SMP’s into tax-cuts and to me it rings with a horrible cackle.

    In two examples that the Nat’s want to raise debt to ensure growth, roads and fibre to the home – I don’t believe that either will benefit my families kids. To date all I have heard is some vague waffle that essentially comes down to “…have faith in muldoon ummm Key. You just need a leader with courage.” rather than some actual numbers and risk assessments.

    Bugger off – I’m too old to be caught by that crap, and so will a significant portion of the voters. We’ve seen it all before – and we paid for the tee-shirt many time over.

  15. Draco TB 15

    But I think there is a little difference in that when you borrow to pay for a house you do so because there is no other realistic way for the vast majority of people to buy a house. And imo it is similar with certain larger items in the national interest. eg. infrastructure.

    IMO, this is wrong. A nation should never have to borrow for infrastructure. All that really needs to be done is that income taxes need to be raised to cover the investment and once finished the taxes get dropped again. This has the advantage that government spending will remain inflation neutral unlike deficit spending which forces inflation upwards.

    And another related matter – imo it is unfair to require this generation to use its cash for infrastructure that spans generations.

    I’ve addressed this part here.

  16. Matthew Pilott 16

    Just a quick point, the difference between a govt budget and a houehold is that it does not earn an income as such. It can set a income level as required and can choose to set that at the level of expenditure. So the tv/mortgage example doesn’t quite work – a government could choose to fund everything through cash inflows, not debt, a household does not have the option.

    So when we can afford something but choose to reduce government income and fund it by debt there is no household equivalent. If anything it would be like making two purchases, one funded by debt and the other funded from income.

  17. vto 17

    Wasn’t Muldoon’s think big more actually setting up some industries that could be of value in the future, rather than actual infrastructure. The methanol plant for example. Muldoon was out of control in many other ways too though so perhaps a little different. And as for SMP’s for his constituency – student loans paid by the workers (I refuse to call them free) are the same thing politically. Throw the money at some people you want to vote for you.

    Draco, I have to disagree a great deal. Tax is something that should be used with absolute caution. It’s not just some pool of money that the wgtn power freaks can just dip into at will (tho many do seem to think that way). My point on the political spectrum is such that the people and their own financials come first, the government second. The current govt’s attitude to this is the reverse – witness Cullen’s many words over the years betraying his philosophy here. It is not right.

  18. Draco TB 18

    Draco, I have to disagree a great deal. Tax is something that should be used with absolute caution.

    I agree – there would have to be some very strict rules about such use and probably the use of an independent institution like the RBNZ but I’m not about to speculate on that just ATM.

    My point on the political spectrum is such that the people and their own financials come first, the government second.

    I’m of the opinion that there’s no difference. The individual needs society to achieve what they want and vice versa. There needs to be a balance between the two though. If the government takes too much then the people suffer and the economy collapses but if the government takes too little then government services collapse, the people suffer and the economy collapses. I think Cullen has been trying to walk this fine line and doing a fairly good job of it so far.

  19. Quoth the Raven 19

    Farrar has demonstrated the same hypocracy when it comes to National’s plans and Labour’s budget:
    The Labour line of not borrowing for tax cuts is dead and discredited. Now as I have said, I actually do not have a problem with borrowing for capital investment so long as the operating surplus (OBEGAL) remains positive and large enough to cover the Cullen Fund and a buffer on top of that. But OBEGAL will not be high enough to even cover the Cullen Fund until 2016.

    So where does that leave National’s increased borrowing?

    He has in fact cut them so much he needs to borrow money to put into his Cullen Fund. Anyone else doing that would be howled down. It is indeed a “poison pill’ budget like in 1990 designed to force the next Government to run a deficit or cut spending.

    There will be spending cuts regardless of who is in office. The only difference is Labour calls them “reprioritisation’.

    So this will make it tougher for National. they certainly will be able to deliver tax cuts larger than these ones, but not massively larger unless they get more rigorous with saying no to various spending proposals.

    National’s just promised billions of new spending has Farrar changed his tune now. Okay so DPF is not as bad as Hickey but it’s still poor form. I’m not registered with kiwiblog so can anyone who is bring up the right’s collective amnesia around Labour’s last budget.

  20. Swampy 20

    “Obviously I’m reasonably sensitive about this because I’m in the generation that the previous John Key (Sir Robert Muldoon) used that argument on my parents. Consequently I’ve not only had to help pay for restructuring the useless command economy he left, but also the debt. This was debt to pay for infrastructure that would ensure that my generation would be wealthy enough to pay for easily (right – like that happened). The infrastructure was to be paid for by debt, and that meant that muldoon could pay for SMP’s for his constituency – the rural community.

    Does this sound familiar ”

    What sounds familiar is
    – Blame National for all the bad in the economy
    – Give Labour credit for fixing National’s mistakes

    So Roger Douglas’s reforms of the late 1980s must have been 100% right, never mind that they have been roundly condemned by the Left in general.

    Muldoon followed in the footsteps of a long line of previous governments, National and Labour. He cannot wholly be held responsible for the situation NZ found itself in at the time he was in office. Nor can it be reasonable to pretend there was a major difference between the policies of Roger Douglas and Ruth Richardson.

  21. Swampy 21

    “If the government takes too much then the people suffer and the economy collapses but if the government takes too little then government services collapse, the people suffer and the economy collapses. I think Cullen has been trying to walk this fine line and doing a fairly good job of it so far.”

    No, Cullen and Co have pushed the envelope too far in the direction of the government pushing the private sector out of too many parts of the marketplace so the government can have a greater share or a monopoly.

  22. Kevyn 22

    Correct me if I’m wrong, but isn’t GDP only a measure of consumption quantity rather than consumption quality? As such I can improve my quality of life and reduce the GDP at the same time. For instance the money I spend on an imported cylinder wrap is money I can’t spend on something made in NZ. Once I have installed the wrap my spending on NZ made electricity will fall and I might spend that saved money on a subscription to a foreign magazine. Since the magazine is imported it doesn’t count in the GDP. Now, I am still using as much hot water as did before, thus getting the same standard of living in that regard, but I am also enjoying a new source of reading pleasure so in that respect my standard of living has improved. Yet by using energy more efficiently I have reduced the GDP.

    So is fixating on growing the GDP actually a good thing? In the context of borrwing for roads as a means to increase GDP it seems this will actually work more sucessfully than borrowing to improve the railways. Firstly because imports aren’t included in the GDP spending heaps of money importing wagons and locomotives and electricla equipment won’t increase the GDP whereas spending heap on locally produced cement and gravel and rebar and employing lots of people to put it all together will increase GDP. Whatever impact the two investment option may have on future fuel and vehicle imports is irrelevant if the motivation is confined solely to growing the GDP. But the impact on the balance of payments is going to be quite different and that might affect my future quality of life much more than the artficially grown GDP might.

  23. r0b 23

    I know a lot of debates here feature “GDP”, but it’s actually a very odd measure. Some of the issues are discussed here:
    http://www.latimes.com/news/opinion/la-oe-costanza10mar10,0,5656929.story?track=ntothtml
    or here:
    http://dieoff.org/page11.htm
    an alternative is described here:
    http://en.wikipedia.org/wiki/Genuine_Progress_Indicator
    and many other places e.g. here:
    http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm

  24. Kevyn 24

    r0b, Excellent links. Just what I wanted.

    The graph at the 2nd link shows a remarkable coincidence between abrupt changes in the GPI trend and some of the most surprising abrupt changes in the US car buyers preferences. Maybe America’s GPI mood-swings are detected soonest by astute car designers and legislators; or the car is so central to American life that their satisfaction/disatisfaction shows up there first.
    The first long plateau ends when the Lee Iococca’s Mustang starts the pony car horsepower race.
    The next plateau begins when Congress enacts federal mandatory vehicle safety standards.
    That plateau ends when OPEC starts pushing Americans into small imports.
    The next plateau begins when Lee Iococca joins Chrysler and launches the MPV (mini passenger van) as the new American station wagon.
    That plateau ends when Chrysler-Jeep launch the SUV.
    Unfortunately the graph stops before either the Hummer or Prius were released. The tables in the Genuine Progress Indicator 2006 have much less dramatic trend changes but they are still there. The GPI actually goes up when the Hummer/Escalade and other mega-SUVs are released, dips at 9/11 then continues rising slowly. The last year is 2004. Eagerly awaiting for an update covering the Prius release and 2006 fuel price surge.

    I wonder if our GPI is reflected in house prices or sizes?

  25. lprent 25

    Swampy:

    What sounds familiar is
    – Blame National for all the bad in the economy
    – Give Labour credit for fixing National’s mistakes

    If the hat fits – then wear it. The track record of National is exactly that within my adult life. They simply do not seem to be able to do anything right.

    Of course I’ve only really had 2 national governments that I’ve observed closely.

    The first was Muldoon and that started with the long-term fuckup called national superannuation with its classic passing of costs to future generations. It ended with an economy that was massively constrained by paying the interest on government debt.

    The second was Bolger’s that started with the Mother of All Budgets that drastically cut benefit payments and massively deepened a recession. For all of the excuses that some people use for that budget, there was no need to do it fiscally (no world bank leaning down the back, and having some borrowing capabilities), it was done for purely ideological reasons.

    In the last 9 years, the national opposition has looked like the same set of blind faith ideologues that cause problems. This one just appears to want to do everything covertly and to get in by badmouthing the government rather than showing their own long-term policies. Reminds me of muldoon in 1975, and also sounds like a recipe for another disaster for NZ.

    Labour is less dangerous to have in power because they actually use their brains. They aren’t perfect but they don’t make long-term screw ups like the Nat’s routinely do. I’d argue with a lot of the policy decisions, but at least they tend to be thought out.

  26. vto 26

    Hey Draco (way back up there somewhere) you referred to there needing to be a balance between the people and the government when it comes to taxtion. Of course.

    Between the people and society you mentioned. This is wrong imo. The govt is not society. The people together are society. The govt is an appendage that can carry out some jobs for that society.

    This is where the philosophical differences between left and right crop up. I do nto accept govt as some sort of over-arching representative of my society. At all. My society is the people around me, the first concentric ring around me being my immediate family. Next concentric ring, wider family and friends. Next the local community. Next the district.. etc until the nation state is reached.

    The importance seemingly placed by th left on the position of govt in our society is what turns me off it. It is poorly placed and by its own nature is incapable of performing those tasks hurled at it by, generally, the left. The results of that poor placement are thick on the ground.

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