Bill English is holding the country’s purse like an old woman on the subway. Far from doing what every other country is doing, injecting an adrenaline shot of spending into the economy to restore confidence by breaking the negative cycle, English is repeating the mistakes he made when he was Finance Minister during the Asian Crisis in 1997-98. He is taking money and jobs out of the economy by cutting government spending and undermining people’s confidence to spend by raising questions around the sustainability of superannuation by letting rumours swirl around the future of the Cullen Fund.
What every other country has realised is that essentially this recession, as with any recession, is a crisis of confidence*, the opposite of the irrational euphoria that existed just a couple of years during the boom. How do you restore confidence? By breaking the downward cycle. And you do that by using government spending like an adrenaline shot. A big boost that means that businesses suddenly can stop worrying about cutting production and firing people, that six months from now people look around and say ‘hey, I’ve still got my job after all, nothing to worry about’. The Government doesn’t have to keep putting these injections in. If the negative cycle of layoffs and decreased consumer spending is broken for only a short period, confidence is restored. That causes the economy to start ticking over by itself again.
English doesn’t get that. First and foremost, English is a former Treasury official from the dawn of the neo-liberal revolution. He is anti government and anti government spending to the core. Therefore, his instinct is to see a recession as a reason to cut spending on public services, not to use the Government’s muscle to stimulate the economy. Thus, he frets over our credit rating more than losing jobs. Ultimately, he thinks that New Zealand will only be pulled back into growth once the rest of the world recovers. So, his priority is to keep the books as balanced as possible in the mean time by cutting spending as tax revenue falls.
What that thinking misses is that he is actually worsening the Government’s fiscal position by refusing to spend government money to save jobs. Consider – the median employed worker’s income is $40,000. They pay $7210 in tax a year. If that person loses their job and goes on the dole, they’ll get about $11,000 a year after-tax from the Government. So, the net fiscal cost to the Government of a person on the median wage losing their job and going on the UB is $18,000 a year. That’s before you get into the flow-on costs in housing, health, crime etc. And, on top of that, you’ve got the vicious cycle effect of that person losing their job and not only decreasing how much they can spend but making others nervous of losing their jobs. On the other hand, not everyone can go on the dole, and there will sometimes be savings from Working for Families tax credits. But, overall, it seems to me that it makes economic sense for the Government to spend thousands of dollars to save a job, if that job would otherwise disappear.
Paying the wages for a worker while they do training one day a week (or one day a fortnight, which Key is said to be keen on), is one example of how this could be done. But, unfortunately, English’s response to such ideas has been ‘no money for that’. He simply won’t countenance new spending at that kind of level, even though it will protect the government’s fiscal position. While he has his firm grasp on the public purse it won’t happen. Key is going to have to pry him off if the Government is going to act to save jobs and stop the budget blowing out. The outcome of the conflict between Key’s desire to stay popular even if it means taking on left-wing ideas and English’s hard-right economics will have a major bearing on how well ordinary Kiwis weather the recession’s storm.
[* unless we believe that underlying this global recession is the fact that we have hit the world’s natural limits to growth and no government believes that, even though it might be true. Personally, I await further data. ]