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The cost of doing (next to) nothing

Written By: - Date published: 11:26 am, February 27th, 2009 - 18 comments
Categories: economy - Tags:

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. ]

18 comments on “The cost of doing (next to) nothing”

  1. higherstandard 1

    “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.”

    I’d temper that by pointing to the bail out of the motor companies in the US which in my opinion is insanity – save jobs/industries in NZ that have a future in the medium and longer term everyone should realise that sometimes companies must be allowed to fail.

  2. HS. agreed completely. I would like to see an Obama-style Green New Deal.

    • higherstandard 2.1

      I think we’ll find Obama is full of hot air …. much as today’s conference.

      I’d like to think that’s just my cynicism coming through but I doubt it.

      • Pascal's bookie 2.1.1

        Here you go,

        http://www.whitehouse.gov/omb/budget/

        Obama’s budget, already written, already online. Fill yer boots. And note that this is the budget, not the stimulus package, that’s something else again. And then there’s the health care reforms, which he is also doing this year.

        You can agree or disagree with what he’s doing, but he is doing a lot.

        • higherstandard 2.1.1.1

          Hot air, converted to waffle on paper, detailing how to spend money printed out of thin air, much of which will end up here – business as usual in the Us of A until the US dollar heads west.

  3. John Dalley 3

    The irony of Nationals double standard was not lost on me when John Key said that they where trimming the cost of renovations to Government House. Nice little PR statement you may think, but here’s the irony, this is construction work with all the associated trades just the thing JK has said we need to preserve in this country.
    I fear this National Government is going to talk a lot and do nothing constructive to assist the country through this recession.

  4. Far from doing what every other country is doing …

    Perhaps it might have something to do with the fact that these countries experiences are on a significant scale larger than NZ. We don’t see anywhere the same level of problems with banking, nor the same level of problems with mortgages (the two issues are linked). Yes, problems with finance companies but that is a separate issue.

    The irony of course was that when the right was screaming for tax cuts because that’s what every other country is doing, you’re answer was quite different.

    That’s not to argue that things won’t get progressively worse but the reality is that our long term improvements are linked to that of our trading partners.

    By all means soften the landing but as with your argument on the Cullen Fund, we need to see the big picture.

    • IrishBill 4.1

      The problem with the argument for tax cuts in New Zealand was that we already had very low tax rates.

      One thing this recession has done is made people realise how suicidal the tax cuts National wanted in 2005 were.

  5. Redbaiter 5

    “What that thinking misses is that he is actually worsening the Government’s fiscal position by refusing to spend government money to save jobs”

    The reason that we are in this mess is that we allowed politicians to take our money and spend it.

    National needs to stop thinking like socialists (and that bat eared commie fuckwit Obama), and do something that really helps the economy.

    Like cutting taxes and cutting government spending.

    Its not your money you left wing politicians here and in the US, and when you have taken it , you have wasted it.

    Spent it on unworthy things like propping up the uneconomic businesses of socialists posturing as businessmen, or you have dissipated it by handing it out to worthless bludgers in return for their vote.

    Now, step aside and let the people who earned that money spend it as they wish. That, as unpalatable as it is to any socialist, is the only true path to economic recovery. Everything else is either lies, or smoke and mirrors that will only exacerbate the situation.

  6. Redbaiter 6

    “What that thinking misses is that he is actually worsening the Government’s fiscal position by refusing to spend government money to save jobs’

    The reason that we are in this mess is that we allowed politicians to take our money and spend it.

    National needs to stop thinking like socialists (and that bat eared c*mm*e fuckwit Obama), and do something that really helps the economy.

    Like cutting taxes and cutting government spending.

    Its not your money you left wing politicians here and in the US, and when you have taken it , you have wasted it.

    Spent it on unworthy things like propping up the uneconomic businesses of socialists posturing as businessmen, or you have dissipated it by handing it out to worthless bludgers in return for their vote.

    Now, step aside and let the people who earned that money spend it as they wish. That, as unpalatable as it is to any socialist, is the only true path to economic recovery. Everything else is either lies, or smoke and mirrors that will only exacerbate the situation.

    Oppps, sorry- forgot aboput nanny filter.

  7. Redbaiter 7

    I give up.

    IrishBill: By which I assume you “give up” the outdated and absurd economic ideas that you have clung to for so long despite them being empirically, and repeatedly, disproved?

  8. Ari 8

    Can we not compare our failure of a finance minister to poor old ladies who have done nothing wrong but hang on to their limited retirement money during a downturn? A much better comparison would be that he’s holding the purse strings like his business mates on a pay day 🙂

    And you’re right, Redbaiter, it’s not “your” money, it’s our money. We ought to spend it in the way that evidence has suggested works best when we give it to the government. Untargetted tax cuts, while they fit your ideology nicely, do very little for the economy as a whole, and are much better spent on keeping up employment levels to take us out of the recession. You know, keeping the nice taxpayers who have done their bit in their jobs, rather than giving them fifty damn cents back from their pay packet before they get fired.

  9. monkey boy 9

    That was an interesting and informative post.

  10. IrishBill 10

    Agreed. Solid post, Steve. I’d add that national are desperate to not seem out of step with the rest of the world which is why they are trying to create the impression of big spending without actually spending. We are going to see some real tension as Bill tries to shift public opinion toward cuts around too fast and people cotton onto the government’s misdirection on the issue.

  11. djp 11

    What every other country has realized is that essentially this recession, as with any recession, is a crisis of confidence

    I disagree with this assertion (and this seems to be the point that your whole post relies on).

    This recession is an awakening. It was caused by malinvestment. People are now realising that:

    a) their assets are not worth as much as they (wished) to believe

    and

    b) they have been spending too much because of point a)

    Seriously Steve a shot of “confidence” aint gonna fix a) or b).

    Remind me never to come to you for budgeting advice 🙂

    • Felix 11.1

      Correct, to a point.

      But really, no-one actually believed that their house became more valuable in 6 months without them improving it – they just had confidence that someone else would think it was more valuable.

      Sometimes expressed as the “bigger fool” principle.

      OK, there are some really stupid people who probably actually believed it but there’s not much you can do to protect people from that degree of ignorance.

      Actually, there probably is but you need to start young and give kids some basic economic education before they get too caught up in the consumerist nonsense we call a culture.

  12. CASSE 12

    For further data and logic on limits to growth – and the prospects for a prosperous steady state economy – feel free to peruse the resources of the Center for the Advancement of the Steady State Economy.

    Brian Czech, Ph.D., President
    Center for the Advancement of the Steady State Economy

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    2 days ago
  • Statement on passage of national security law for Hong Kong
    Foreign Affairs Minister Winston Peters today expressed the New Zealand Government’s deep disappointment at the passage by China’s National People’s Congress Standing Committee of a national security law for Hong Kong. “New Zealand has consistently emphasised its serious concern about the imposition of this legislation on Hong Kong without inclusive ...
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    2 days ago
  • July 1 marks progress for workers, families
    More jobs and more family time with newborns are the centrepiece of a suite of Government initiatives coming into effect today. July 1 is a milestone day for the Government as a host of key policies take effect, demonstrating the critical areas where progress has been made. “The Coalition Government ...
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    2 days ago
  • Auckland water consent referred to Board of Inquiry
    Environment Minister David Parker has today “called in” Auckland’s application to the Waikato Regional Council to take an extra 200 million litres of water a day from the lower reaches of the Waikato River for Auckland drinking water and other municipal uses.  The call-in means the application has been referred ...
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    2 days ago
  • New Zealand to host virtual APEC in 2021
    Foreign Affairs Minister Winston Peters and Trade and Export Growth Minister David Parker announced today that New Zealand’s hosting of APEC in 2021 will go ahead using virtual digital platforms. Mr Peters said the global disruption caused by COVID-19, including resultant border restrictions, had been the major factor in the ...
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    2 days ago
  • Matakana Link Road construction kicks off and drives jobs
    The start of construction on a new link road between Matakana Road and State Highway 1 will create jobs and support the significant population growth expected in the Warkworth area, Transport Minister Phil Twyford and Mayor Phil Goff announced today. Transport Minister Phil Twyford said construction of the Matakana Link ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • PPE supplies secured as COVID-19 response focuses on border
    The Government is prioritising its latest investment in PPE for frontline health workers, including staff at managed isolation and quarantine facilities, Health Minister David Clark says. “With no community transmission of COVID-19 our response now has a firm focus on keeping our border safe and secure. “We must ensure that ...
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    3 days ago
  • PGF funding for Parihaka settlement
    The Parihaka Papakāinga Trust in Taranaki will receive up to $14 million for a new visitor centre and other improvements at the historic settlement that will boost the local economy and provide much-needed jobs, Regional Economic Development Minister Shane Jones and Minister for Treaty of Waitangi Negotiations Andrew Little have ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Protections for workers in triangular employment
    Protections for workers who are employees of one employer but working under the direction of another business or organisation have come into force, closing a gap in legislation that  made the personal grievance process inaccessible for some workers, says Workplace Relations Minister Iain Lees-Galloway. “This Government is working hard to ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Government strengthens managed isolation system
    A range of improvements are already underway to address issues identified in the rapid review of the Managed Isolation and Quarantine system released today, Housing Minister Megan Woods said. The review was commissioned just over a week ago to identify and understand current and emerging risks to ensure the end-to-end ...
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    4 days ago
  • Whakatāne to go predator free with Government backing Ngāti Awa led efforts
    The important brown kiwi habitat around Whakatāne will receive added protection through an Iwi-led predator free project announced by Minister of Conservation Eugenie Sage and Under Secretary for Regional Economic Development Fletcher Tabuteau. “The Government is investing nearly $5 million into Te Rūnanga o Ngāti Awa’s environmental projects with $2.5 ...
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    5 days ago
  • Growing Goodwood: Expanding wood waste recycling plant in Bay of Plenty, Waikato
    An extra 4,000 tonnes of offcuts and scraps of untreated wood per year will soon be able to be recycled into useful products such as horticultural and garden mulch, playground safety surfacing and animal bedding as a result of a $660,000 investment from the Waste Minimisation Fund, Associate Environment Minister ...
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    5 days ago
  • Scott Watson’s convictions to be referred to Court of Appeal
    The Governor-General has referred Scott Watson’s convictions for murder back to the Court of Appeal, Justice Minister Andrew Little announced today. Mr Watson was convicted in 1999 of the murders of Ben Smart and Olivia Hope. His appeal to the Court of Appeal in 2000 was unsuccessful, as was his ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Protecting Kiwis with stronger financial supervision
    A new five-year funding agreement for the Reserve Bank will mean it can boost its work to protect New Zealanders’ finances, Finance Minister Grant Robertson says. “New Zealand has a strong and stable financial system. Financial stability is an area that we are not prepared to cut corners for, particularly ...
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    6 days ago
  • Forgotten funds and missing money
    A law change has been introduced to make it easier for forgotten funds in institutional accounts to be returned more easily to their rightful owners. Revenue Minister Stuart Nash has introduced an amendment to the Unclaimed Money Act 1971. It will update the rules controlling forgotten sums of money held ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Government delivers on mental health commitment
    The Government is delivering on election commitments and a key recommendation of He Ara Oranga: Report of the Government Inquiry into Mental Health and Addiction with the establishment of a permanent independent Mental Health and Wellbeing Commission, Health Minister Dr David Clark says. Legislation enabling the establishment of the fully ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • New Zealand privacy law modernised
    A Bill to replace New Zealand’s Privacy Act passed its third reading in Parliament today, Justice Minister Andrew Little has announced. “The protections in the Privacy Bill are vitally important. The key purpose of the reforms is to promote and protect people’s privacy and give them confidence that their personal ...
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    6 days ago
  • Tourism operators provided extra support
    Extra support is being provided to tourism businesses operating on public conservation land announced Tourism Minister Kelvin Davis and Conservation Minister Eugenie Sage today.  The Government is providing $25m worth of support to tourism operators impacted by COVID-19, with a decision to waive most Department of Conservation tourism related concession ...
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    6 days ago
  • Queenstown infrastructure package to bolster local economy
    A central Government partnership with Queenstown will help unlock around $300 million of projects in the township and create about 320 direct jobs, Prime Minister Jacinda Ardern has announced today. The Government will contribute $85 million to the Queenstown Town Centre ($35m) project and Stage One of the Queenstown Arterials ...
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    6 days ago
  • Key appointments to ensure high quality healthcare for New Zealanders
    Health Minister Dr David Clark welcomes the appointment of Auckland coroner Morag McDowell to the role of Health and Disability Commissioner. He is also pleased his appointments to the inaugural Paramedic Council were confirmed by gazette this week. The new Health and Disability Commissioner Ms McDowell will commence the role ...
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    6 days ago
  • Whakatāne Māori food producers receive $2.1m PGF boost
    The Provincial Growth Fund is investing $2.1 million in a blueberry orchard initiative, Deputy Prime Minister Winston Peters and Under-Secretary for Regional Economic Development Fletcher Tabuteau announced today. “The Meihana Koata Trust will receive a loan from the PGF’s Whenua Māori allocation to develop an 18.8 hectare blueberry orchard on ...
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    6 days ago
  • PGF investment in Rewa’s Village
    A well-known Māori tourism in Northland will receive $1.25 million from the Provincial Growth Fund for much-needed redevelopment, Regional Economic Development Minister Shane Jones says. Te Rūnanga o Ngāti Rēhia Charitable Trust will use the funding to upgrade Te Pā Kāinga o Rewa, or Rewa’s Village, in Kerikeri. The long-established ...
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    6 days ago
  • Government partners with Ngāti Rēhia to create kauri sanctuary
    The Government and Northland iwi Ngāti Rēhia have today announced up to $6.25 million in One Billion Trees funding for a new kauri sanctuary. Forestry Minister Shane Jones said the sanctuary would help protect kauri by creating New Zealand’s first bio-secure kauri sanctuary, free of kauri dieback disease. “I am ...
    BeehiveBy beehive.govt.nz
    6 days ago