As usual Granny Herald in their usual editorial policy of supporting NACT has it wrong. On their front page article they said…
The economy is in for a long and deep recession, but the Government has done all it prudently can to stimulate it, says the OECD.
What the OECD really said was that the government can’t spend more than it is already in fiscal stimulus. The question is are we spending it on the right things – the issue that the Herald avoided.
Phil Goff has pointed this out – OECD Report Highlights Need For A Real Plan. Perhaps the black budget next month will give more of an idea. But I wouldn’t hold my breath waiting for it. The government seems to have no coherent idea about how to handle the next few years and is frittering away its fiscal advantages ineffectively. In the meantime our economy keeps getting worse than it should.
The OECD looked at the history..
Policy makers have moved aggressively to support demand and put a floor under a potentially vicious downward spiral. In this they have been helped by greater room for manoeuvre than in most other OECD countries, the result of relatively conservative monetary policy during the last phases of the boom and a very low level of gross public debt.
In other words, Michael Cullen was doing his job. In 2005, Don Brash and John Key wanted to put in irresponsible tax-cuts targeted at the better off. The consequent reductions in government revenue would have left us completely vulnerable to the economic downturn. It is likely that money from those tax-cuts would have simply been used to fuel the real-estate bubble*. Instead Cullen used the revenue to reduce government debt and to put the investment in savings programs like the NZ Superannuation Fund and Kiwisaver for the longer term aging issues. This put the government in a good position to handle the immediate shock of this crisis. Cullen started the emergency measures and English has continued with them.
The handling of the economy over the next few years by the government has since then been apalling. They are not addressing the issues that Alan Bollard raised in his speech to the job summit.
The non-government parts of the economy have unhealthy levels of exposure to the unfolding finance crisis. There is a drop in demand in offshore markets, which inevitably shows up in exports. This is partially being offset by our currency exchange rates dropping back to better export levels. However this exchange rate advantage is likely to be transitory. The banks have a ongoing credit crunch as they have to roll their funding loans.
The biggest economic exposure is because of the inevitable readjustments in the local economy resulting from the level of leveraged debt from speculation in real estate over the last decade. People are repaying debt rather than spending and increasing demand. This is causing a major drop in local demand, and consequently fueling the increasing unemployment rate. The OECD report highlights this when looking at the dire prospects over the next few years and the governments possible responses.
Fiscal measures can increase employment and demand fairly quickly by way of infrastructure projects and the like, provided they can be implemented in a timely fashion. Tax cuts are less potent as demand boosters but could bolster confidence and assist balance-sheet adjustments. Already, recent and planned tax cuts and accelerated infrastructure spending will provide a fiscal expansion equal to approximately 5% of GDP over the two financial years ending June 2010. The government has also helped shore up confidence
As everyone except the ideologically driven wingnuts (some in this government) and the Herald appear to be aware, tax-cuts at the upper levels of income are not particularly good at producing economic stimulus. In the more affluent tax-payers the money tends to go into savings (low in a recession) or debt reduction. Savings can produce longer term benefits for the economy if the savings go into productive investments – not the case in NZ*.
The more numerous less affluent tax-payers use tax-cuts on consumption which does help – but they got bugger all in NACT’s tax-cuts.
This is exactly the picture that a recent survey has shown on peoples intentions about what they are doing with their taxcuts. It doesn’t significantly help the economy in the short-term as a demand booster.
Infrastructure projects that start quickly and have a longer term economic benefit are probably the most effective use of the fiscal power of the state. However the government is frittering the favourable fiscal state of the government away in projects of little immediate benefit while effectively cutting ongoing ones on ideological grounds.
They have effectively cut ongoing projects like the rail upgrade in Auckland by fiddling with its funding. They are bringing forward state highway roading projects, most of which have lead times in years and offer little immediate benefit to the economy.
So the question is – what in the hell is the governments plan for dealing with the local demand in the next few years? At present it is hard to see that there is any coherent plan. It seems more of a mish-mash of ministers favourite projects with no underlying short-term strategy.
The big issue at present is that there is a rapidly decreasing local demand with the consequent increase in unemployment. This government is making token gestures in that direction for PR reasons. However the government appears to be internally stalemated into ineffective decision making process based on ideology and personalities. They are concentrating on fiscal debt rather than substaining growth as is now required.
Having a 8% of our population in unemployment with the consequent drop in revenue costs a lot more than servicing the governments debt. The current lack of coherence in the government policies doesn’t seem to be addressing that problem apart from silly PR exercises like the job summits.
* NZ’s lack of a capital gains tax on property means that savings usually get sunk into relatively unproductive property assets.
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