Every time we go into recession, it is a bolt from the blue. Remember in 1987, and indeed in 2008, times were good, everyone was employed, the economy was strong… and then BANG – it all fell apart within weeks. And so it is again. At the end of last year, at what was the beginning of their election campaign, the government announced out of the blue that it was going to loosen the purse strings, borrow billions for ‘shovel ready’ infrastructure projects and then start ordering their election posters showing how they have rebuilt the country.
Believe me, they did that. Ginny Andersen’s face is already plastered all over Lower Hutt, telling everyone how the Melling interchange was never funded by National and that it is fully funded by Labour. But Ginny got a little bit ahead of herself there, because in December when the posters were printed, there wasn’t a pandemic sweeping the globe. Yet.
It is very rare for me to commend this government on anything, but I commend Grant Robertson for not giving in to all the calls to spend like a drunken sailor in his first two years as minister of finance. He was being told by everyone to let loose. He didn’t. Once they were within shouting distance of the election, however, he relented slightly and agreed to borrow for infrastructure, and it is hard to describe that as being wasteful. We should be very grateful that Grant did not give in to the calls from people like James Shaw who never saw a surplus he didn’t want to spend. Well, now we should be grateful that Grant held out.
Many economists called for more spending too, arguing that debt in New Zealand was one of the lowest in the OECD. They never seem to understand that prudent treasurers from all sides of the political divide do understand the need to save for that ‘rainy day’. Well, here we are. Now the economists are singing from a different songsheet. Well, there is a surprise.
Net government debt looks to be headed well above 50 per cent of GDP and is on an unsustainable path.
A lot of other countries are in a worse predicament, but they don’t carry the same level of private sector debt.
The best way to turn an unsustainable debt trajectory into a sustainable one, and restore the Government’s war chest for the nest [sic] rainy day, is by improving New Zealand’s economic performance. That is going to require an extensive economic shake-up not tinkering.
The spending that the government is undertaking is necessary. This is the rainy day we all needed to save for. Just one event can turn a well-performing economy into a basket case. I wish James Shaw understood that.
The Reserve Bank is trying to keep bond yields down by buying bonds, but as the supply of bonds (more Government debt) ramps up there will be pressure heading the other way. Rating agencies and investors will start paying attention to debt metrics.
A time will come to get the books back in order. We don’t want a repeat of the early 1990s policy prescription but will need to make some tough decisions.
A lot depends on how long the lockdown goes on for. If it is just for 4 weeks, we may be able to survive that, but if it is for longer, the economic consequences could be dire. No one wants that, but it is what the government does next that will count.
The starting position for net debt this time is 20 per cent of GDP. Pencil in 50 per cent of GDP straightaway. The size of the nominal economy was projected to lift from around $300b to almost $400b by 2024 in the December Half-Year Economic and Fiscal Update. That underpinned cumulative tax revenue of almost $500b over five years.
Already people are starting to struggle to pay their taxes. The tax take for this year alone will be well below forecasts.
The economy will not be anywhere near $400b, nor cumulative tax revenue over the period $500b. Even a modest downturn will shave tax over the projection period by $50b. This one doesn’t look modest.
Then we need to start adding up what is likely to be the roll-out of more Government support to keep businesses and households afloat, and account for rising numbers on the benefit. There will need to another [sic] ramping up in infrastructure spending to help with the recovery.
That infrastructure spending is already in place, but the projects are not ‘shovel ready’ as was claimed at the time. Because of lapsed consents, teams moving onto other projects and now collapsing companies, there will be a significant delay before these projects can be started.
The Government will continue to have the economy’s back. Fiscal policy is the correct tool to ramp up. Money is flying out the door as it should. But we need to be looking towards the other side too.
A massive fiscal repair job is going to be required down the track.
This is the bit that gets me. Only a few months ago, economists were demanding that the government spend up large. Now they are telling them to close the wallet.
Beyond improving our health capability and border controls, now is not the time to be cementing more money in government spending baselines that will prove difficult to extract and unwind when needed. Tough times demand tough decisions.
He is right, of course, and it is most unlikely that this, or the next government will be in any position to spend money like water on pet projects. It is far more likely that some of the pet projects, such as Zero Carbon and contributions to the UN will have to be scaled back. Oh dear.
New Zealand is going to need a ruthless obsession with lifting its economic performance if we are to avoid a large drop in our living standards and get the Government books back in order. It will be a tall order to address the latter.
The right people need to be cajoled into many places. We are going to need a big and bold vision, and the ability to execute around it.
Cameron Bagrie
With our biggest export earner (tourism) in tatters, and likely to remain so for some time, the delicious irony is, that if anything is to bring us out of the bad times, it will be agriculture, horticulture and viticulture. Those farmers who are denigrated and spat upon will be the ones to save us. I just hope that this government, while they are still in power, recognise the damage they almost did to the economy by imposing terrible regulations on farmers.
Maybe voters will see that climbing up trees to stop them from being cut down and imposing unrealistic regulations on emissions will do us much more harm than good. Why is it that the airlines were getting off scot-free while farmers were being punished? It doesn’t matter now; emissions are dropping like a stone and there is still the same number of cows. Now we can see who the real culprits are.
As for Bagrie’s last comment… we may need a big and bold vision and the ability to execute it, but honestly – is there anyone in the current government or opposition that is up to the task? I can’t think of anyone. Can you?
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