Former National Party Finance Minister Ruth Richardson has called on her successor, Nicola Willis, to pass an emergency austerity budget by Christmas in response to the June swoon.
Willis would do well to ignore her. Doctor (honorary) Richardson made up her mind 35 years ago and would prescribe the same medicine regardless of the symptoms.
Her 1991 budget intensified a downturn for over two years. Unemployment surged to 11%, poverty levels shot up and never fully recovered, protestors took to the streets, and New Zealand's social fabric frayed.
She would argue the fiscal situation was so serious that this pain was unavoidable and strong economic growth between 1993 and 1996 had proven it all worthwhile. She may well be right.
But let's not overstate the case. Much of that growth was making up for the years of recession, the global economy was in an upswing, and the New Zealand economy had freshly liberalised.
Today the situation is very different. Public debt is a third lower, while servicing costs and the operating deficit are roughly half what they were in the 1990s. New Zealand has a near-perfect credit rating with a stable outlook, compared to being at risk of its third downgrade back then.
Richardson inherited an economy which had just been radically liberalised. It was not just spending cuts which built confidence. It was also an independent central bank, a floating currency, and a true market economy flourishing for the first time.
Setting aside the ethical debates about deregulation, there simply isn’t much low-hanging productivity fruit for politicians to pick and the Coalition is already reforming what it can.
What would New Zealand gain by slashing spending? It would not improve our credit rating, attract any foreign capital, or give households and businesses more confidence.
It would simply prolong the economic downturn while greatly improving the chances of the Labour Party winning the next election and immediately reversing the austerity measures anyway.
New Zealand is not Argentina. There Javier Milei has had some success with radical neoliberal reforms and spending cuts. But he is only trying to get his country ‘in cooee’ of what New Zealand already is: a successful, liberal, solvent economy.
Slashing spending today would undoubtedly delay economic recovery. Richardson will argue it is worth it in the long-term but, everyone say it with me, in the long run we are all dead.
32 Comments
Raising the pension age would be a much better option. Make it 66 now and increase it by 1 year every 3 years or similar.
Not fair if someone has zero notice of having to work for another year, what if you have just told your boss you are leaving at Xmas?
Band aid
All indications are that Richardson has had Willis' ear since before the election and this is simply an attempt to ensure she dosn't backtrack now.....with the rush of public support and obfuscation from certain quarters the sense of threat is evident.
Willis has borrowed 15b this year about 11 next planned etc, $3 bil of that is interest deduction restore.
Easy Peezy 3bil fix, just revert it... see has virtually no space to borrow more to stimulate so needs RBNZ Cuts.
A 3-5% reduction in government staffing would impact front line but is maybe required. Can you imagine the education health, police strikes if this was attempted here.... Labour would have a field day.
IMHO she has to hold the line do nothing, hope like hell things approve. lux and Willis will be rolled Q1 if things do not approve, they are basically at the whim of international markets turning south.
"... see (sic) has virtually no space to borrow more to stimulate so needs RBNZ Cuts."
Really? She has ample room to 'borrow' for sensible projects though after having cancelled so much and with the time delay a reversal now wont save them in time but it may give them a talking point for the election...nor is it likely further rate cuts will produce a result in time for them.
Asset holders of course will be as vocal as possible for an OCR reduction.
"in the long run we are all dead" - it was easy recommend spending other peoples money when there was a increasing supply of grandchildren. Grandchildren at a TFR of 1.56 with zero natural population growth past 2040 notsomuch.
Who's money do we spend?...I dont know any individual that issues an acceptable currency .
Repayment chap.
A 50% UK population increase since 1919 and they finished paying off WW1 debt 96 years later. Keynes was long dead, so not his problem.
"The UK has paid a total of £1.26bn in interest on these bonds since then.
The debt has not been paid off before because of the relatively low interest it incurs.
The Treasury plans to cut the annual cost of the debt by re-borrowing money at current market rates. It is the first such move for 67 years.
The bonds that Chancellor George Osborne has acquired have a lower rate than the 4% interest on the debt.
The continued existence of the war bond debt illustrates the lasting shadow cast by World War One.
According to the UK Treasury there are currently 11,200 registered holders of the bonds.
Winston Churchill first issued "4% Consols" in 1927 when he was Chancellor partly to refinance bonds from the First World War.
In addition to the war bonds, some of the debt being refinanced by the Treasury dates back to the 18th Century.
One of these bonds was issued by William Gladstone in 1853 to consolidate the capital stock of the South Sea Company, which was founded in 1711.
The South Sea Company collapsed during the South Sea Bubble financial crisis of 1720, leaving behind it a lot of debt.
In 1932 Chancellor Neville Chamberlain converted some war bonds into "perpetuals". This gave the government the right not to pay back the loans, as long as they continued paying 3.5% interest on them.
Perpetual bonds, as the name suggests, pay a steady stream of interest forever."
https://www.bbc.com/news/business-29844961
Think about it profile ..debt from the 1720s has been (again) rolled over with the issuing of new bonds (which is all theatre anyway).
Good opinion piece Dan. Ruth is off her head.
But please remember that Milei has changed the dial temporarily thanks to a massive IMF loan (giving him the US dollars he needs to service debt in dollars) and a chunky swap line with China. It's a completely unsustainable approach and the harm his domestic policies are doing is grim.
Great article Dan. I'm not a lefty or greenie but neoliberalism must die. It is a bankrupt ideology and it has sucked the marrow from younger generations in NZ. We have many under-employed people and way less govt debt as a percent compared a Singapore. (using debt to buy good investments). I offer a suggest - have a tax cut for export companies & manufactories based in NZ. ( yes let's slay another scared cow - level playing fields are BS, eg. more manufacturing = increased supply = good fight of inflation = more jobs). Also relook at Kate's article for other suggestions https://www.interest.co.nz/public-policy/133744/what-do-you-get-when-yo…
Supportive for Alliance or similar meat producers perhaps but not necessarily farmers, who are not going to increase on farm employment if you cut taxes by 10-20%, even then reducing tax here does not increase export demand. But are these firms demand constrained or ability to supply constrained?
Both National / Labour will pick different winners, and this will mean a flip flop of investment with associate uncertainty
I prefer broad macro changes to promote investment
1991 austrity budget was a turning point. The beehive utterly embraced neo liberalism to our continued detriment. Ruth Richardsons part in that has a very special place in my bag labeled most disgusting.
But she was always sorted.
From memory Labour did not reverse it.....
Exactly.
What aspect of neo-liberalism are you thinking they did not reverse? I thought the Labour government that replaced Bolger's National government was pretty progressive - Wiki makes a nice bullet-point summary of specific initiatives;
https://en.wikipedia.org/wiki/Fifth_Labour_Government_of_New_Zealand
When you are a hammer, everything looks like a nail. I think RR would have had an austerity budget every year since the 90s and likely the economy would be an absolute basket case.
Can RR name a place where austerity has worked since the 90s? I asked ChatGPT if there is any case where austerity has worked after the neoliberal budgets of the 1990s. Its answer is:
Since 2000, there are examples where countries implemented large fiscal consolidations and later saw bigger economies or higher GDP per person (Estonia, Latvia, Iceland; Germany and Ireland are more complex cases). But in every case the positive outcome was conditional — not a simple causal law that “austerity alone makes an economy bigger and more productive.” Most credible research finds success requires complementary policies (bank repair, reforms, favourable external environment) and good timing.
I then asked how many it didn't work in:
-
About 25–30 OECD and EU countries attempted some form of austerity since 2000.
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Of those, only ~5–6 (Baltics, Iceland, Germany, maybe Ireland) can be called relative “successes.”
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So in ~20+ cases, austerity failed to deliver higher sustained GDP per capita or productivity — at best leaving stagnation, at worst deepening recessions.
Unless the government is about to get very bold and introduce a raft of other changes, its not going to work here either. Richardson is simply not aware of her ideological blinkers.
No harm in listening to Ruth Richardson. Who here believes that the RBNZ is more accurate or productive with its increased head count? Is MOE improving school or student performance with its increased headcount?
I appreciate that this site has its bias. But I don't necessarily agree with it.
Austerity is fine if there's an economic strategy to assume growth in the private sector. Barring another property boom, it's simply non-existent.
The economy needs kickstart money somehow.
Austerity is fine if you're relying on a major expansion of private debt, people spending down their savings, and/or the whole world deciding they want to import NZ goods and services and give us our first current account surplus in 55 years.
The coalition govt needs to get the economy growing or it is going to lose the next election. The takeoff room is shortening rapidly and having people in the room like Ruth Richardson is getting in the way of clear thinking.
Money needs to be spent on building future productivity while govt and the private sector still have some of the finance required to enable these projects.
Once vested interests start diverting finance away from productive enterprise to non productive consumption and gambling 'investment' then the wheels come off very rapidly, and it becomes a fight between vested interests over what is left.
No more austerity please, spend money on increasing productive capacity.
Part of NZs problem is any plan will need RMA go ahead so it will be a 2030 recovery.
Seriously even if they wanted to kickoff big projects, they cannot.
the 2500 houses near Orewa is a case in point, would be a few tradie jobs, landscaping etc etc, but we cannot because water care cannot cope until 2030+... perhaps allocate funding to advance watercare at same time as starting project? is it really that hard?
Having lived through this period with a young business it was hell. The real catalyst for the take off was actually led by a massive spike in Forest export prices in 93 and stayed for 5 years, and I mean massive - today it would be equivalant to a sudden lift of around around 500% plus - Forestry earning 30 billion plus per annum of export earnings - more than Dairy. This injected huge amounts of money into the system. Imagine another 24 billion arriving out of the blue into the system.
I can remember handing farmers massive amounts of money out of the blue which suddenly paid of the debt and started to flow through - next commodity prices elsewhere started to lift.
You need low inflation but this sudden lift had zero to do with what Ruth did. It came after Clinton got elected and as usual something out of our control has a massive effect on us.
Bit like the wool boom in the 50s - imagine if the Korean war had not happened?
In reality we have little idea and are not in control of changes that can have massive effects on us as a little country. We need to keep inflation under control.
Clinton got elected
And leading took off into housing and equities with scant regard to credit quality, the standard way to get out of recession is to shower the economy with cheap credit and blow up a feel good bubble, weather it be equities or housing.
NZs trouble is our equity markets are too small and housing still caries to much credit and prices are too high now with a wall of sellers waiting just above.
What ever we produce as a growth industry is going to have to pay tax to make NZ hum.
In this case he closed down logging on a lot of federal forests - result - panic in markets and prices skyrocketed. These sorts of things can come out of left field and if we go back a lot of our wealth has been from offshore events that impacted markets and we benefited - not by plan.
We need to be competitive and having seen the evils of inflation back many decades ago it is very hard to contain and very painful to many, usually the poorer but we have to contain it.
Our equity markets will never be big and yes we carry to much debt relative to the risks our income industries face - NZ is very poor at understanding risk.
Be grateful we can go over to Australia (one of the wealthiest countries in the world), work etc and come back easily - its amazing really.
We need to remember over 50% of the OECD economies face a contracting economy as we do - we are not alone and not the worst.
'Slashing spending today would undoubtedly delay economic recovery.'
Someone still isn't listening.
We are on a generally-downward path now. Aiming to go 'up', is invalid.
But of course, one has to learn and be brave, to call that like it is.
Richardson, Willis and apparently Brunskill, from my POV, are all on the same page. All seem to expect exponential growth (which I suspect they see as linear) to be a permanency.
Austerity might work if what money that was spent, was spent on building real productive capacity to reduce outgoings. Essentially a war footing: a strong focus on limited objectives and the inessentials like vanity projects and ideology get shelved in the interim.
Except that's not happening.
Even in the times of plenty over the last 40+ years, we've underspent on infrastructure, transport, training, productivity tools and made a mess of policy that could have developed a diversified economy - and we're doing it again.
Speaking of war footing - time to end our covid and climate change war spending.
"In the four years from peak World War II spending in 1944 to 1948, the U.S. government cut spending by $72 billion—a 75-percent reduction. It brought federal spending down from a peak of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948, a drop of over 35 percentage points of GNP.
While government spending fell like a stone, federal tax revenues fell only a little, from a peak of $44.4 billion in 1945 to $39.7 billion in 1947 and $41.4 billion in 1948. In other words, from peak to trough, tax revenues fell by only $4.7 billion, or 10.6 percent. Yet, the economy boomed. The unemployment rate, which was artificially low at the end of the war because many millions of workers had been drafted into the U.S. armed services, did increase. But during the years from 1945 to 1948, it reached its peak at only 3.9 percent in 1946, and, for the months from September 1945 to December 1948, the average unemployment rate was only 3.5 percent."
https://www.mercatus.org/research/working-papers/us-postwar-miracle
Enough spin, Profile.
The boom years were the high-EROEI energy years, coupled with a much smaller population (in 1980, there were half the global inhabitants there are now).
The Chicken Littles care so much for children when it comes to scaring them with energy/climate doomsterism but don't seem to mind virtue signal taxing the bejesus out of them.
"...Government borrowing was also avoided. “High national debt... is the surest precursor of high taxation,” he said. “I am sceptical of the theory that we have a right, if we could, to pass on our capital burden to future generations... Our predecessors had not passed any significant part of their burden on to us.
...Hong Kong’s tax policies were the polar opposite of those pursued by Britain over the same period. Where Britain – and most of the West – had high levels of taxation, government spending, deficit financing, industrial planning and economic intervention, Hong Kong went the other way. Most people – ‘all but the well-to-do’ – paid no income tax at all. Even higher earners only paid 15 per cent. There were no tariffs or duties, no sales taxes or VAT, no taxes on capital gains, on interest or on overseas earnings. But there was a land value tax. The overall tax burden never exceeded 14 per cent of GDP.”
https://www.scotsman.com/arts-and-culture/books/the-scot-who-helped-hon…
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