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NZ not set to follow UK back into recession because of government austerity, PM Key says; 'We've done it the Keynesian way'

NZ not set to follow UK back into recession because of government austerity, PM Key says; 'We've done it the Keynesian way'

Government spending restraint in New Zealand will not have the same effect on the economy as austerity moves in the UK, as the government here was able to take a Keynesian stance and help the economy through the downturn by using its balance sheet to soften the blow, Prime Minister John Key says.

The UK economy last week plunged back into recession, with the government there being blamed for overcooking austerity measures it says are needed to get its own position back in order as the European sovereign debt crisis rolls on.

New Zealand's Finance Minister Bill English is set to deliver a second consecutive 'zero budget' in May, as the government here tries to reach its self-set goal of returning its books to surplus in the 2014/15 year.

That goal got harder last week, with new Treasury forecasts showing a previously-expected surplus of NZ$370 million in 2014/15 was now set to be a NZ$640 million deficit. English responded by saying the government was still set on the goal, and would have to control spending even more than previously thought. It would be an achievement if the government got "near surplus."

Over the weekend, Key reaffirmed the government was intent on reaching the 2014/15 goal. In January, Key warned the government may have to forego the 2014/15 surplus track if global conditions worsened to such as point that austerity measures needed here for reaching the target led to a "sharp contraction" in demand in the economy.

'Not a slash and burn budget'

Speaking on TVNZ's Breakfast programme this morning, Key said he would be revealing more details about Budget 2012 in a speech on Tuesday.

“The important point here is, we need to get back to surplus. As a country we need to start spending what we earn, and not more than what we earn," Key said.

“So the government’s been very focused on that over the last three or four years – zero budget last year, zero budget this year," he said.

Despite the revised forecasts showing a billion dollar deterioration in the government's expected position three years out, Budget 2012 would not be a slash and burn budget.

"I don’t think people have an enormous amount to be fearful of in the Budget, but there’s no extra money to go around,” Key said.

There would be less spending in certain areas, and changes in others, but Key would not go into details. He would not be drawn on whether there would be any new tax changes.

“In the end the test, I think, for the government in its budget will be, what position does it leave New Zealand in?" he said.

“If we keep spending more than we earn, and that’s what the Labour Party is promoting through all of their policies at the moment, it’s got a name, and it’s called Greece. Eventually you lose control of your own country and your own destiny, and more and more taxpayer dollars go to actually having to pay the interest on that debt.”

We're good Keynesians

Key said he did not think New Zealand would follow countries like the UK, where the government had gone on a large austerity drive, back in to recession.

“I don’t think that’s right in our case. I think that Keynesian view that you would use government resources in the bad times to bridge you through, is exactly what we’ve done," Key said.

“We didn’t spend more money through our new budget spending process, but we maintained, and therefore spent a lot more money, on things like the unemployment benefit, Working for Families, student loans, all of those areas, in the first three and a half years that we’ve been in," he said.

“And those areas are off-limits [for spending cuts] this time. So I think we’ve done that bridging about right.

“But eventually, you’ve just got to get to a point where you live within your means. And I might add, that the vast bulk of people watching this show are doing exactly that. In the last three years, New Zealanders have changed their spending habits," Key said.

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As I see it, a major part of the solution to our problems is to lower the high dollar (I comment that this is 'comparatively')
A lower dollar would reward exporters and even Fonterra would be able to maintain payouts at high levels. How many National voting dairy farmers realise this?
A lower dollar would reduce the number of flat screen TVs sold and hence imported.
On a bit and it seems that except for Australia with its reliance on digging up its wealth, almost all of them have resorted to QE in some form or other or China by holding down its rate to a US peg..
I contend that we should have done the same.  Perhaps to a less extent. We were (are we still?) borrowing $300m each week from overseas. Maybe a balance of $150m borrowed and $150m printed would have the effect of lowering our overvalued exchange rate. The threat to do that may have been enough.
Just monday musings.

As I read somewhere else on this website, the strength of the dollar is more affected by US monetry policy. Most dairy product is going to Asia. Low $ = higher input costs.

BB3: An interesting question. For the whole of 2010 and 2011 it was repeatedly pronounced on these pages that NZ was borrowing $350 million per week. Then, in January 2012, the RBNZ released data that NZ's borrowing for the December quarter was $18 billion. That equates to nearly $1½ billion per week. And silence followed. No explanations.

Then, in January 2012, the RBNZ released data that NZ's borrowing for the December quarter was $18 billion.
Any source for this claim?.
Actual NZ government market traded net debt issuance is graphically noted here.
NZD 1.437 bn government debt was cancelled in the fourth calender quarter 2011.

Got it. September 2011 quarter and for the whole country not just government debt - obviously an election had to be bought - thereafter things quietened down considerably as you can see from Bernard's original link  to RBNZ data from your link. 

Is this the correct link. This is a link to oversea debt. Isn't this the correct link?
Total gross government debt.

The article was slightly misleading, poorly written.  Yes there was a jump in borrowing during the September 11 quarter but the December 11 quarter shows a reduction in borrowing back to a similar level prior to the $18b increase.

Stephen Hulme: Here's a question for you. Was reading the RBNZ web-site a couple of months ago and noted a statement that the RBNZ can lend as much as it likes. Unlimited. Given the 4 big banks exist in two jurisdictions is it possible for these banks to borrow off the RBNZ at 2½% and deposit it with the RBA at 4½%? Simple arbitrage?

Not to my knowledge.

Congratulations John Key for having the intelligence in knowing what economic rational was best suited to avoid NZ plunging further into the cactus than neccessary. However I take issue with your position on ensuring a strong balance of payments, as quoted from above:
“If we keep spending more than we earn, and that’s what the Labour Party is promoting through all of their policies at the moment, it’s got a name, and it’s called Greece. Eventually you lose control of your own country and your own destiny, and more and more taxpayer dollars go to actually having to pay the interest on that debt.”
How is facilitating the sale of our land to transnational corporates and foreign investors, and more importantly doing the opposite of other successful developed countries (Denmark, Germany, Netherlands) and scuttling our co-operative dairy industry going to help NZ in  spending less than what we earn?
How is NZ going to earn foreign receipts, and more importantly ensure they are put to best use for everyone? By selling our land and co-operatives, how are we going to earn the tax dollars to even pay the debt?
Is it fair to suggest Key is also partial to popular type of neo classical economics with fundamentally flawed rational that underpins so called free market capitalism, leading to inevitable instability and tough times for the pueblo?

I believe Key is avoiding necessary reform and hoping to balance the focus between growth and austerity without us noticing that in reality nothing is happening.
Others note this dilemma for what it is: 
From the WSJ:  “Growth or austerity? That’s the choice facing Europe these days—or so the Keynesian consensus keeps saying. According to this view, which has dominated world economic councils since the 2008 crisis began, ‘growth’ is mainly a function of government spending. Spend more and you’re for growth, even if a country raises taxes to pay for the spending. But dare to cut spending as the Germans suggest, and you’re for austerity and thus opposed to growth. This is a nonsense debate that misconstrues the real sources of economic prosperity and helps explain Europe’s current mess. The real debate ought to be over which policies best produce growth.”  Read More - referenced FT article. - google title to view..

The Kiwi's did own the land but they made two very large and bad decisions:
1.  But they chose to borrow big against at and spend that money elsewhere.
2.  And then practice enough management incompetence as to go bankrupt.
Mr Key didn't choose to sell the land, the Kiwi owners did when they decided it would be wise to mortgage it to heaven and back.

“The ratings agencies have so far let us kick the can down the road a little further unlike in the UK this suits us as the alternative is to take hard choices which would almost certainly be political suicide”

It all very well being Keynesian but their policy is based on ever upward growth and that this is only a negative wobble, therefore the gov can act counter cyclically and tax/bank later.
1. What if the -ve phase lasts longer than expected?
2. What plans do the gov't have to repay the debt accrued?

While I don't rate English or Key, I have to believe they very well understand the difference between the Current Account deficit and the fiscal one; and so you have to believe Key is yet again deliberately misleading people in confusing the two. 
"As a country we need to start spending what we earn, and not more than what we earn," Key said.
This is the definition of the Current Account; and he has to know that National have done absolutely nothing to fix that. In fact their asset sales, and passive non existent exchange rate and monetary policies, are guaranteeing the current account deficit stays high.
Somewhat surprisingly the Greens and Labour have in fact identified the Current Account as our core problem, and have come up with sensible ideas to address it.
I don't really care which party does so, other than it would be tragic if we have to wait three years to even start to address the issue. Hopefully enough pressure will come about to at least make a start.

No philosophy can alter the reality - we are at the nodal point re limits to growth.
So this 'debate' is somewhat irrelevant. The question is: Which approach best morphs to a 'steady-state'?
Spending your way out, would leave you with an unrepayable debt - which means someone else owns you. Silly stuff. Better make folk live withing their means - and doing so fiscally is a good step towards doing so physically.

Interesting that if you fail to consider one significant aspect of the problem then the answer is indeed irrelevent/wrong.
Paul Krugman for instance says Keynesian spending is the answer to the liquidity trap we are in and is needed to get us back to where we were, as the social cost of un-employement  is unacceptable.  Nature on the  other hand doesnt care about such things it simply follows the laws of physics etc.  So austerity is actually sort of the right answer but its being done (I assume) for the wrong stated reason ie its "economically the correct thing"  according to the right yet this early in the piece its showing the expected result, self-reinforcing recession/depression......funny that..........

John Key needs an urgent lesson in both economics and history, before he ruins the country completely. Doing things the 'Keynesian way' has been shown time and again to be a recipe for absolute disaster. 
Just look at the Great Depression and contrast the response of the US government to its response to the severe recession of 1920.  In 1920 it cut government spending and cut taxes, while the Federal Reserve kept interest rates at a relatively high 7%.  Crucially, wages and prices were allowed to fall.  Within two years the economy was roaring again.
Under both Hoover and FDR, the response to the 1929 stock market crash (the initial recession being less severe than in 1920) was to massively increase government spending and deficits, while doing everything possible to prevent prices, particularly for labour, from falling.  Not surprisingly there was massive unemployment and the economy didn't emerge from recession until after World War II, when government spending was slashed and despite warnings from the doomsayers, the economy boomed.
New Zealand is doing almost exactly the opposite of what it needs to do to get the economy growing again.  All this nonsense about 'austerity' in the UK ignores the fact that even with the relatively minor cuts the British government is making, its deficit is still at a peacetime record and the government's share of the economy is also at record levels. 

This is so wrong....if you look at basic graphs you can see that the "new Deal" was showing signs of working though actually tthe spending was not very big, massive it was not....what happened that was the President was persuaded to go to austerity in 1937 and GDP growth reversed for 1938.
"Note in particular that in 1937-38 FDR was persuaded to do the “responsible” thing and cut back — and that’s what led to the bad year in 1938"
in 1935: $73.3
in 1936: $83.8
in 1937: $91.9
in 1938: $86.1
in 1939: $92.2
After 1938 of course the US Govn was spending like mad in the militray build up to effect a keynesian fiscal stimulus...
Here are the graphs and comment........
Oh and after the war 1946 we see the US Govn actually had a fiscal policy..oh and the USA boomed,
The 1946 Employment Act
announced that it was the “continuing policy and responsibility” of the federal government to “coordinate and utilize all its plans, functions, and resources... to foster and promote free
competitive enterprise and the general welfare; conditions under which there will be afforded useful
employment for those able, willing, and seeking to work; and to promote maximum employment,
production, and purchasing power...
did this cause a huge recession or depression I missed?
Plus another great comment on FDR,

Well, here in Palmy North we haven't got any of these global worries in play according to our Council.  See this from their 10 year (Long Term Plan) document under the heading Significant Forecasting Assumptions: Worldwide Economic Downturn
That there will be no long term significant economic or social threats such as increased unemployment, homelessness, lack of income or reduced personal wellbeing which adversely affects residents as a result of the worldwide economic crisis. 
That the worldwide economic crisis will be a significant threat to people in Palmerston North.
Level of uncertainty of assumption
Reasons and financial effect of the uncertainty
The impact of the worldwide economic crisis is unknown. As a people focused Council the impact and affects on residents of the downturn will be monitored.
Yep, you heard it here from the Palmy Nth Council ... we're different!!!! 
Come to the Manawatu and be part of an alternate reality!!!!!

I have already taken the PNCC to task regards their economic assumptions. They should have received from me Fiday afternoon a 14 page submission that conclues with:
In summary, and in simplistic terms, my requirements are that:
1. I want the councils Long Term Plan to be based on sounder economic assumptions than it is currently. That means a re-assessment of economic assumptions using information that is broad based and reflects a deeper understanding of what lies behind the global financial crisis. Information should be up to date and ignore prevailing conveniently packaged economic drivel.
2. I don’t want poor economic assumptions leading to plans that are not sustainable in the real economic conditions that are developing. I don’t want the council with debt, and particularly not guaranteeing the debt of more profligate councils.
3. If the councils Long Term Plan is based on sound economic assumptions then it is likely that decreasing debt will become a priority. Less access to debt financing will likely force more emphasis onto operational efficiency and limiting expenditure to what residents are prepared to pay for now. At that point the councils Long Term Plan may be sustainable. If the council’s Long Term Plan is sustainable then we shouldn’t see the council facing the stresses some cities in the US are facing and migration out of such cities.

Thanks for submitting on this - by the time I got around to reading the larger set of documents (that letterbox drop said practically nothing of substance) I had only a day before submission were due.
It seems to me that their assumptions (take those on no long term issues associated with energy cost rises over the next 10 years) are so plain wrong that the whole document would likely succeed in being tossed out if judicially reviewed.  Plainly, the assumptions have been written as a means to legitimize their intention to increase borrowing to new highs.  And to support all other LAs in NZ to do so as well through the new LGFA model (and yes we're all guarentoring one another's debt nationwide through this model).  I also note that although they said joining the LGFA would reduce the cost of borrowing - I didn't actually see that decrease applied in their assumptions!
Seriously, if someone started up a fighting fund to get this kind of forecasting falsehood tested through the Courts - I would pay into such a fighting fund.  I'm just that tired of lies.

Kate, a group of us over a 10 year period tried valiantly to introduce peak oiland other issues to PNCC, via written submissions, oral presentations, letters to the editor etc. A complete waste of time. In a submission on a 10 year plan I told them to sell the airport asap and retire debt. I don't think I have the written response to that submission anymore but you would hold your face in your hands and weep/laugh uncontrollably if you were able to read it today. If you want entertainment try sitting through a few council meetings. A few "maverick" councillors have tried and given up trying to work with these clowns. 

Plainly, the assumptions have been written as a means to legitimize their intention to increase borrowing to new highs.  And to support all other LAs in NZ to do so as well through the new LGFA model (and yes we're all guarentoring one another's debt nationwide through this model).  I also note that although they said joining the LGFA would reduce the cost of borrowing - I didn't actually see that decrease applied in their assumptions!
Nor will you find the (possibly unlimited?) guarantee of other councils debt shown as a liability.

Their liability is limited to the extent of their percentage shareholding, I believe - my understanding being (if I recall) their intention is to contribute the minimum amount required - that being $100,000.   So I guess the question is what sort of stake others around the country take - I assume that one's initial stake thereafter influences the amount of borrowings one can draw from the fund.
But yes, the liability is largely unquantifiable at this stage I would say.

IF and WHEN you get a reply you should post it up here so we can all have a laugh

The PNCC's economic assumptions are probably not a lot different to some other councils with high debt. All councils seem to rely to at least some extent on BERL for their economic assumptions.
If I tidied up the submission (it was rushed because it takes a lot time to get to understand a nearly 300 page draft) it may be useful as template for those wishing to submit to other councils with closing dates this week or later.

PNCC has a deserved reputation as one of the most idioitic Councils in the country, I know this from personal experience. Do they still have an "International Airport", are they still on course for a humongeous debt? LOL. Presumably the word "affects" instead of effects in the above is their typo.

I think the airport is still called international but the direct flights to Aus have ceased for now anyway.  What's in a name anyway - it doesn't cost anything!!!!  They can call it what they like to my mind. :-) 
As far as humongeous (is that how it's spelled?) debt - we're about mid range indebted in comparison to the wider NZ LAs - plenty worse than here but they're working on that :-). 
I think affects is the correct term - as in affected (as opposed to effected - effect being a noun; affect being a verb) by an event or situation.
In the past I had found them better than most Councils.  Progressive without being over-the-top.  And they do provide good services at reasonable prices.  But this time round, it isn't looking so good - denial is going to prove costly - by the time their "monitoring" of the situation suggests they got the assumptions wrong - the debt will have been committed.

Kate, I lived in PN from 1957 until about 3 years ago, believe me the Council is on another planet and despised by a significant number of ratepayers. There is an untold story here, which I doubt you know, if you are a relative newcomer. Humongous has two spellings, either with an o or a u.
 As a people focused Council the impact and affects on residents of the downturn will be monitored.
Nope, should be effects
Their debt is set to balloon and if there is an earthquake which totals the waste water treatment plant - much of the city is on soils prone to liquefaction - all bets are off.

When the government released that 'Better Local Government' brochure they did a calculation on the debt to population ratio for every council.  They got the figures muddled in the first release, but have since corrected the data errors and re-released the tables here;
For interest OMG, those with worse levels of debt than Palmy North include:
Dunedin, Far North, Ruapehu, Auckland, Hamilton, Buller, South Taranaki, Queenstown Lakes, Kaipara, Central Otago, Hurunui, Mackenzie, Rangitikei, Whangarei, Wanganui, Thames-Coromandel, Tasman, Western BOP, Tauranga, Waitomo, Taupo and Wairoa.
Where are you living now?  Personally, going forward I could see people making living/investment decisions based on those LAs with the least debt.  It is going to become a serious burden on ratepayers in the more heavily indebted city/district council areas in future I suspect.
So, at the moment P Nth is only mid-range in terms of debt levels.  We got a significant reduction in rates when moving here from Kapiti - and have further reduced them by now living rural in this District.  But, I'm still disappointed to see the present Council planning to increase borrowing to the degree they are, and particularly in this economic climate, and particularly backed by trumped up assumptions..

Hi Kate, 
Yes I've seen  figures somewhere regarding LA debt, I think the Kaipara is the worst, but may be mistaken.
PNCC debt is set to climb
" new debt of $46.1m will be raised for new and replacement capital spending during the next decade, increasing total net debt to $198m."
 Curently living in Hong Kong, after a couple of years in Sydney - a beautiful city. Our friends would like us to return to PN but not sure if we will do so. The Turitea wind farm will ruin rateable  property values on the Tararua side of the city and that's the main reason, as I see it, that PNCC has gobbled up a chunk of Manawatu with 1,100 new ratepayers. 
Now as far as the debt is concerned how will ratepayers react when interest rates go up as they will one day? Imagine 9% on $200 million?

The true level of debt is difficult to ascertain. Choose your number from the draft plan. A selection:
The council's additional 'debt required' sums to $46.1 million over the 10 years (page29), but is elsewhere stated as “total borrowing of $136 million and this is projected to grow to $226 million by 2022” (page 41), and “total net debt will still increase from $138 million to $198
million” (page 12).

Yep, it's Kaipara - followed hot on the heels by Taupo - and Queenstown-Lakes is right up there too.  My previous link I see didn't provide the data (very odd as earlier today there was a link to a spreadsheet on that page .. but not now). 
So, here's another one with it (debt per capita by council);
See page 14 and 15 in the document - and if this suddenly disappears or changes - then there's a definite cover up going on!
And Colin's right - the way the data is presented - pick a number any number - they represent borrowing and additional capex requirements in so many different ways!  I suspect in many cases a number of council's are borrowing to pay the interest on debt.  Surest slippery slope going.

Thanks, Kate. Curious to know which part of the rural Manawatu you live in - just the general area, though.
BTW I saved the pdf

OMG - we're in Aokautere with a gorgeous view back over the city.

Kate, I know the area very well, did a lot of cross country training on those hills - long before there were houses. Also up the Turitea and Kahuterawa valleys. Sure hope this is not too close to you though.
Here's the background to all this.
All the best.

Yes, really familiar with the Turitea issue and process but we aren't near that one.
We're just below Te Rere Hau - bought one of the properties that the windfarm bought from the previous owner as part of their consenting process.  Ironically our place doesn't get any turbine noise in or around the house, but a number folks in the neighbourhood do.  From my observation turbine noise seems to be very directional - based on land contour between each individual property and a specific turbine(s) + wind direction. 
We rented in the hospital area whilst we were renovating this place - and couldn't get over the noise of the city that we lived with there.  Truck traffic along Tremain Ave most hours of the day, the airport, railway shunting in the near vicinity and ambulance sirens - so moving up here was an absolute joy :-).  But of course the difference between city noise and why city folk put up with it is because (largely) it is/was there when they made the decision to purchase and it just gradually gets worse as the city further develops around them.


Larry Summers: Debt Got Us Into This Mess and Debt Will Get Us Out
Debt Is Good?
"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending," Summers writes in a recent op-ed in The Financial Times.
Is Larry Summers right? What else will get people spending? A Debt jubilee as per Steve Keen?

Profligate debt fueled spending by those unable to pay, which collectively includes all of us, is not an option so either choice is moot, as who is willllingly capable of writing off the debts when every deposit is someone's debt? 

as who is willllingly capable of writing off the debts when every deposit is someone's debt? 
A jubilee would bypass the Banking system so deposits/debts wouldn't enter the equation.
After the jubilee people would be forced to pay off their debts. The end result would be that the Banking sector would shrink as they wouldn't be getting interest payments on peoples debts.
Rules would then change so that Banks couldn't lend/create Asset Bubbles.
This is possibly a more urgent problem for European Countries/USA, as NZ does not seem to have as much of  a precieved problem with excessive debts. .People still seem to be paying their mortgages.

Not so much Keynesianism as it is socialism for the rich & capitalism for the poor.