Softening us up...

The coverage this morning (Stuff, Herald) that forms part of the pre-Budget PR activity by the government should be putting all progressive New Zealanders on alert.

There is no question that the economic situation is serious; no question that the Budget deficit is going to be very large; and no question that because of the decisions of households and firms over many years, New Zealand's net international position is highly indebted and restricts greatly the opportunity for government to borrow.

Those things are all true. 

So is this:

"You can't cut your way out of a recession."

Thus spake Alistair Darling, the Chancellor in the UK, in the run up to this morning's British budget. He is right. You can only grow your way out of a recession. Cuts - to public spending in particular - will make the problem worse, not better. If the government uses this Budget to make cuts to public spending, then it will deepen the recession and create higher unemployment.

What should they do?

• change the tax cuts just given from benefiting the highest income earners, to benefiting the lowest income earners - and probably don't give major new tax cuts in future.
• Invest some money in making sure that there are job and training opportunities available for those who do get laid off during the recession. 
• Focus on economic growth and, if required, tax increases to stabilise and then reduce the Budget deficit once growth resumes - not before. 
• Protect and promote the public services that people need during the downturn, rather than cutting them. 

Most important is the focus on growth. Cutting spending during a recession will worsen the recession and increase the permanent loss of income, the permanent damage of unemployment, and slow down the resumption of growth. It should not be the approach taken. If the international funding constraint means that the Budget deficit really does have to be reduced, that has to be done in ways that do not affect public services or flows to households. Public sector investment is the obvious one to squeeze in such a situation.

  
What I fear is more likely is a Black Budget, which will follow National's traditional agenda of cutting the state and offloading costs onto individuals - especially those with the lowest incomes. So look out for higher tertiary tuition fees, "adjustments" to state housing rentals, cuts to community and voluntary sector funding, further sackings of public servants, constraints on school operating grants, reduced funding levels for Health Boards compared with plans, and so on.

I also expect that National will cast Labour as the villain of the piece, blaming us for the recession in defiance of the obvious effects of the financial crisis. They will simultaneously deny Labour any credit for the low levels of public debt and prudent investments that were made in the course of the past nine years. That is what governments always do, fair and accurate or not, but it's still moderately irritating.

Finally. Someone on the radio this morning mentioned possible privatisations to help finance the deficit. That is just dumb. Selling assets to meet a short term budget deficit is madness. You borrow or you tax. You do not sell out the future.

Comments

[Clint Heine]

The only black budget was Darlings one - the 50% tax rate is being heralded in all the papers as the writing on the wall for Labour in the UK. Governments spending all the money during the good times has meant that future governments have no choice if they are to save the economy. British Labour has created a generation of debt and it is only getting worse.

[libertyscott]

and it has based its budget on forecasts of growth that are ridiculously optimistic, because to forecast worse would demand spending cuts by Labour - when it would far rather leave that to the Tories then finger point how "mean" they are, when it has squandered the last 12 years with deficits nearly every year. Something both Australia and NZ governments have not done since the late 1990s.