Just Left

Downgrades #gfc etc

New Zealand owes the world too much.  It's not a government problem, but government can help the privatae sector fix it. That stock of debt was the main driver for the downgrades we faced on Friday.  It's the main thing politicians have wanted to avoid, but now it has happened.

Our fiscal situation is broadly OK.  Government paid off a lot of debt in the 1990s and 2000s, and the level is quite low.  We need investments to drive growth that will help close the debt gap, and we need a tax system that drives productive investment and closes the fiscal gap in the future, but Labour's already set those things out.

Private sector savings is the next big frontier.  KiwiSaver was really starting to turn things around, building a culture of savings where people could see the cash adding up and plan what to do with it when they retired.

It was a good scheme that's been cut at, but it needs to be rebuilt and extended.  We need to tackle with even greater urgency the need for Kiwis to save more. It's the only way we can #ownourfuture.

By itself though it won't be enough, and Labour's acknowledged already that in the 2000s we didn't move in the right direction or fast enough on some things. I think savings is one. Regulation of the finance sector, and doing something about the property bubble are two others.

The election is now going to focus more sharply on these things than it was going to before the downgrades.  The country needs a credible plan to lift growth, reduce the government deficit without cutting needed investments, and get people saving again.

Budget time: what 2011's effort must do

The election year budget is always a politically important moment. 

The Government has its final chance to set out big picture policy directions, which it will be held against come election day.  The Opposition has its chance to define itself in its critique, and gets the information it needs to pull its policy framework together to present to the people.

Playing out this year are many other factors that increase the importance of what is decided. The means of paying for the Canterbury earthquakes will need to be spelled out, and the ongoing effects of the world-wide economic crisis continue to demand a response.

The Budget needs to tackle this situation comprehensively, with two objectives in mind:

• kicking economic growth off again, and
• building a more equal society.

These two objectives support each other, and they are in line with what Kiwis expect their governments to achieve on their behalf.

To get growth moving, the Budget needs to set out some clear directions on:

• increasing the domestic savings rate and the capacity of government to deal with pensions in the medium term
• what sectors are going to be the focus of an export-led growth plan, and what will be done to help those sectors grow
• how we will change the monetary policy framework so that the erratic NZ dollar stops being a savagely negative force on productive investment
• increasing access to skills training and education, to allow for reconstruction and to get more people ready for work
• deepening the pool of capital available to NZ business by reversing recent cuts to support for workplace savings
• how the tax system will change to encourage productive, and discourage unproductive, investment.

In building a more equal society (which is better for everyone in it, happier and healthier and likely to be faster growing as well), the Budget needs at least to:

• show a commitment to catching up with Australian labour market law, so working Kiwis have a better chance of negotiating decent wages
• undoing recent changes to the tax system that have put masses of cash in high income earners' pockets, causing a lift in inequality and driving the budget deep into deficit
• tackle the crisis of affordable housing, so more people can get a foot onto the ladder of asset ownership

To pay for Canterbury, which was an expensive wealth-destroying event that has effects on the whole economy, a targeted time-limited tax increase has to be on the agenda: we can't stifle the economy or lift unemployment by cutting public services and infrastructure investment to meet the costs, and we can't afford to keep going down the route of 'borrow and hope' which now seems to be National's default option.

Of course, there is more chance of the sky turning green than the Budget taking this approach, or securing these things. 

It won't tackle the real challenges the country faces.

It'll be about entrenching privilege for those at the top of the tree, paying for pet projects, and blaming the opposition for the debt blowout and growth crisis caused by the government's own decisions (or lack of them).

It'll talk tough on making difficult decisions, but it will actually show the Government taking the easy way out and delivering only to its base, at the expense of most New Zealanders.

Which is why the only reasonable verdict about Budget 2011 is that it will be a failure.

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.