Tuesday 6 March 2012

Intensifying The Vicious Circle

More Of The Same: In spite of the ongoing shortfall in the National Government's anticipated Core Crown tax revenues, Finance Minister, Bill English, has reaffirmed his intention to keep tightening the screws on New Zealand's economy.

BILL ENGLISH claims to have cut core Crown expenditure by $1.24 billion. Just as well, given a $1.4 billion shortfall in Government revenue. The latest monthly Financial Statements of the Government paint a dismal picture of relentless economic contraction with Core Crown tax revenue a staggering $946 million below the amount forecast in last year’s Pre-Election Economic and Fiscal Update.

In spite of the Treasury’s consistent failure to provide the Government with even vaguely accurate fiscal forecasts, Mr English’s faith in its policies of austerity remains undimmed. The data’s brutal exposure of the Government's economic inadequacies will, however, powerfully reinforce the criticisms of Mr English’s critics.

The Treasury’s figures certainly vindicate the Opposition parties’ argument that the National Government’s cost-cutting fetish is hampering – not helping – the New Zealand economy’s slow climb out of recession. The falling tax take, exacerbated by the effects of National’s earlier tax-cuts, continues to run well ahead of the austerity drive’s much-vaunted savings.

The situation is likely to deteriorate still further as “slightly weaker labour market conditions” indicate a further rise in the number of New Zealanders without work. With more people unemployed, economic activity is predicted by the Treasury to slow even faster, leading to yet another shortfall in Government revenue.

New Zealand is thus caught in a vicious circle, with falling revenues necessitating further cuts in spending, triggering more economic contraction, more unemployment, reduced consumer spending, lower profits and falling real wages. The Government’s tax-take will fall correspondingly, depressing its revenues still further.

Mr English talks about “limiting our debt to foreign lenders”, but if he wishes to avoid plunging the country into a new and even deeper recession, it is difficult to see how extensive borrowing from overseas sources can be avoided. The value of the New Zealand Dollar will rise on the back of the higher interest rates needed to attract foreign lenders. Kiwi exporters will, as always, pay the price for the National Government’s refusal to raise the taxes of New Zealand’s wealthiest citizens.

Rather than reduce Government expenditure, Mr English should reverse the last two rounds of tax cuts and engage in a quantitative easing of the money supply sufficient to fund a massive state house-building programme. In tandem with the Christchurch re-build, and backed by an all-out effort in trades-training for young, unemployed school-leavers, such a building programme would dramatically reduce the number of people out of work. A commitment to source its building needs locally would further stimulate economic activity, lifting tax receipts and lowering the Government’s borrowing requirement. Interest rates and the NZ Dollar would fall – boosting export receipts.

Mr English will not, of course, adopt such a stimulatory strategy. In response to the latest Treasury release, the Finance Minister simply stated that the official data “reinforces the need for the Government to be disciplined and stick to its plan to get back to surplus in 2014/15, so we can start repaying debt.”

At least for the foreseeable future, New Zealand’s economic performance is set to remain well below the level commensurate with rising employment and fiscal surplusses.

This posting is exclusive to the Bowalley Road blogsite.


peterquixote said...

Economics 2010 Europe from Chris:
"Rather than reduce Government expenditure, Mr English should reverse the last two rounds of tax cuts and engage in a quantitative easing of the money supply sufficient to fund a massive state house-building programm"

Now as everybody knows. Quantitative easing is government bureau speak for printing money. Thank God this country New Zealand has not indulged, in this pathetic wastrel to our citizens.

Nick said...

I doubt that the comments that come on this column will actually address the reality we face. There will be calls for Keynesian remedies, Hayek /Freidmanite austerity, some other nameless "growth" orientated dogmas etc etc.

So lets be very blunt. Brent crude is at US$129 today, and that will not allow any growth. There is a price problem and soon a supply problem. Our GDP has for the last 100 years tracked freely available energy supplies that recently peaked. As energy supply declines we will have commensurate GDP decline.

Bill English is a total fool, but he is no different from any Treasury economist whose whole paradigm has been conditioned by "growth" as a constant. The media in their laziness and deliberate deference to their paymasters also are hooked on "growth". Growth is what underpins our extreme debt loading, the ability to pay the interest and inflate the debt away. No growth, big problem.

A shock awaits, time for the rest of us to wake up and understand that what was has been. Growth as a constant has gone. Tomorrow will be a completely different day.

Anonymous said...

Someone might care to point out to cliche-peddling politicians that capital has enthusiastically exploited a debt system of financing since at least the 70s to keep wages low, managerial "elite" salaries vulgarly over-inflated, and now to have allowed the realisation of post-Capitalist corporate oligarchy in the financial monopolisation effected by way of derivative hallucinations.

If they are genuinely intent on abolishing the debt structure itself they'll do a hell of a lot more to destroy the dominant class of parasites than the working class has ever managed to do.

Anonymous said...

peterquixote is correct, and I'm afraid Chris you are wrong on this one.

Printing money/borrowing to cure a debt problem ahev all been tried and not only failed, but will leave Europe/US ruined for 10+ years. Japan tried the same in 1990's, and still haven't recovered.

If you go back to the depression, first countries out were the ones like Australia, where the governemtn balanced their own books. It gives wealth creators confidence to invest, and create wealth/jobs sooner.

Printing money causes inflation, which is good for middle class wealthy asset holders, but is the worst thing for the poor, you profess to care about.

The "gap" in NZ, imho can be traced back to early 80's inflation - while it was a paper rise for homeowners back then, it allowed income to free up with mortgages repaid, and investment income to supplement salary/wages for many who owned houses at taht point.

Anon. E. Mouse said...

Printing money will only work when all of it is spent here and remains here.
The US and others have a problem with it because that money was pouring out of their respective countries. That feeds inflation.
NZ needs to borrow more short term and get people back into work. That will filter out into the economy and start it growing again. As it is the reduction in Govt. expenditure and the loss of the jobs in the various Depts. is just increasing the length of the Depression we are in.
The only reason we have not got as bad as the 30's is because of Welfare payments. That tax money filters out into the economy and softens to recession.

Simon said...

Value that oil in gold Nick ie real money and not in paper money central banks print. Big inflation is being built in worldwide. Oil is usually the first to go.

As always the case with central bank printing those on low income or in poverty now suffer with the problem of having incomes adjusted slowly in face of rapidly increasing prices. Those who can adjust the price of their labor survive and the asset rich prosper.

“ engage in a quantitative easing of the money supply sufficient to fund a massive state house-building programme”

What would happen is the printed money would flow to big business and everyone else would all be living in state houses with work skills dependant on government money printing.

The 1% salute you.

Guy said...

Don't see how QE would create funds for state house building (assuming one thought that was desirable, pushing even more NZers into govt dependency). In QE, the RBNZ would purchase govt bonds from banks and print money to do so. In theory the banks would use this to expand private sector lending. In practice overseas they have recently tended to plough it straight back into govt debt. In either case the govt's debt position is not improved, and no funding for govt programmes is created, although govt's ability to borrow may be improved and interest rates may see downward pressure. Even if banks increase lending to the private sector there is an argument that it just pushes up asset prices, particularly housing as mortgage debt is easier to get and possibly cheaper.