Ukrainian crisis proves need for fiscal discipline

The crisis in the Ukraine is a perfect example of what people in my former profession, risk management, warn their clients about. As they say, you need to expect the unexpected. That means making sure your business (or country) will be resilient in the face of unforeseen shocks.

Many politicians and commentators nowadays are unjustifiably sceptical about the possibility of major conflicts and attendant economic crises. The Russian occupation of Crimea is an aggressive act which risks provoking a military response from the West or the new government in Ukraine.

The Russians under President Putin seized a good portion of Georgia and got away with it. But that was significantly different. The Georgians started the fighting. Georgia is a long way from Europe and not strategically significant. And Georgia had no treaties with anyone. None of that is true of Ukraine.

When the USSR broke up, Ukraine posed two military problems. The Russian Black Sea fleet was based in Ukraine and so were many nuclear weapons. The nuclear states did not want another nuclear-armed country and persuaded the Ukrainian government to give up its nuclear weapons. In return Russia, the USA and the UK pledged that Ukraine's borders would be respected.

If Russia can simply seize Crimea (perhaps by setting up a puppet regime) then why should any state, such as Iran, accept assurances from the nuclear powers? American and British credibility are on the line.

President Putin surely wants to avoid either war or civil war in the Ukraine A deal will probably be done. But we should not take it for granted. Twice last century Europe brought war to the entire world.

What does this risk mean for New Zealand? We cannot influence the direction of events in Ukraine but we can be affected by them. If the European economy is seriously affected, the knock-on effects will be felt around the world.

Resilience in the face of shocks requires capital (savings) – either your own or those of your insurer. The more indebted you are, the more vulnerable you are to shocks.

The New Zealand government’s debt has grown substantially in recent years. It is now projecting surpluses in the coming years. These should not be used to fund government spending on election bribes. They should be returned to taxpayers, either directly through tax cuts or by paying off government debt. Now is not the right time for tax and spend. Our government must be prudent.

ENDS

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