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On National Spreading Panic About The Economy

It is a political strategy as old as time. Scare the public with tales of disaster and stampede them into supporting your ideological agenda because they believe There Is No Alternative. Yet, if the NZ economy truly is as “fragile” as PM Christopher Luxon says it is... Then how come New Zealand has enjoyed a double AA+ credit rating from the international rating agencies for so long?

If we have truly been in the thrall of incompetent tax, spend and borrow extremists for the past six years, how come our net government debt burden is only in the middling average of OECD countries, and how come our government debt-to-GDP ratio – however you measure it – is less than half the average for the Asia-Pacific region?

It's not just me saying so. Just before last October’s election, the head honcho from a major credit rating agency was sounding pretty chilled out about the prospects for the New Zealand economy:

[S&P's sovereign ratings director Martin Foo] said the country's AA+ rating, which was upgraded in 2021, reflected the government's handling of the pandemic, low debt, discipline and economic growth, and there was no reason to change.

In a seminar on the credit outlook for New Zealand, Foo said the election of a National-led government would not make a material difference to the rating, given that Labour and National had broadly similar fiscal approaches... Foo said official debt had risen recently, but New Zealand still had one of the lowest levels in the world among developed economies.

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That’s not the diagnosis of an economic mess. It sounded more like business as usual. In fact, the line “Labour and National had broadly similar fiscal approaches...” is worth repeating. Because if you believe the current Government’s marketing spin, Grant Robertson was a wild-eyed tax and spend socialist with no head for figures.

Not true. From the time when Robertson embraced the Budget Responsibility Rules, the criticism from the left has been the exact opposite. Robertson was seen as moderate to a serious fault. He presided over an economic agenda that was National-lite, with a bit of hand-wringing on the side about the plight of the poor, and the occasional crumbs for them when he could afford it. Like the man from Standard and Poors, I think that if you took Michael Cullen, Bill English and Grant Robertson down to the police station, you would have a hard job telling them apart in a policy line-up.

So the default position we should be applying to the current government is – where is all the evidence for the claims that Luxon is making? Sure, this country has economic problems. Most of the serious ones are to be found in our export markets, where the over-dependence on China (which was cheer-led by Phil Goff and John Key alike) has been doing us serious harm over the past 12 months.

Otherwise the evidence for the catastrophising by Luxon and Finance Minister Nicola Willis doesn’t stack up. Inflation has already peaked, and is now in gradual retreat. Despite the best efforts of the Reserve Bank to create a recession (by jacking up interest rates to force down household spending) the labour market has actually held up reasonably well here – as it has in the US – in defiance of the 1980s economic orthodoxy, which has always treated workers as cannon fodder in the battle against inflation.

By this time next year, there will be interest rate cuts, growth will have begun to revive, inflation will be tamed, and the post-Covid re-adjustment process will be firmly in the rear view mirror. Absolutely none of this will be because of what the Luxon government is doing. Brighter economic prospects lie ahead, if we can sell more stuff overseas, at better prices.

If the economy is as fragile as claimed, shouldn’t we be investing our scarce resources in areas of structural weakness? Why are we wasting our revenue on a tax cut-fuelled consumption binge that will mainly be of benefit to the wealthy? If anything, the tax cuts will extend the mortgage belt pain for longer by stoking the inflationary embers. As we all know only too well, the Reserve Bank has tackled inflation by hiking up interest rates in order to reduce household spending. The tax cut spending binge will push the economy in the opposite direction. As the S&P managing director warned six months ago:

It is important... that monetary and fiscal policy are not working at cross purposes to each other.

Yet that is exactly what Luxon and Willis are hellbent on doing. Only cynics would argue that there is actually a degree of demonic congruence to the policy settings. The Reserve Bank wants more people thrown out of work, while the government wants more people kicked off welfare.

Talking about wise investment and avoidance of waste... If the NZ economy is so fragile, how come we can afford a multi-billion tax giveaway to landlords, but cannot afford to spend one third of that amount on securing a reliable trade and tourism ferry link between the North and South Islands? Surely, we must be the only country in the world that is pinning its hopes on a landlord-led economic recovery.

Toughlove on welfare

Rule of thumb: When politicians talk about making the tough calls, they don’t have self-sacrifice in mind. Not even a trace. They aim to make you suffer for their beliefs. Case in point: every economist in the country is predicting unemployment to rise this year. Given that outlook, you’d think a prudent/compassionate government would be strengthening the welfare safety net to ensure vulnerable families (and their children) make it through safely.

Instead, National is treating this as an ideal time to kick people off welfare support and on to a job market in relative decline – and to introduce a punitive traffic light system of welfare compliance that threatens to halve benefits or eliminate them altogether. This isn’t “tough love.” It is political sadism.

Beneficiary bashing is always popular with the comfortably-situated voters on the centre right who like to see the poor treated with a firm hand. In addition, the indexation of benefits to inflation is being estimated to cut some $669.5 million from the welfare budget over the next four years. More money for tax cuts, right? As George Jackson once said “To those that have, shall more be given; and to those that have not, what little they have will be taken away.”

Governing by TED Talk

Given the lack of evidence for the central thesis of Luxon’s speech, no wonder it came wrapped in TED Talk motivational cliches. Apparently as a nation, we’re getting our mojo back, and re-discovering our “can do” ability to do what only Kiwis can do... The message for people on Struggle Street? Look at hardship as an opportunity. Allegedly, too many kids living in poverty have been having a “free ride” for far too long.

Frankly, a National government should be the last to complain about “nasty surprises” and the “economic mess” they have inherited. The last National government chose to leave the country in the same condition that Sam Uffindell reportedly used to leave his student accommodation.

Think about it. The legacy of the last National government included a run-down public health system whose share of GDP had been reduced for the best part of a decade, thereby leaving New Zealand totally unprepared for the Covid pandemic.

National left behind glaring capital needs in our hospitals and schools; inadequate, outdated infrastructure in water, transport and IT; it made grossly inadequate investments in public housing which it was more inclined to sell than to build; and a Defence Force with such outdated equipment that the Labour/New Zealand First coalition chose to spend billions on replacements for the Orion surveillance aircraft and the Hercules cargo airlift planes. Last year, Labour felt compelled to fund the NZDF with a huge pay rise, to try and stem the outflow of armed forces personnel.

In sum, National trashed the place. The Key/English administrations “balanced the books” only by deferring essential investment and running the country into the ground. It is now preparing to do the same again. (See: second hand ferries.) National also has a history of ignoring climate change and environmental pollution altogether.

Weirdly, Luxon and Willis continue to treat all of the corrective spending carried out by Labour and NZF since 2017 as being evidence of waste. In reality, the levels of “fix-it” spending required over the past six years has been an index of National’s failure, not Labour’s.

Delusions of debt

In particular, Luxon’s speech offered this country’s “staggering” level of debt as evidence of Labour’s mis-management. Hello? As the bloke from Standard and Poors indicated, New Zealand’s ratio of government debt-to-GDP is freakishly low by world standards. It is our private sector/ household debt that is alarming; but since that is a by-product of the failure of market economics to raise incomes sufficiently for any but a privileged elite, that issue doesn’t get quite so much political attention. (The Reserve Bank’s high interest rate policy is actually making the levels of household debt even worse.)

Government debt depends on the ability of a country to service it. That’s why the ratio of debt to GDP (i.e. the size of the economy) really matters. In 2022, government debt was a sharply declining 32.2% of GDP. By comparison, the average ratio of debt to GDP in the Asia-Pacific region in 2022 was 82.2%. We were doing well. Moreover, there’s a very interesting table here of government debt ratios to GDP since 2002.

What it shows is that the debt ratios run up by the Key/English government were overall worse than Labour’s, the two pandemic years excepted. Look at those soaring government debt figures that National was happy to indulge: 2011 = 48.14% of GDP; 2012 =

a whopping 51.66%; 2014 = 46.45%; 2015 = 42.94%; 2016 = 41.42%; 2017 =38.66%; 2018 = 36.62% and, as we get solidly into a more disciplined Labour-led administration in 2019, the figure is 32.75%.

Only during the pandemic did the figures climb back up again, and even then only to a figure (50.99%) below what National racked up in 2012. In sum... By election time last year, Labour had the debt ratio figure roughly back to pre-Covid levels, and significantly lower than it had been during the two terms of the previous National government.

There are different ways (net or nominal, government debt plus or minus private sector debt etc) of calculating these ratios. Here’s a different one. This one showed the government’s nominal debt to GDP ratio rising as at election time last year:

New Zealand government debt accounted for 37.4% of the country’s nominal GDP in September 2023, compared with the ratio of 34.3% in the previous quarter.

But this analysis still proceeds to make the same point: “The data reached an all-time high of 38.7% in March 2013.” Under a National government. To repeat: the nominal government debt to GDP ratio was regularly worse under the last National government and yet... the sky did not fall in. So Luxon should stop with his Chicken Licken routine.

Footnote: Even if , as Willis has done, we re-calculate that debt in ways that make the inherited situation look as grim as possible, this still brings us – by her reckoning on RNZ yesterday – to only 44% of GDP. This is still below most of the world’s developed economies, and below the ratio of debt to GDP that the previous National government was happy to run up a decade ago.

Talking trash

One of the weirder moments in Luxon’s speech was his repetition of this sentiment from a speech made by Nicola Willis last September:

Debt has completely blown out. From just $5.4 billion in 2019, it is forecast to hit $100 billion in 2025....

The Luxon repeat comes at about 12:34 in his speech.

Hmm. Gosh, that alleged $5 billion to $100 billion trajectory certainly sounds bad. So bad you have to wonder why it hasn’t spooked the rating agencies. Maybe it’s because in April 2018, just as the last financial year of the Bill English administration concluded, New Zealand’s level of government debt actually had a total value of outstanding bonds of NZ$77.7 billion plus NZ$4.1 billion in Treasury bills outstanding.

Add it up. The government figure wasn’t $5 billion – it was already up at $82 billion six years ago, in 2018. This means that (a) the $5 billion figure used by Luxon to scare the horses is absurd, and (b) the fact it will reach $100 billion in 2025 (seven years later) is neither surprising nor unsustainable. Today, we have a bigger economy with rising needs, an ageing population and decaying infrastructure. We need to borrow to help meet those needs. Treating 2017 as the virtuous template for government spending in 2024 is deeply misleading and delusional.

A prudent government needs to be willing to borrow (a) to help meet the current levels of unmet social need, and (b) to make the investments essential to meet future needs. The debt gets repaid by future growth. Therefore, debt only becomes evil when the government cannot service it. Even if exports continue to struggle, New Zealand, as the debt-to-GDP indicates, has ample headroom for further borrowing.

Rather than be spooked into cutting services – because of the bogus fear of placing an intolerable debt burden on future generations – we should be more worried about burdening future generations because we didn’t borrow and invest today, in order to ensure those future needs are to be met. That goes double for funding significant action on climate change and environmental pollution. Instead, we plan to fritter the money away on a socially regressive round of tax cuts. But no doubt, Luxon’s TED Talk spin will be inspirational.

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