Scoop Election 08: edited by Gordon Campbell

Cutbacks to Central (and Local) Government Spending

October 27th, 2009

As sure as night follows day, when farmer incomes come under pressure, Federated Farmers want to cut welfare – and slash anything else they think might be fuelling the stronger dollar while they’re at it. In 2009, this sort of cry looks particularly stupid. If welfare payments had been cut when the Key government took office, the country would have plunged from recession into crisis – which is exactly what happened when Ruth Richardson and Jenny Shipley cut benefits shortly after National took office, and created the mother of all recessions.

Deficit spending in a recession is not a vice, but a virtue. Sure, what it gets spent on is important, longer term – but 2009 has not been a year when sweeping cutbacks in government spending would have made any economic, or social sense. Yes, borrowing helps prop up the dollar, and that can have unwelcome effects. So does cranking up interest rates in the battle against inflation. Economic policy always has such downsides. In Finance Minister Bill English’s job there is no free lunch – even if sometimes, there can be free rent.

Welfare is simply not the right target, though. It seems to have eluded Federated Farmers economic spokesperson Philip York at least – just as it eluded Ruth Richardson – that spending on welfare is one of the engines of the domestic economy. Beneficiaries spend the money that they get from the state in local shops – not on overseas trips or on luxury imports.

Same story with the low paid. It has been estimated for instance, that 2/3 of this year’s wage rise to staff at Progressive’s supermarkets will be spent back at Progressive, on groceries. The money circulates back through retailers, and government gets some of it back in tax. While bank economists ( and well-paid journalists ) seem happy to announce that the recovery is not only here but kicking in stronger that expected, reality begs to differ – out in the real world, unemployment continues to be on the rise. The burden of any tightening of interest rates, even in March, is just as likely to kill the fledgling recovery in its cradle – and you can bet that farming will not be the sector that feels the worst pain from that.

If we’re talking about restraint, it is still worth remembering that benefit levels were not restored to their pre-Richardson levels, even after Helen Clark took office. Beneficiaries have therefore continued to contribute to government thrift in ways that say, the chief executives in government departments and agencies have never done. It is impossible to estimate the social cost in crime, marital breakdown and mental health problems that have resulted from this ongoing pressure on benefit levels and entitlements.

Safe to say though, today’s call by Federated Farmers for restraint might have had a bit more credibility if they had backed the speech earlier this year by Chief Justice Sian Elias, when she pointed out that our punitive sentencing policies and the resultant expenditure on prisons is socially and economically unsustainable. That however, is an area of government spending that the Neanderthals in Federated Farmers would probably regard as being essential. Similarly, if banks paid up – rather than continuing to defend tooth and nail the dubious legality of their tax schemes in court – the government wouldn’t have to borrow quite so much overseas. Not a peep from Federated Farmers though either, on that particular cancer on the government revenues. Much easier to beat up on beneficiaries.

The issue of what is essential spending and what isn’t will resurface this afternoon when Local Government Minister Rodney Hide unveils his plans for local government. Supposedly, Hide has backed away – or been told by John Key to back away – from his extreme agenda of cutting local government by law, back to its core services. If that happened, local councils would have had to privatise the services they currently provide. If so, local ratepayers would quickly find that what they save on their rates bill, they would now have to purchase at market rates – and in many cities and towns around the country, there would be little or no competitive market between suppliers to keep those prices down. People would either have to go without, or pay through the nose for services currently provided – usually at reasonable cost – by local government. The only winners would be Hide’s friends in business.

One item on Hide’s wishlist that does seem likely to survive is the necessity for councils to hold referenda in future, if they want to spend money on major projects. Plainly, everything will depend this afternoon on what we find out about the rules that Hide will be wanting to apply to this process. No-one would mind if the fate of say, a speculative punt by councils on an appearance by David Beckham had to be put out to a ratepayer vote. It will be something else again if essential infrastructure – the likes of say, Wellington’s sewage treatment scheme a few years ago – would now have to be decided in future, by a ratepayer poll. That would be a recipe for inertia, and decline.

The overseas evidence (from experiments in places like California and Colorado) is that local government-by-referenda is a pathway to the running down of public services. That may be the heart’s desire of the Act Party. They should be reminded that at the last national referendum in November 2008, barely 3% of the New Zealand public voted for their agenda.

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