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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    1. 14 Responses to “Cutbacks to Central (and Local) Government Spending”

    2. By banjo on Oct 27, 2009 | Reply

      There have been attempts 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.

      A quick google finds the Brenner report from 1979

      http://ashleymac.econ.vt.edu/ashley/3204/brenner.pdf

      and

      http://www.mja.com.au/public/issues/mar2/morrell/morrell.html

    3. By mike on Oct 27, 2009 | Reply

      Just an aside.

      As I listened to RNZ this morning I was reminded of how, back in the 60s and 70s, British trade unionists in the NZ unions were often labelled as trouble-making migrants who should “go home”. (These people seemed to forget that Peter Fraser and Mickey Savage both fitted the same bill).

      Hearing Philip York’s British-accented puff and bluster, however, I wondered from which of Thatcher’s lost legions he’d come from. What, Federated Farmers couldn’t find a local right-wing economist? Hardly seems possible.

    4. By Louis on Oct 27, 2009 | Reply

      What absolute garbage. Gordon, do you truly believe what you have written? Lindsay Mitchell has responded to your article on her blog:
      http://www.lindsaymitchell.blogspot.com/

    5. By sean14 on Oct 28, 2009 | Reply

      Gordon, as you clearly believe that benefit levels should rise, do you have any concerns that doing so will further erode the will to work?

      It may be un-PC to say it, but there are plenty of people out there choosing welfare as a life-style.

      On the other hand, perhaps we could all just quit work and go on the benefit?

    6. By stuart munro on Oct 28, 2009 | Reply

      I don’t suppose sean14 has tried it, but the ‘lifestyle’ accessible on the benefit includes things like living on potatoes, and running down any savings so fast that even a brief period will destroy years of work.

      As official unemployment once again tests ten percent, it is difficult to explain the sudden surge in this lifestyle choice. Have New Zealanders discovered a new enthusiasm for asceticism?

      I got sick of being unemployed and left NZ. Both the pay and opportunities are vastly better almost anywhere else. And the employers are a damn sight more polite too.

    7. By Lindsay on Oct 28, 2009 | Reply

      Stuart, If you have grown up on welfare, going onto your own benefit is no hardship. The difference between the minimum wage and welfare as a single parent is negligible. Official unemployment is at 6 percent – well off 10. Let’s hope it doesn’t go much higher before reversing.

    8. By Annabell Cloude on Oct 28, 2009 | Reply

      You admit Lindsay you don’t have a grasp on the current economic situation -and this is why you are harping on about the priority on issue of the (flawed) DPB system .
      Tomorrow you could help the business roundtable take the food off the table of every disadvantaged or unemployed beneficiary, you and the roundtable could take all that money and invest it .
      It would not be half a year before every last investment made was lost.As modern banking Ponzi scheme outstrips natural resources.

      .. don’t forget history the first flush of ‘Ruthanasia’ Nats cut spending quite ferociously benefit cuts, cuts in health, cuts in education ended in tears.
      Nat’s are sneakier now & with a league of paper fiddlers( and goblin trolls).

    9. By stuart munro on Oct 29, 2009 | Reply

      Lindsay,
      I did not grow up on welfare.
      The problem of the minimum wage is, as much as anything else, that market led reforms have not produced real price competition in New Zealand, so that low waged and yes, beneficiaries are really struggling to make ends meet.
      Commercialisation of essential services and cost recovery exercises such as ‘user pays’ have not resulted in broader societal efficiencies.
      I presently live in Korea, which has a 10% income tax rate and similar gst. But the government subsidises gas and electricity, and telecoms must offer competitive products and services or face restructuring. On 2/3 of what I can earn in NZ (supposing there were jobs available), My disposable income is roughly 10 times greater.
      So there is an argument for serious redesign of public services, but current praxis would have to be completely reviewed. Neither National nor any other party have either the brains or the stones.
      This feeble beneficiary bashing is just flogging the same old dead horse. It is cruel and stupid. Sometimes government must be cruel, but it is never entitled to be stupid. Government needs to make some real jobs, and readjust the housing/savings balance, if it wants a real improvement in New Zealand’s situation.
      But there’s the rub: they don’t. They’re quite happy to score a few bucks for their business mates and let it all go to hell. Which means they are ratbags, and the sooner we lynch a few of them, the better.

    10. By Lindsay on Oct 29, 2009 | Reply

      Annabelle, I do not and never have advocated cutting benefits. The focus has to be on deterring incomers.

      Stuart, The private sector needs to make the jobs – not government. And I am not talking about large companies necessarily. Small businesses, especially exporters, need to be able to expand. The tax burden is a significant factor in preventing that from happening.

    11. By Annabell Cloude on Oct 29, 2009 | Reply

      Actually on your blog you did say you think the funding for beneficiaries is better spent on investment and infrastructure.
      I encourage you to go do something more positive and deter unemployment (and don’t address the DPB with the current rising unemployment and big small business expansion problems).
      Lindsay why don’t you try to stop the govt’s new NDHB ‘Thorny Horn” Global sharing (outsourcing)structure.You will save 500 jobs.
      The Doctors and nurses are supporting this NDHB as they are in the dark about the nature of the NDHB business and structure details.

    12. By stuart munro on Oct 29, 2009 | Reply

      @Lindsay – “The private sector needs to make the jobs” – perhaps, but it has no duty to the welfare of the country. The government has, and failing private sector action (we can safely discount the possibility) the government must act.
      The desire of the private sector to hobble government is all very fine, in theory, when things are going well. When things are going to hell in a handbasket, you a government that will act. Small chance with this pack of braindead hacks.

    13. By Sinner on Nov 1, 2009 | Reply

      .. don’t forget history the first flush of ‘Ruthanasia’ Nats cut spending quite ferociously benefit cuts, cuts in health, cuts in education ended in tears.

      Ended in Tears? Rubbish. Every single reputable economic commentator things that Ruthanasia was the best budget NZ ever had – Ruth did far more in just one year than Roger did in the whole time he was finance minister.

      The sad thing is that the lessons and discipline of Ruthanasia have been lost: the budget position is now far worse than the problem Ruth faced. The situation is urgent, and the only responsible remedy is a far harsher permanent elimination of most of the welfare state than Ruth ever managed (although of course she saw the need back then).

    14. By Annabell Cloude on Nov 2, 2009 | Reply

      The budget position ( foreign debt) is now far worse than the problem Ruthansia faced. Then large numbers had their standard and quality of living indecently reduced; those who did not saw around them indicators of a decay in social cohesion in, for example, rising crime.(thank goodness for the costs of privatization of our jails along with developing police state).New Zealand growth stagnated during the restructuring while Australia grew modestly by changing more gradually.
      So the costs for beneficiaries basic needs are used for private profits and we can get increased social degradation. Economic thinking in the rise of inequality under globalization.
      Of course every single treasury lovin commentator thinks that Ruthanasia was the “best” budget. If you like hurting puppies any govt policy that allows you to hurt more puppies( and profit from it)is thought of as good by the profiteers.

      *I hope the treasury is enjoying all the liquidity of my illegally cut invalids benefit.All $226 per week-
      Say ‘Mr sinner’ how much interest on our foreign debt does that pay off ? .0000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000?
      Nothing you say?

    15. By Jack Russel on Nov 2, 2009 | Reply

      found a good whinny-the-poo quote…
      “there will be nothing of value in Dr Brash’s study.
      He is hardly likely to point out that the real reason for growing chasm in Australia and New Zealand economic performance is the economic policies pursued by New Zealand under Douglas et al which people like him so foolishly supported.”
      Woof!

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