Scoop Election 08: edited by Gordon Campbell

The Treasury Update, And Calls for Austerity

December 16th, 2009

Any future built on Treasury forecasts is on shaky ground, but lets assume the relative optimism expressed by Treasury in yesterday’s half yearly fiscal update is well founded. Should Finance Minister Bill English respond by keeping the screws on government spending – and by spending we mean not only on the provision of services, but on wage rounds for health and education workers? Yesterday, English made it clear that the tight settings devised to meet Treasury’s earlier, much harsher outlook will remain in place, regardless.

It is always hard to tell whether such decisions are being made on ideological grounds, or for sound economic reasons. Is the current regime of austerity being maintained (a) because business tax revenues are down ( b) because of fears about another inflationary spiral or (c) because the government wants to be able to afford to put its tax cuts programme back on the table in election year 2011?

To the extent that (c) is a factor, nurses and teachers are being asked to subsidise a future round of tax cuts that will make dubious economic sense, and no sense at all on social equity grounds. At the very least, there will be further unemployment next year thanks to yesterday’s continued message of austerity. Given the shakiness of the economic recovery – globally, this recovery has been a product of stimulus packages by government rather than virtuous effort by the private sector, and those packages are now running out – there is still an argument for erring on the side of stimulus, not austerity.

Yesterday was also something of a holding action. After all, there is a more immediate reason why English is not wanting to tip his hand just yet. The Buckle tax review recommendations are due to be released to the public during the third week of January, and the government will be wanting to use any good news from yesterday’s figures to rejig the trade-offs between the various changes in taxes and tax rates likely to emerge from that exercise. Any state wage rounds next year will be made secondary to that process, and are probably being factored in as nil items – whatever the effects of such austerity for domestic economic activity.

That seems more like ideology talking, rather than economic sense. The recovery is still largely a phantom. The economy is still being expected to contract in the year to March 31,2010 – but by .4 per cent, not the 1.7 per cent predicted by Treasury in this year’s Budget. From there, growth is expected to pick up by 2.4 per cent, 3.2 per cent and 3 per cent in succeeding years. Even so, English warned yesterday, “we’re not going to get back to pre-recession levels until late 2010.” So that’s official, then : no genuine return to anything resembling normality for the next 12 months.
The political spin though is that we are on the brink of the good times again. The sober reality is that 2010 is not going to be a happy year for most middle income and lower income New Zealanders. Why, given the high kiwi dollar and our current levels of debt, Treasury is not expecting any growth in exports until the March 2012 year.

This must mean that the initial recovery (if it happens) will be being driven by the ordinary business cycle and by the same domestic spending that English (and the Reserve Bank) will be doing their best to choke off, in order to dampen down the fires of inflation. Yes, nurses, teachers and the unemployed will be being used next year as unpaid frontline fighters in the battle against inflation. That is, until the next round of worship at the altar of tax cuts throws austerity and inflation control out the window once again,

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    1. 6 Responses to “The Treasury Update, And Calls for Austerity”

    2. By Joe Blow on Dec 16, 2009 | Reply

      I’m not sure that I’d describe the recession as a “phantom”! Some of us are finding it a little hard to find a job right now! I think it is accurate to call this a holding action and even if the economy continues to recover they’ll probably want to get the books straightened out over the next year. Wasn’t Key’s original election campaign policy to leverage the country and pump in some spending? It does make one wonder if extreme ideology will creep in even if the recession passes. It’ll be in the second term if it does…

      Still there’s that “W” shaped recovery theory still simmering and what’s the next problem on the agenda? Government debt! Those bond yields look to be set to rise at some time. Bond investors are already roaming through Europe trying to force governments to cut budget deficits… It would be cool if we could ride this one out on the back of other countries’ stimulus and come out the other side less in the red than elsewhere. Still people will only be happy with that if things continue to improve…

    3. By Tom Semmens on Dec 16, 2009 | Reply

      The political problem for English (not Key, he is rapidly losing control of this government) is that the public expectation is the recession is over.

      An austerity budget risks a major public backlash, especially if it is accompanied by generous dollops of taxpayer money to the Maori Party stooges who will run the unaccountable Iwi based welfare programs Turia is demanding.

    4. By Stuart Munro on Dec 16, 2009 | Reply

      Treasury optimism and fiscal austerity make a bad combination. We need instead a few prudent and pragmatic stimuli. Housing would be a smart area for government to get into, they might learn a thing or two from the housing policies of Singapore or Hong Kong.

    5. By Richard on Dec 16, 2009 | Reply

      @ Joe Blow

      Campbell describes the *recovery* as a phantom. Not the recession.

    6. By Joe Blow on Dec 17, 2009 | Reply

      Thanks for that Richard. Completely got that wrong. I must say that it is nice to be on the same page with Gordon once again…

      Yeah if this recovery is a phantom then people are not going to be content with continued frugality. Still I’m still with the government on this one with not jumping in with stimulus just yet. How different would Miserly Cullen be?

    7. By Laura on Dec 26, 2009 | Reply

      The stimulus is a false economy, like using a credit card to make a payment, to another credit card. I think, we are headed, for, a crash. There are no permanent jobs. When the pick and shovel jobs are done, we are back to square one. In fact,we are going to be worse off because of, the HST, a terrible burden on citizens, who,have to choose between, heat or food. Canada, is in a dictatorship, where, people don’t matter and our voices are ignored.

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