The country’s political leaders, competing for our votes in the run-up to the election, seemed curiously phlegmatic about global financial upheaval and its economic implications (including zero global growth, according to the International Monetary Fund).
They were like shopkeepers eagerly selling their wares – offering blue set of tax cuts or red one, take your pick – while cyclone built up and was headed their way. Tax cuts are great, but who was peddling cyclone-shelter or rebuilding programme?
The campaign rhetoric was sprinkled with words like productivity, competitiveness, R&D and so on. Slogans. We’ve heard them before. You can throw sustainability, innovation and economic transformation on to the list. But while the politicians were making much the same noise, their promises amounted to little more than tweaks of programmes that have brought us to where we are – standstill.
Most critically, no one was asking if the policies we are running or intend running are appropriate for small open economy. Such an economy can do without wildly fluctuating exchange rate or high interest rates that push up the exchange rate and make exports uncompetitive. But the framework in which monetary policy is set was not being challenged. There have been regulatory failures, too, most notably in the banking and financial sector. The experts cooed about New Zealand being immune from the global upheaval, because we have well-regulated banking sector, although raft of finance companies has gone under in the past 18 or so months. The Reserve Bank can counter it wasn’t responsible for monitoring the finance companies. So who was?
As governments and central banks around the world set about cleaning up the mess from the collapse of Wall Street and what have you, few commentators were seriously arguing ‘the markets’ (or the rascals who prospered by playing the rest of us for suckers) should be left to regulate themselves.
The magnitude of this country’s problems became awfully obvious with publication of the Pre-election Economic and Fiscal Update. The Treasury was projecting decade of budget deficits, even though the economy is forecast to pick up enough steam over the next year or so to get back to three percent annual growth.
How the books deteriorated so drastically in the few months since the 2008 Budget was published, cried out for explanations. If three percent growth over the longer term can’t get the Government’s accounts out of the red, we can forget about cyclical explanation – it ominously means the Government’s revenue and spending flows are structurally flawed. Yet there was no hint of the heads of departments like Economic Development, Inland Revenue and Treasury hastening to find out what’s gone awry.
Management of our monetary policy has been potent factor in the economic slowdown that has slowed tax flows. Interest rates were deliberately raised to curb activity and stem inflation (which the global slowdown has taken care of anyway). The export sector was first to feel the crunch. It’s happened before; it will happen again – but if the economy must be slowed, why must the most important sector be slugged? Neither major party was showing signs it recognised this as an issue.
National leader John Key did urge Reserve Bank governor Alan Bollard to lower the official cash rate. I think it would be in New Zealand’s best interests for those interest rates to come down as rapidly as they can, hopefully before October 23, he advised much earlier in the month. But the banks were tightening up on credit, and lower interest rates seemed unlikely to help much other than (perhaps) inject some ‘feel good’ into proceedings. Rates did need lowering to keep relativity with the rest of the world, however.
Generally, the Nats could claim to be somewhat more business friendly than Labour, but they decided in the name of fiscal prudence to rid us of Labour’s R&D tax credits. They also decided to wind back the capital investment in infrastructure programmes they had previously signalled.
Prudent? Not really. There is bad government spending and there is good government spending, and the good stuff includes capital investment in developments calculated to help us pick up the pace with economic growth.
When credit is drying up elsewhere, governments can raise funds – overseas or at home – to help out. Gilt-edged, risk-free lending to the government to build the nation – roads, electricity, broadband, whatever. So stop talking about it and do it – this year instead of spreading it over several years. That’s what could be done by government intent on getting things going, lifting productivity and what have you. But don’t count on our leaders being so bold.
Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.