The politicians were still campaigning as this column was being written. They were threatening the health of the economy, too, by promising to put more money in our pockets if we do the decent thing by electing them.
Naturally, they were adamant they would be keeping their own promises if they became the government (and just as adamant the economy would be better managed with them at the helm). But they doubted their opponents could keep their promises or do the economy any good.
Finance Minister Michael Cullen, typically, challenged National’s finance spokesman John Key to put out “a proper alternative budget with all policies fully costed as Labour had done in Opposition”. The Nats could not be allowed to coast through to the election on the basis of bland assurances their numbers added up. higher standard was required of any party claiming to have the credentials for government, Cullen huffed.
On the same day, Key complained about Cullen’s refusal to release the full Treasury costings for Labour’s student loan election pledge. “What is Dr Cullen trying to hide?”
Besides carping about each other’s credibility, both major parties were feverishly (and cynically) trying to outbid each other for the electorate’s favours.
It’s long time since public money was so blatantly thrown into campaign to win votes, even though Cullen has portrayed himself persistently as fiscal disciplinarian who couldn’t cough up more cash for this, that or whatever without harming the economy.
He was right to be disciplined. It’s no time to be generous or stimulatory with fiscal policy when the economy is seriously constrained by three deficits – the current account deficit, the skills deficit and the infrastructural deficit.
True, we are not sliding towards recession. BERL forecasts GDP growth averaging three percent in the year to March, increasing to 3.3 percent for the year to March 2007, followed by 3.4 percent growth in the year to March 2008. Underpinning this expansion is the robustness of employment growth. But BERL said: “We remain nervous about the future. It is not too difficult to paint much bleaker scenario.”
The current account deficit, in parlous shape at seven percent of GDP, is its Achilles heel. The twin deficits in the American economy are another potential source of global economic and financial instability, BERL warned, and oil prices potentially could tip the world into downturn.
“We suggest that the various election contestants bear in mind the possibility of such scenarios before considering their next bid in the current auction,” BERL counselled.
It foresees the current account deficit rising to 8.5 percent in 2006/07 and sticking there the year after (the end of its forecasting horizon).
The Treasury projects the deficit will rise to 7.7 percent this March year, gradually easing to 6.2 percent by the end of the forecast period in 2008/09, but this was not taking all the costs of election bribes and their effects on consumer behaviour into account.
Labour was making its pitch with the promise of debt relief for students, the promise of more tax relief for families and slew of fresh post-Budget spending announcements. Even when using bigger-than expected surpluses to justify the more generous package for families, however, Cullen tried to maintain his pose as fiscal disciplinarian, saying he must ensure against giving the Reserve Bank cause to hoist interest rates. “Treasury’s advice,” he said, “is to be cautious about increasing the fiscal stimulus in the next two years and an increase in mortgage rates would penalise the very households we are anxious to help.”
National would do the economy no fiscal favours either. The key plank in its policy involved tax cuts (albeit gradually introduced).
Whether the electorate finished up with more money for “working for families”, beneficiaries or tax cuts for everybody, more money will be sloshing around for spending after the election.
The current account deficit is measure of the extent to which this country is tapping into the savings of people in other countries to pay for our imported consumer goods and for investment in capital developments. The Government has been building up its “savings” (represented by those contentious budget surpluses) but companies and householders have not.
So what’s the smart way to build up company and householder savings without eroding the national savings? Not by running down the Government’s saving and dishing out money to businesses and householders in the hope they will not spend it. Yet Labour and National committed themselves to doing precisely that.
There was time when the warning bells on balance of payments problems would ring when current account deficit hit five percent of GDP. They should be ringing louder now. We can’t keep borrowing our way to prosperity as we have been doing.
Bob Edlin is regular contributor to Management.
