In my last post I indicated that I would be doing a series of posts on growth and jobs, reflecting my portfolio work in economic development. Here’s the first – and I want to begin with the Government’s results (or lack of).
By way of context, as a country we need to create and export value in order to pay for imports and good wages. Sustainable economic growth is not at odds with social democracy, but a necessary component of making it work. Growth is not an end in itself but a means to families and communities getting ahead. For modern social democrats, it should occur within a framework that ensures good social and enironmental outcomes.
The trouble is, despite repeated promises from the current government that economic growth is “just around the corner”, it just hasn’t happened.
After Budget 2011, I posted a graph showing how the economy had actually performed under National compared to the growth forecasts since they came to office. With the latest downgrading of the growth outlook in the recent Budget Policy Statement, I’ve received a few requests for an updated version, so here it is:
Government GDP vs Reality
(sources: Treasury Fiscal and Economic Updates, and Stats NZ GDP series)
What do we see? Well, under National the economy has under-performed each set of growth projections since they came to office by a long way. The sole exception is BEFU 11, which assumed an immediate GDP hit from the Canterbury earthquakes that didn’t eventuate. It raises the question, is the problem with Treasury’s forecasting models or with National’s economic management?
Take a closer look at the 2 oldest sets of projections.
DEFU 08 came out immediate after National become government, at the height of the global economic crisis. It predicted that the economy would now be over 6% larger than it is – that’s $12 billion a year.
BEFU 09 came out with Budget 2009 – this was Treasury’s ‘doomsday’ predictions written at the peak of the Great Recession (although, ironically, it was released after the recession officially ended). BEFU 09 saw a further two questers of recession that didn’t happen and a gradual return to slow growth.
In the jargon of finance, it’s called a “hockey stick” – a graph that always starts by going down in each set of forecasts, but is always predicted to curve up in the future. If ”NZ inc” was a company with accounts like these, the board would be asking hard questions of the managers.
In fact, look where the economy should be now according to that ‘doomsday’ scenario. That’s right, ahead of where it actually is. The recession didn’t get as bad as Treasury thought in BEFU 09 but the recovery under National has been so anaemic that we are now below the level of GDP forecast at the gloomiest period of the Great Recession and falling further behind every day.
Here’s how over-optimistic each set of predictions has proven:
Government Projections Over-optimistic by:
There is a huge mismatch between what Treasury predicts and what National delivers.
So, what needs fixing: Treasury’s forecasting, which serves as the basis for government and opposition policy decisions, or National’s economic growth agenda and “120-point plan” ?
Both are the responsibility of Mssrs Key, English and Joyce.
More on why the Govt’s 120-point ‘laundry list’ is not a real plan, and what a real economic growth plan ought to look like, in future posts.
So, what needs fixing: Treasury’s forecasting, which serves as the basis for government and opposition policy decisions, or National’s economic growth agenda and “120-point plan” ?
I seem to recall Treasury compulsively underestimating growth when Cullen was their Minister. I keep meaning to go back and look at the forecasts from the late 90s through to now and calculate the difference between forecasts and actuals, to see if there’s a significant variation dependent on who is in government.
@ Danyl…thats what I would like to know as well. Do treasury just plug in the numbers based on Nationals assumptions around policy? Is treasury independant of the government of the day?
I read somewhere that Cullen had actually predicted that our deficit would be what it currently is (from prior to his departure). Cullen of course I thought was a smart man. But I would like to know who actually is in charge of the numbers…
That brighter future is just around the corner each time, eh?
Whether it’s National or Labour in Government the contry needs a plan, in business you need a roadmap and benchmarks to measure against.
People need purpose and pride and a sense of nationhood.
We have become a divisive society with the mighty $ being the measure of one’s success no matter how it is obtained.
Not sure how Labour intends to be a government with the Reds (sometimes known as the Greens) when Turei doesn’t want growth, and nor does she think it is necessary.
Here’s Turei last week:
Good luck with the Reds. You’re gonna need it.
@ Danyl. You are right – from memory TSY underestimated growth on the upswing and they are overestimating it on the downcycle. Model probably assumes reversion to the mean after three years or so And smooths to that. But in reality life ain’t smooth.
@Jack R. Amen to the need for a plan. I want to take that debate forward this year by demonstrating what the components of a plan ought to include ( using large business strategy as an analogue).
@ Nick K. Yes the aversion to growth by the Greens is one of their main departures from Labour thinking. Which is why I put the context para at the start of this post. Our position is a responsible one I think – not growth at any cost and not as an end in itself, but recognizing the contribution a healthy growing economy can make to human well being. There are of course major limitations around GDP as a measure – I prefer GNI – and we need parallel measures of non-financial well being lest we fall into the trap of simple materialism.
It’s crucial that we start thinking of “economic growth” in both quantitative and qualitative terms, IMO. Cunliffe’s remark that “growth is not an end to itself” is a vital pointer.
For neoliberal economists and corporate shareholders nothing replaces CAGR (compound annual growth rate) as the single measure to beat. Niceties like how that growth is shared in society, the impact on the environment and on families due to the quality of growth, and what proportion of the benefits of growth are kept in NZ (as opposed to being expatriated offshore to Chinese or Australian shareholders)are generally ignored.
BTW growth as expressed in annual % terms = unsustainable exponential growth. Its what happens to bacterial numbers on a petri dish. Maximum absolute growth occurs – just before the bacteria crowd themselves to death.
The only growth which is truly and finally sustainable in my view is growth of a qualitative, not quantitative, nature.
@ deano That’s what Kiwis have been fed so consistently by this Govt
One sort of growth which, I think, is important (and understatement?) is growth in knowledge. And that means research. This article
http://www.guardian.co.uk/science/blog/2012/feb/23/scientists-basic-research-business
is UK-based, but all it says is true in NZ.
A central quote from it is
“The modern electronics industry would be unimaginable without complex numbers and quantum mechanics. The world wide web was not a product of “mission-driven research”. ”
Doing the simplistic thing of only doing research that produces products (rather than knowledge) is a sure way to make sure that knowledge growth (and consequently other sorts of growth—like, perhaps, how to adequately resource the world without destroying it first) stops.
From memory the Reds recently offered 100,000 new ‘green’ jobs if they got into government. They did not get into government of course, but I do not think that should necessarily stop them. They should go right ahead and create those jobs anyway.
There aren’t going to be 100,000 Green Jobs. That number of Green Jobs requires significant Green Growth, and significant Green Growth during economic stagnation requires significant Government money and Government leadership.
Neither of which will be forthcoming from National.
Now if the Green’s target was several hundred Green Jobs (instead of 100,000) that might be do-able.
BTW where is this term “The Reds” from???
@Stever – Agree re growth in knowledge, both for its own sake and as an increasingly important determinant of economic value.
@Allyson/@Nick K – this Reds/Greens name swap is a pain. But there is every reason to hold the Green Party accountable for its numbers and the value of its policies, as with any other party.
“BTW where is this term “The Reds” from???”
From the same political handbook as “Tories”.
Yes the aversion to growth by the Greens is one of their main departures from Labour thinking.
@ David
This statement is without context. The Greens have been consistent in the view that economic ‘growth’ is a very one-dimensional and blunt measure of personal and national prosperity.
There is an absolute aversion to unreasoning, unmanaged and ultimately unsustainable ‘growth’ being touted by both major parties as a panacea when in fact this dogma should rightly be challenged.
Should air, water and food quality, NZ jobs and our economic sovereignty (whether that even exists anymore) be sacrificed for ‘growth’?
To simplify the issue does a disservice to the electorate.
I thought there was something odd with the projections used and why the government had to keep saying things were not turning out as they had predicted, but what they really should of said was that they had other projections that were more accurate and more conservative, but they decided to do a sell job to the sheeple on the numbers. Good to see where the errors are coming from.
The government is showing more incompetence around using projected figures – the state asset sales are another example. Do we really want leaders that just pull numbers out of the sky, rather than base there decisions on good sound accurate data?
The people know that it is the worst case figures that are reality, why can’t the government act in a way that shows they have an idea of what is really happening out there and come up with a credible plan?
@Gregor – the context for the reference to the Greens was Metiria Turei’s recent speech as quoted in an earlier comment. It is categorical and was not of my making. In terms of the qualifications to growth as a goal- I largely agree with you as set out in the opening paras of this post.
@james- why can’t the govt use accurate figures? Perhaps because they don’t want folks to know just how bad it is.
@David
Why are you suggesting then that the Greens have an ‘aversion’ to growth as though it is a binary decision with no external context?
They are not ipso facto averse to growth.
The aversion is clearly to the type of growth (I.e. reckless) where society as a whole rather than the beneficiary generally assumes the external costs. That’s clear for any nominal assessment of Green party policy. And your post alludes the NZLP agrees unless there is, as you suggest some departure in thinking?
@Gregor. Their deputy leader has said Labour’s pursuit of growth is a ” fundamental difference” with the Greens. No qualifiers in that statement I’m afraid.
@richard the first
Not really. You may know better than me (esp judging by your nick) but to the best of my knowledge the modern British conservative party’s predecessor was an actual Tory party in the UK. The term is still embraced by conservatives in the UK.
Reds is a purely derogatory/cold war term for socialism and communists. I doubt any democratic socialist would feel comfortable with the label.
@David
Fair cop. However, I was referring to your comments rather than Turei’s words.
I was questioning your turn of phrase ‘…the aversion of growth by the Greens’ which is untrue rather than the departure from NZLP policy which is fact.
So do you agree with Turei’s statement, in that pursuing reckless growth is a differentiator between Green and Labour strategic economic policy, or do you believe that not to be the case?
I’m sorry, but if the Greens really believe in what they say they believe in, they would be calling for the development of a debt free steady state economy. (It has to be debt free as interest bearing debt always needs quantitative economic growth to successfully repay).
Now, I’ve not heard them talk about such an idea, they are still pandering to the upper middle class aspiration (delusion?) of “sustainable” growth as much as any other mainstream political party.
BTW if a level and type of growth can’t even be sustained for 100 years, how can it ever be considered “sustainable”? At 3% p.a. growth for the next 100 years our economy would end up 19x bigger than it is now. Energy use would have to be 10x – 15x higher than it is now to support such an economy. Nothing about that looks “sustainable” IMO.
Of course, hard resource constraints coming up will likely mean that a 3% CAGR is absolutely impossible to maintain in the medium to long term, and I just wish that mainstream political parties will start saying so.
(By the way a growth rate of just 2% pa compounded means that our economy will be 7x bigger in 100 years than it is today. Still zero chance of happening in an energy depleting environment IMO).
@CV
So I think a lot of Greens, including parliamentary members do believe this.
That it is unpalatable or misunderstood by the electorate is the issue.
The fact is, you have to be in government to enact change, so moderating what could be regarded as extreme is sensible until you can educate and build consensus.
Again, what I object to is DCs baseless and divisive supposition that the Greens are ‘averse’ to growth, as if growth was some kind of binary rather than nuanced concept.
I would like to know more about how these projections are made up, but if Australia, China, US, Japan (our top ranked trading partners) have difficulty over the next year or two as I expect to see, then I think this projection will be a lot flatter. When that happens, we will get another announcement by the Government that will say “we didn’t see that coming”.
If we look at China and the possible downturn in their growth due to falling demand for their goods in Europe and the US, then the Chinese demand for our raw materials must also be less. There is already much talk of an inevitable “hard landing” in China, and going by what I did see in China while I was there in 2010 it won’t surprise me. Their banking and shadow banking / loansharking for development projects is also of concern. Fitch Ratings has said that the Chinese economy’s hard landing is “potentially the biggest risk for the global economy in 2012.” http://english.ntdtv.com/ntdtv_en/news_business/2012-02-10/imf-forecast-china-s-economic-growth-may-have-a-big-drop.html