David Shearer’s speech today blunted National’s attacks on Labour, and takes the economic debate towards growth in the economy, especially exports. This undermines National’s attempt to narrow the focus.
National is trying to convince NZers that when the government deficit is overcome they should be seen as good managers of the economy, even if the economy is stagnant, exports drop and more private debt and asset sales increase New Zealand’s net international liabilities.
Today’s announcement was an important step in overcoming the National Party’s attack on Labour over government debt.
When in government, Labour ran very substantial budget surpluses and reduced gross government debt from 38% of GDP to 17% of GDP, and net debt to close to nil. This is one of the main reasons NZ survived the GFC better than most European countries. Despite the fact that National opposed those surpluses and called for unaffordable tax cuts, they convinced NZers at the last election that Labour would rack up lots of debt.
Since National was elected, gross government debt increased from $31 billion in June 2008 to $80 billion in the 2011 PreFU – an increase of $49 billion. Net core Crown debt excluding the NZ Superfund increased from $10 billion to $54 billion, an increase of $44 billion.
Government debt will continue to rise until after the government returns to surplus. The trend towards surplus is obvious:
Deficits
2010/11 2011/12 2012/13 2013/14 2014/15
-18 billion -12 to -13 -8 to -10 -4 to -5 nil or close to it
So by 2014/15 NZ will be back to surplus (and will still have low government debt by world standards).
This would have been the case under Labour too. Our confidence in this was one of the reasons we produced the most detailed ever opposition financial projections at the time of the last election – much more detailed than National ever produced in opposition.
Despite this, National managed to beat up Labour over government debt, in large part because we did not convince NZers it was wise to recommence contributions to the Cullen/ NZ Superannuation fund before a government surplus is achieved.
Contributions to the Cullen fund did not increase the government deficit. They are capital contributions not operating expenses. They do not increase net debt, because they are matched by an asset. But they did increase gross debt.
Over the medium term, Labour’s package at the last election of increased savings and a capital gains tax resulted in less government debt (and less private debt).
But in the short term we did borrow a total of $14 billion more.
A whopping 70% of that was because of restarting contributions to the Cullen fund early.
12% was because we would not sell the SOEs. The public got that not selling the SOEs was wise for lots of reasons, including that the savings in interest are less than the profits foregone. As for the rest, most was due to the timing of CGT revenues cf the tax free zone.
Our largest spending commitment was expanding Kiwisaver to all workers.
We were not profligate, but still lost the argument about when to restart contributions to the Cullen fund. By the next election, we will also be three years closer to restarting those contributions even under the government’s plans, and so the substance of the difference lessens anyway.
David Shearer’s speech today takes from National this club with which they beat us, and turns the debate back to the economy, which clearly has not rebalanced.
National’s attempt to narrow the debate to the government deficit (and government rather than private debt), is undermined, especially as the trend towards surplus is clear (unless the economy tanks further from here).
John Key’s pre-budget speech this week titled ”Sticking to a plan that’s working” was so easy to pillory in Parliament this week.
National used to say their plan was to grow not shrink exports, to reduce our current account deficit not grow it, to reduce our net international liabilities not grow them, and to reduce the wage gap with Australia. Given they seem hell bent on continuing with what isn’t working, it seems their plan really is as inadequate as the forecasts show.
David Shearer’s announcement today clears the way for that debate.
So you have no problem with the real neo-liberalism, that banks should be able to borrow on the world market without regulation or restraint regardless of the impact on the national economy, despite the consequences of vast consumer debt after buying property at inflated values. A vast consumer debt that leaves the economy depressed afterwards because of the impost transfer of loan repayments out of the economy.
It is. The Government Budget Constraint (GBC) is a neo-liberal construct, which is a continuation of marginal cost theory. I’ve pointed out the mechanisms that ACTUALLY occur when a government ISSUES debt, not borrows it.
I do, because no matter how you get there it will still be the same outcome – hence the 4 + 4 & 3 + 5. And frankly, they don’t, they focus on all the wrong issues, defined by neo-liberals, and completely irrelevant.
It doesn’t imply anything of the sort you claim. Plenty of economists misunderstood what Keynes said, which is why you have the Cambridge Controversies and the subsequent split. He worked under a different monetary system, which is entirely irrelevant now as I have pointed out. You claim that levels of public debt constrain govt spending, but when I pointed to Japan you simply ignored it… Such terms you use: “deficit financing”, “revenue funding” have no meaning in the slightest.
Bollard says a lot of things, most of them rubbish. Like in the latest Monetary Report, where he claimed the economy was nearing capacity… Oh the hilarity!
Oh a new one!
Where did I say that? None of the policies you have suggested even get close to remedying the issues. You even denied that Labour had anything to do with it during it’s last reign…
You don’t get it, banks access the world markets by their own wishes… The loan is created before that even occurs! And as I said, just before – not that long ago even for you – that I couldn’t care less if that jeopardised their balance sheets…
“You even denied that Labour had anything to do with it during it’s last reign…”
Really? I have not discussed or mentioned Labour policy during it’s last administration.
Is the issue allowing banks the freedom to jeopardise their balance sheets on-lending offshore savings for domestic loans for home buyers (and is that not ultimately neo-liberalism?). I would have thought the GFC discredited that hands off attitude.
Or is it the impact on the national economy?
The loss of more local wage money spent on housing – ultimately going offshore repaying the loan debt – this reduces demand in the local economy as we can note at present.
There are no one fix solutions, but increasing the range of tools that the RB can use (requirements of long term savings to loan ratios etc, local savings to loan ratios, required deposit or loan to value ratios etc) to diminish total lending for purchase of residential property is one side of the equation and supportive government taxation moves are another.
GST on home finance allows a lower OCR while tightening of the property market. A CGT on rental property also, ring fencing of property losses and the end of depreciation (done).
Reducing the amount of wages spent on housing should stimulate the rest of the economy.
Each RB measure and each tax measure helps.
“banks access the world markets by their own wishes… The loan is created before that even occurs”
The loan to the borrower might not be made if there were restrictions on bank funding. Given local funding is scarce (lower than local borrowing demand).
“Really? I have not discussed or mentioned Labour policy during it’s last administration.”
- See your quote, “government fiscal policy had nothing to do with it”. It did, it allowed it to happen, all under Labour’s watch.
“and is that not ultimately neo-liberalism?”
- No. Why are you so concerned about where banks get capital from? It’s a business decision. It doesn’t fund mortgages as you suggest, which I pointed out time and again for you… And, money spent in the construction sector boosts economic growth considerably. Employing many hundreds of thousands of people.
Debt does constrain individuals spending habits, but placing another cost on top of that would just constrain it EVEN MORE… It wouldn’t boost money to the rest of the economy… I’m not against adding constraints on banks, I just disagree completely with the analysis and the policy prescriptions…