Red Alert

Reading through National’s Budget spin

Posted by on May 23rd, 2012

Tomorrow is Budget Day.  Tomorrow we’ll find out whether National actually does have anything resembling a pro-growth agenda, or whether it will all just be cost cutting.

We will also find out who gets what, and whether National will continue its habit of favouring the very wealthy at the expense of the broader community with its unaffordable tax cuts.

New Zealand’s Budget debate will occur against the background of a fierce battle around austerity economics vs growth economics.

Here’s a selection of articles which undermine the zero National Government’s spin on zero Budgets:

  1. The Economist says austerity Budgets in small countries, without fixing the broader international system problems, will simply undermine growth and jobs.
  2. Nobel Prize winning economist Joseph Stiglitz argues European austerity Budgets fail both economic and social fairness tests, and can drive economies into double-dip recession.
  3. The Financial Times balances this by noting small economies cannot simply spend their way out of a mess. Lax fiscal policy in small open economies can result in demand leaking offshore without resolving local structural problems.
  4. Writing in The Guardian, Professor Mariana Mazzucato, says small states can help drive growth and jobs by investing in innovation and skills, reducing risk for private sector commercialisation and growth.
  5. Will Hutton devastates the UK Conservatives’ zero Budget for their ignoring the role of the state in mitigating risk and creating jobs through driving innovation.

Tomorrow, National will argue that New Zealand needs a zero Budget.  Labour believes a zero Budget is what you get when you have zero growth in your economy, and zero plan for delivering the growth that’s needed to create jobs.

Responsible fiscal policy is important – Labour would always be careful and prudent with the state’s finances – but a zero Budget is not the only success test when you’re talking about the finances of a country that real people live in.

The articles show this is a global debate, not a local one.  New Zealanders need to understand the lessons of history, not repeat them.


31 Responses to “Reading through National’s Budget spin”

  1. Pete George says:

    – Labour would always be careful and prudent with the state’s finances –

    Hopefully in the future, but not always in the past. There’s been widespread comment and opinion that the latter years of the Clark government spent too much, and committed the country to longer term expenditure that’s a burden on the economy now, for example interest free loans and WFF, plus a large increase in the size and cost of the public service.

    It’s time for National to take responsibility for the health of the ecomony now, but they inherited huge cost commitments and a major global economy hiccup that have significantly contributed to the struggle to recover.

  2. Draco T Bastard says:

    New Zealand’s Budget debate will occur against the background of a fierce battle around austerity economics vs growth economics.

    And totally without the needed discussion about sustainable economics.

    Nobel Prize winning economist Joseph Stiglitz argues European austerity Budgets fail both economic and social fairness tests, and can drive economies into double-dip recession.

    They’ll do worse than that: Think about what happened in Europe between the wars but especially during and after the Great Depression. What we’ll see from these austerity* measures will be war and revolution (not in any particular order).

    * Of course, it’s only austerity for the many, the few are still doing well because they’re being propped up and protected by the governments.

    New Zealanders need to understand the lessons of history, not repeat them.

    Yes they do but the one lesson that’s not even being debated is the failure of capitalism. All we’re getting from the pollies an economists is the need to tinker with a failed system but not any actual solutions.

  3. OneTrack says:

    “Labour would always be careful and prudent with the state’s finances”

    Step 1 on Labour’s return to the treasury benches – Borrow shed loads of money from off-shore
    Step 2 – Borrow even more money from off-shore because they are in coalition with the greens
    Step 3 – ditto Mana
    Step 4 – Start spending – yay
    Step 5 – Ask Robert for advice following the credit downgrades….

  4. OneTrack says:

    Austerity = not spending money you don’t have.

  5. Anne says:

    Austerity = not spending money you don’t have.

    That’s because much of it is going into the back pockets of the rich pricks who prop up this amoral government.

  6. Tim G says:

    @OneTrack – if that’s your definition of austerity, then your government is doing a pretty poor job of that too.

    @Pete George – hmm… long-term spending… like perhaps… borrowing more for inflationary tax cuts for your constituents that perpetuate inequality?

    If you want to talk about spending commitments at least include a perfunctory analysis of the social policy behind them and how they are justified. I have never heard a justification with even an iota of persuasive force for what National did when they got into power.

  7. Spud says:

    I’m scared :-( :-( :-( !!!!!!

    Bleeping zero budget! :evil: !

  8. Tim G says:

    Spud’s back!

  9. Bea says:

    Re back pockets of rich pricks – I understand National’s targeting “boats, baches and beemers” in this budget – under the Labour government, these things were very useful to reduce taxes for those who could afford to own them. National’s also shut down loopholes that were there under Labour whereby rich pricks could manipulate WFFTC. They’ve reduced the herd valuation options that were available under Labour. They’ve stopped rich pricks who want their hobbies to include flying aeroplanes paying for it by way of a student loan. They’ve made IRD hold back big WFFTC cheques until they’ve been reviewed by an actual person. And curtailed GST phoenix fraud schemes. Redirected IRD’s money into audit activities (of rich pricks). Brought in nasty “look-through company” legislation to stop the rental house tax break that rich pricks had under Labour. Increased audit activity on dodgy-looking charities. Cut claims for depreciation on buildings….

    Bastards.

  10. David Cunliffe says:

    @Pete George: for goodness sake, National inherited a fiscal surplus and zero net debt after nine straight years of surpluses (when Bill E was arguing for tax cuts). Lets not lose a grip on history shall we?

    Fiscal prudence is not a multibillion dollar revenue hole caused by tax cuts forthe wealthy.

    Worst growth record in 50 years.
    50,000 per year voting with their feet
    Unemployment up 50%+

    Now tell us all the good things you are going to do with a Zero hope Budget

  11. Nathan Mills says:

    Just to clarify Anne, at what point does a New Zealander, in your opinion, go from a hard-working, aspirational citizen to a rich prick to be reviled? Is there a specific threshold, or is it everyone in the top tax bracket?

  12. Mel says:

    @One Track

    Step 4 – Start spending – yay
    Step 5 – Ask Robert for advice following the credit downgrades….

    You must be confused with the National Party.

    4. National Government spending in the form of $2 billion dollars of tax cuts.

    5. Under 2011 National Government – Fitch ratings agency has lowered New Zealand’s credit rating by one notch to AA and expressed concern over its high external debt.

    Trying to falsify history by painting Labour as the ‘spendthrift government’ despite the facts…. priceless!!!

  13. al1ens says:

    “Austerity = not spending money you don’t have.”

    Nope, that’s you and I paying for governmental incompetence.
    That’s you and I and everyone else except rich pricks, paying for a failed system.

    That’s you and I standing together for equality, justice and transparency.

  14. jennifer says:

    @ David Cunliffe, its a bit late now to start running the line about them inheriting zero debit and 9 years of surpluses. You guys allowed the Tories to rewrite history and convince Kiwis that you spent too much and can’t be trusted with the check book. Pity you didn’t stick up for yourselves when it counted. Oh, and weren’t you the finance guy then?

  15. David Cunliffe says:

    @Jennifer I/We have been reminding the public of these facts for the last four years. There’s an old rule in politics that when you are sick of saying something the public is just hearing it for the first time….

  16. richie says:

    I am getting sick of John Key and the other idiots that keep comparing us to Greece as reason for a back to recession Zero budget. The biggest difference between Greece and us is not the Public/Private debt loading. It is the fact we have our own currency. Greece is suffering because they are stuck with the Euro.

    History will judge Key and English as fiddling with books as our economy and standard of living burns.

  17. Quoth the Raven says:

    Austerity is an all to often heard word which doesn’t mean in practicality what people think it means. People think it means simply large cuts in government spending, but the reality around the world is that is not what has occurred where austerity is purported to be taking place.

    All too often ‘austerity’ in actuality are small cuts in government spending and large counterproductive tax increases or tax increases with reduction in the rate of increases in government spending. Perhaps it would be helpful if David Cunliffe would actually define what he meant by ‘austerity’.

    One can look at the UK, a poster child of austerity, as a case in point they raised the top marginal income-tax rate to 50 percent, the capital-gains-tax rate to 28 percent, and the value-added-tax rate to 20 percent. Government spending on the other hand, adjusted for inflation, in £ billion was 528.66 in 2008, 563.09 in 2009, 613.30, in 2010, and 614.70 in 2011. As a percentage of GDP that is an austere decrease from 2009-2011 of 0.3% from 51.1 to 49.8%. Compared to 43.9% in 2007.

    Commentary at VOX looks at the evidence on new taxes versus new spending cuts and finds:

    The accumulated evidence from over 40 years of fiscal adjustments across the OECD speaks loud and clear:

    First, adjustments achieved through spending cuts are less recessionary than those achieved through tax increases.

    Second, spending-based consolidations accompanied by the right polices tend to be less recessionary or even have a positive impact on growth.

    These accompanying policies include easy money policy, liberalisation of goods and labour markets, and other structural reforms.

    There remains a lot of work to be done on identifying the appropriate accompanying policies and understanding the channels through which they help spending-based stabilisations, but the fact is there, as shown for instance in a recent paper by Roberto Perotti (2011).

    Third, only spending-based adjustments have eventually led to a permanent consolidation of the budget, as measured by the stabilisation – if not the reduction – of debt-to-GDP ratios.

  18. whodunnit says:

    Hi David, it’s nice to see you back in the seat as finance spokesman and talking on finance issues. I missed you on the telly the other day when you weren’t allowed to appear.

    When you say that Labour had nine years of surpluses, why did you forget to mention that Labour left a forecast of a decade of deficits? Is this part of the legacy of the Labour government that you are trying to move the Party away from?

  19. Tim G says:

    Two great Crosby/Textor lines being parroted in this thread:

    The “boats, baches and beemers budget” is destined to go the way of the National Party in 2014, yet a little sad to see the tories are still screaming “decade of deficits” after all these years…

    But let’s pause for a moment: if National actually believed Treasury’s revised forecast or had any intention on cutting down the super rich, why did they immediately legislate huge tax cuts for the rich upon their election?

    Still waiting for an answer…

    P.S.: Good to see the media is not actually letting Crosby/Textor and the nats define the language for the discussion this time.

  20. SPC says:

    Real tough on bach owners – all they have to do is rent it out as much as they use it themselves and they can claim 50% of the costs. If they use it 30 days a year and rent it out for that time they can claim 50% of the costs – and any CG on the value is totally untaxed.

    Given half the bach owners probably do not even claim costs – notice that they can will probably mean Inland Revenue does not improve its revenue position at all.

  21. SPC says:

    As for growth economics – raise the company tax back to 30% for the first $100,000 then to 33% above that level, progressive income tax for companies as in the USA.

    With the increased revenue – R and D tax credits at 15%, Fast Forward, easier terms for SME tax compliance, increased funding for CRI’s and science at university and improved apprenticeships etc.

  22. SPC says:

    Quoth the Raven, perhaps if you defined government spending as that exclusive of welfare you could get to figures that had some relevance to the point you were making – of course as we both realise the cut in government to GDP spending would then have been more than minor and undermined your argument (and that of evidence cited on VOX?).

  23. Quoth the Raven says:

    SPC – Why on earth would someone define government spending as that exclusive of welfare? It is by definition of the term “government spending” government spending. You would end up with definition of government spending that did not include a major component of government spending.

    Perhaps you want to make a more sophisticated point about stimulus per Keynesian thinking. In which case I should quote economist Russ Roberts:

    Silly me. I didn’t realize that in the Keynesian model it isn’t government spending that affects aggregate demand, but only certain kinds of government spending. Krugman goes on to show that much of the increase in spending in Ireland is due to bank bailouts and increases in transfers because of the “dire state of the Irish economy.” But I thought those transfers were supposed to stimulate the economy. Joseph Stiglitz taught me that it doesn’t matter what government spends money on, it’s all stimulus.

    Where those like David wish to imply that austerity has failed because of weak growth they always seem to imply that large spending cuts are to blame. Yet the data clearly shows that a number of countries cited as following austerity have actually increased spending in absolute terms, most countries are spending more than they were pre-recession, and where there have actually been cuts against post-recession highs they turn out to be minuscule. Furthermore, they wish to implicate spending cuts alone and define austerity by it where countries have also massively increased taxes. Why is that not mentioned more when discussing austerity?

    In fact for Europe as a whole, tax revenue increases were a much larger component of ‘austerity’ measures than spending cuts. See here for instance:

    In fact, between 2010 and 2011, according to Eurostat, government spending across the EU dropped by €2.6 billion. But during that same time frame, taxes rose €235.5 billion. That is not a misprint: Europe raised taxes by almost €90 for every €1 in actual spending cuts.

  24. SPC says:

    The future cost of government – post the recession – does not include the temporary rise in welfare cost.

    So it’s a little disingenuous to include welfare in the government spending to imply that too much of the emphasis in Europe has been on tax increases and not spending cuts.

    The real problem there has been the lack of action on Eurobonds and the lack of action on investment for growth – infrastructure and investment incentives.

    Just maybe the point of the budget packages across Europe was to manage the budgetary (increase in public debt) cost of increase in welfare with rising unemployment by both increasing taxation revenues and cutting other budget spending in equal measure. Here we have focused on real spending cuts and improved tax collection rather than rate increases – with the obvious exception of not broadening the tax base via a CGT and minimising the intended increase in carbon taxation.

  25. Matt says:

    The future cost of government = zero. It can always afford what it chooses to.

    It’s not disingenuous, it IS govt spending.

    Agree, dependent on analysis and policy.

    Disagree, the budget packages systematically undermined growth. Secondly, rate increases would “shuffle the deck” so to say, not increase growth in NZ…

  26. SPC says:

    It is disingenuous, WHEN the point of debate was about the relative impact on future growth of spending cuts (in areas apart from welfare) and tax increases.

    No one is claiming that tax rate increases are to create growth in the short term, but without sufficient tax collection now there is a future debt cost build up that constrains future growth.

    Otherwise the issue is what the tax revenue raised is used for – it could result in less consumption and qualitative investment in productive sector led growth.

    PS “The future cost of government = zero. It can always afford what it chooses to.”

    The government cost always impacts on the wider society/private sector, whether in allocation of money at source constraining availability of credit to others or via tax and/or debt financing.

  27. Matt says:

    Clearly, you still can’t grasp simple facts…

    As an aside, it’s easier to point to the BIS paper that Raven quotes (in an article) and point out that the conclusions of the author completely contradict the interpretations he’s trying to convey.

    Future debt? What does that mean? More risk-free assets in the private sector? That doesn’t constrain anything. The private sector loves it!

    Yes, government adds/removes spending from the economy. It can’t constrain credit. Credit is driven by demand. Allocation & availability? No sense.

    It is zero…

  28. SPC says:

    Matt, if you continue to debate like a troll, people will stop feeding you.

    Credit is not driven by demand, no market is demand or supply driven. Ask the Europeans/Greeks whether credit is really demand driven.

    Future offshore debt build up constrains national government – and the foreigners who love it only do so while they think you can pay it back – so far and no more. Heard of a credit rating?

  29. Matt says:

    Troll? Charming… Who drives credit creation then? Trolls?

    As I have pointed out to you, Greeks and other EU nations CANNOT be compared with NZ. To attempt to simply shows your ignorance.

    What debt? Public, private? I’m guessing public. How does that constrain govt spending? It doesn’t.

    Credit rating? By who? Those private entities only interested in bigging themselves up? Remember those Aaa rated CDOs? They were a good investment! Again irrelevant. Rating agencies have zero say in what sovereign govts can do…

  30. SPC says:

    “Cearly, you still can’t grasp simple facts” about what a troll is and does.

    Where have you pointed out anything but in your own imagination, as as for your claim of the ignorance of those who do not agree with you …

    The most pointless debates on economic policy I have had on the net in years has been with you Matt – this one and one a few weeks back. Consider this one over.

  31. Matt says:

    Really? If you can’t understand the difference between our monetary system and the EU monetary system, then you can’t grasp simple facts. It’s all there for you.

    My imagination? I’ve clearly pointed out to you what govt debt is, but YOU, continue to ignore it. And I’m being ignorant?

    You don’t understand economics at even at basic level, but you accuse me of being a fraud? Love it! When someone looks to Moodys and co. for intellectual weight they may as well just give up…