Governments quite often set the criteria by which they want their policies or budgets to be judged. In his Budget speech in May this year John Key was very clear about how he judged his Budget to be a success- the accolades of Standard and Poor’s. So how should we judge the Government’s success, given the double downgrade?
I have received this letter from a Chinese constituent living in Helensville.
It explains how the 2011 Budget will help ordinary kiwis and their families.
However, reading between the lines I can only see ways in which the Budget will make hard working kiwis worse off – not better!
It is interesting to note that in the fourth paragraph Mr Key says: “we’re making changes to Kiwisaver to increase private savings”.
This statement is misleading. The Government is reducing their contribution to Kiwisaver despite promising it wouldn’t cut Kiwisaver (a good reminder of the GST saga though).
Mr Key also talks about how “strong economic management is important for all of us”.
Of course it is but since Mr Key has been in office the public has not seen a definitive plan to grow the economy.
Most worrying in the letter, Mr Key says that National will “extend the successful Air New Zealand mixed-ownership model to four state-owned energy companies”.
I’m not sure whether National can claim any credit from the Air New Zealand model but regarding the asset sale (or whatever terminology they use) New Zealanders have spoken loud and clear. We do not want our assets put up for sale, but yet Mr Key continues in his plan to do just that.
Probably Mr Key needs a reality check. While the ordinary many are struggling to keep up with the cost of living (http://blog.labour.org.nz/index.php/2011/07/13/families-struggle-as-food-prices-go-up/) he is selling his idea to the general public (or to the privileged few?) about buying shares in companies the Government are passionate about ditching. Besides, the ordinary many already own a stake in these companies – as New Zealanders!
What Phil Goff said is correct:
It is wrong and it is not fair – some Kiwi parents are having to send their children to school hungry but the top 150 New Zealanders on the NBR rich list have experienced a 20 per cent increase in their wealth in just one year. It isn’t about envy. It’s great to see some Kiwis doing so well for themselves. But our society is becoming more unequal. It is wrong. It is unfair.
I say to the Prime Minister: When the gap between the super-rich and the super poor is growing, it is a worry for everybody.
Our opponents have been tied all in knots as they attempt to rebut the obvious – that Labour’s CGT is an idea whose time has come.
First the leader of the National Party, John Key, shrilly claimed it would be a “dagger through the heart” of western capitalism – or as Bomber Bradbury put it “aliens were coming to eat our pets”.
Then Bill English said it was a good idea in theory – but wasn’t comprehensive enough.
So with tweedles dee and dumb at cross-purposes, they called in the “cavalry” on Sunday – a Steven Joyce press release with some bodgied numbers from his Beehive hacks.
It tried very hard to construct a strawman and then shoot it down. Trouble was, the strawman bore no resemblance to Labour’s policy.
First, Mr Joyce alleged that our tax plan had not replaced the capital value of the non-sale of SOEs: “You see Labour done a big lie, and said it is a choice of asset sales or their tax package. But they have not calculated for any increased borrowing through no sales”.
John Armstrong made the same mistake in his Herald column: ”In May’s Budget, National cunningly “booked” the money from its planned post-election sell-off of such shares even though the money has yet to be realised. Some of that “money” has been set aside for $900 million in capital spending. Labour has exacted revenge for this trickery by simply ignoring it” .
Sorry John, our numbers do incorporate the asset sales revenue because it’s in National’s net debt track and our net debt track is based on theirs. Not getting that revenue is essentially the sole reason why our net debt track is above National’s in the first few years.
Second Mr Joyce tried the line that we had not modelled in the cost of interest on debt. Wrong again. Interest costs are fully included.
Third, he argued we would achieve “$0″ on our tax avoidance crackdown. Wrong again: IRD says there is $3.5 bn in colleectable tax debt (of $5.5 bn total); and over $300m p.a. in avoidance through trust structures; as well as -$500m on the $200 bn invested in property. Bill English says there is $5 back for every extra $1 in IRD tax collection. IRD says 30:1. It all makes our provosion that rises over 5 years up to $300m look pretty modest.
Three strikes and your credibility is out, Steven.
Have had request for link to this morning’s TVNZ Business slot re the Budget. For those who weren’t awake at 6am (very wise) here ’tis.
Our Labour team wanted to understand why every year under National the budget deficit has far exceeded the forecast when they took office. In the graph below, the black line is the projection of the deficit made in December 2008, at the height of the global financial crisis. But you can see the actual deficits have been much larger.
Part of this is due to National’s tax cuts, even accepting the rosy predictions English made about the cost of his tax packages, they still cost a significant amount (green blocks). This year the deficit has been worsened by one-off events in the form of the Christchurch earthquake and the South Canterbury Finance bailout (brown and purple blocks). But there’s still a huge difference between the 2008 projections and what happened that isn’t accounted for by the one-offs or the borrowing for tax cuts. What’s behind that?
When we look at the GDP growth forecasts vs reality for the same period, the answer becomes clear. Every year, National has projected that a return to strong growth is just around the corner which will mean more tax take, lower benefit costs – and a smaller deficit. But it hasn’t eventuated. Instead, the economy has stagnated under National and every year National has evened up having to slap billions more on the taxpayers’ bill to cover for this economic underperformance (blue block).
No doubt today’s budget will also contain rosy growth projections. Will the reality end up being more deficit blowouts?
The New Zealand economy has failed to fire under National. As a result successive rosy Treasury forecasts have been revised downwards. The starkest example is between last year’s May Budget and December Half Year Update.
Implications: The growth upturn “hockey stick” just keeps getting pushed out into the future. The so-called GST tax switch had no discernable positive impact on growth. And the same rosy forecasts will be embedded in today’s Budget. On this track record Budget 2011 growth projections will not be worth the paper they are written on.
When the 2009 growth projections are added the picture gets even more interesting. As this graph shows the actual GDP growth track has been so bad that it is back down to the proections made by Treasury during the darkest days of the 2008/9 global financial crisis.
In other words, despite the international crisis having passed 18 months ago and NZ receiving record prices for our agricultrual commodities, our economy has performed so badly that it is back down to the track Treasury predicted during the darkest days of the crisis. Quite simply, whatever the Govt has been doing is not working.
In a future post we will decompose the relative impact on debt of this under-performance and otehr factors like earthquakes.
There is no coherent plan from National on how to manage debt reduction alongside needed investments in economic and export development, closing the savings gap, repairing the damage to middle New Zealand, and giving all Kiwis hope and confidence for the future.
Labour has an integrated economic strategy that will achive that withi a fully costed programme that will reduce net debt over a 10 year economic cycle. You can see the direction we are heading in set out in a recent speech I gave to Business NZ here.
For the wonks among you, here is the underlying data – all the Government’s own numbers.
| GDP per capita, 95/96 dollars | ||||
|
Actual |
Half Year Update 2009 |
Budget 2010 |
Half Year Update 2010 |
|
|
30/12/2008 |
7,805 |
|||
|
30/03/2009 |
7,700 |
|||
|
30/06/2009 |
7,683 |
7,683 |
||
|
30/09/2009 |
7,677 |
7,694 |
||
|
30/12/2009 |
7,716 |
7,721 |
7,716 |
|
|
30/03/2010 |
7,741 |
7,741 |
7,758 |
|
|
30/06/2010 |
7,734 |
7,768 |
7,802 |
7,734 |
|
30/09/2010 |
7,701 |
7,795 |
7,909 |
7,747 |
|
30/12/2010 |
7,694 |
7,830 |
7,883 |
7,799 |
|
30/03/2011 |
7,873 |
7,928 |
7,859 |
|
|
30/06/2011 |
7,916 |
7,973 |
7,904 |
|
|
30/09/2011 |
7,967 |
8,026 |
7,948 |
|
|
30/12/2011 |
8,027 |
8,088 |
8,010 |
|
|
30/03/2012 |
8,055 |
8,118 |
8,039 |
|
|
30/06/2012 |
8,091 |
8,156 |
8,085 |
|
Sources: Budget relevant documents and Statistics NZ series
GDP growth has been so poor that the National government’s predictions have continually been downsized. The gap is huge – 505 underperformance in 2010 alone, achieving only 1.5% actual on 3.0% predicted.
This underperfromance is a key factor – alongside fiscally irresponsible and economically useless tax cuts – driving the awful budget deficit New Zealand now faces.
in response to requests on my Facebook page, here are the underlying numbers.
| Quarterly GDP growth |
Q1 2010 |
Q2 2010 |
Q3 2010 |
2010 annual growth |
| Budget 2010 forecast (BEFU additional information, p 3) |
0.8 |
0.8 |
1.6 |
3.0 |
| Stats NZ actual |
0.7 |
0.1 |
-0.2 |
1.5 |
| Average annual percentage change, real wages |
Year to Q1 2011 |
| HYEFU 2010 forecast (HYEFU additional information), p 6 |
-0.9 |
| Stats NZ data |
-1.2 |
Source: Parliamentary Library
Yesterday Mr Key announced National’s intentions to cut Kiwisaver costs by:
Commentators have warned about undermining confidence in the scheme. Among many, good commentary by Bernard Hickey here, Vernon Small here and The Standard here.
Here are some reasons the Government should think twice about changes which weaken confidence in Kiwisaver and do not contain real measures to grow the scheme:
Its changes are regressive – tougher on low and middle income earners because they have a reduced matching contribution on the first $1000 per year they invest.
It is a double whammy for low and middle income earners: cutting the tax credit and increasing the contribution rate at at a time when cost of living pressures are acute.
It is a confusing policy u-turn for Kiwisavers without reasonable explanation, having had their default contribution rate reduced to 2% by this Government not two years ago, and now the reverse. The logic they used to reduce the default (reducing contribution costs to families and businesses was supposedly inportant – but apparently now is not).
(more…)
Some quick answers to a couple of good questions about debt and Kiwisaver from recent Facebook inquiries:
Q: Has NZ’s debt really cimbed from $300 m per week to $380 m per week? Why?
A: The difference between $300 m and $380 m is the fact that NZDMO is in the market issuing more debt securities than it needs beacuse demand is good and prices low. In other words it is bringing forward next years borrowing, and that is all. Of the $300m about half is rollover of exisitng debt. So next year it can say it reduced the borrowing, beacuse it will have pre-borrowed some of what it needs already.
Q: How much will the cuts to Kiwisaver Key announceed today save? $40m a year ?
A: Kiwisaver cost savings are unknown untill policy is made clear in the Budget. The Member Tax Credit costs about $880 m per year. Half that would be ($440m pa) would be ”saved” to Govt if MTC halved to $10 per week. But that ’saving’ but would have to be offset against lower private savings from weaker incentices. That is a problem beacuse private debt is huge – in fact 90% of NZ’s total international debt is private. Govt debt is only 10% of the problem.
Q: Is it true that Dr Cullen’s books in 2008 showed a fiscal surplus in 2008?
A: Yes Dr Cullen’s 2008 books showed a net debt (incl NZSF assets) to GDP ratio surplus of 7.6% In other words we were in positive CREDIT, though the GFC meant a forecast net deficit up to around 2% of GDP. Gross debt to GDP is ow 34%and climbing under National. It is hard to believe that National still gripes and tries to shift blame. Time they manned up and took some responisbility for their own choices – like $23 Billion of tax cuts over 4 years in Budgets 2009 and 2010.
Q: Are our incomes catching up with Australia like National promised?
A: No, we are going backwards. When National took office in 2008 the gap was about 30% of GDP per capita It was 34.7% and growing last time I checked.
Bottom line – NZ’s problems are serious and need serious fixes, but don’t buy the panic line that it is only public debt that matters. Responsible fiscal management, including reducing debt across the cycle, is essential- but it is not the ONLY thing that matters. We have to grow jobs, exports and savings at the same time as reducing debt. And we have to build a country that is fair, caring and ready to take on the world, not slide into two NZs – one for the haves and another for the have nots.
PS happy to take your budget questions – message me on http://www.facebook.com/david.cunliffe.labour.
Near-zero gross domestic product (GDP) figures for the December 2010 quarter prove how badly the New Zealand economy is stuck in a rut.
Treasury and the Reserve Bank had both forecast zero growth for the quarter. I have taken the view that was about right and that minor variation either side would not change the story.
It doesn’t. Today’s 0.2% is within a shade of that, and is still subject to revision.
The big picture is that the economy is going nowhere because National has no plan.
A breakdown of the statistics is instructive – wholesale trade is down, retail is down, accommodation and restaurants are down, confirming the message that businesses in New Zealand towns and cities have been giving us — that for them 2010 was even worse than 2009.
Cost of living pressures were also clear. Goods and services purchased by Kiwi households are almost flat even though prices rose 2.3 percent in the December quarter alone. This shows Kiwi families are hard hit by the rising cost of living and are having to tighten their belts month by month.
There is no good news on the external side either. Imports rose faster than exports, and the fastest-rising export, raw logs, effectively represents exporting Kiwi processing jobs along with the timber.
Kiwi families and firms are borrowing more than ever before to stay afloat, and the Reserve Bank says this will continue until 2013.
Bill English is presiding over an old-fashioned slump, and clearly has no idea what to do about it.
Last week he wanted to put the whole cost of the earthquake on the country’s credit card, but Prime Minister John Key rolled him a few days later when announcing a zero budget this year.
Economics 101 says that savage budget cuts in the middle of a deep recession will only put more people out of work, undermine confidence, reduce demand and drive down tax flows.
This isn’t a plan. It’s a recipe for continuing economic failure.
As this is my first blog post since the quake, can I preface my comments by acknowledging the devastating loss suffered by too many Cantabrians and their families, of ther lives and homes shattered, and our shared determination to everything necessary to support their rebuilding and renewal.
In this immediate post-quake period we are all exercising restraint – both in the quantity and tone of poitical comment. But the debt question has in fact been brought into starker relief by the quake, so I am moved to observe the following.
Before the quake, National would have you believe that New Zealand had a huge international debt problem, and that the solution to that was for the Government to compress spending and services to pay down this debt.
It was always a half truth: 90% of that debt is private debt and only 10% of it is public (government) debt.
The second deception was that this high debt was “Labour’s fault”. The facts are that in 2008 net debt (including NZ Super Fund assets) were in surplus to the tune of 4.7% of GDP. Virtually no government in the western world saw the collapse coming in advance, but at the least the former Labour Government had the books in strong shape.
Post quake, we are all confronted by huge costs. Families have lost loved ones. Homes and businesses destroyed will take time to rebuild and renew. Infrastructure is hugely dislocated. Much of the CBD will have to come down. Hopefully there will be proper consultation and an eye to the heritage that makes Christchurch unique.
The financial costs are also huge – in Treasury’s February Indicators, around $12 billion (later estimates put it around $15 billion), of which some $5 will fall to the Crown because it is not covered by EQC, its reinsurers or private insurance. Around a further $5 billion in lost Crown revenue will occur due to the reduced tax take from decimated business activity and personal earnings in Christchurch. (I will blog further on the “growth gap” shortly).
So, to use the PM’s very round numbers – there is $10 billion for the public to find over the next four years or so.
Some of that can legitimately be redirected from other investments – for example the “holiday highway” north of Auckland - to help fund Canterbury roading costs.
Mssrs Key and English believe the rest can be borrowed – that is, placed on the international debt pile – and say that is now acceptable becasue it is a “one off”. They are so far dismissing suggestions of any additional support for Canterbury through the tax system. (Raising the EQC Levy only restores its capacity to deal with future disasters, rather than this one).
Why then was the international debt pile so huge that reducing it by slashing Government spending and prolonging the recession was necessary a month ago, but borrowing the lot is no problem now?
Forgive me, but could it be that the answer is not economic but political? Could it be that reducing government expenditure pre-quake was the price of Budget 2009 and 2010’s - largely upper income – tax cuts; and that even Canterbury’s needs have been trumped by the need to protect National’s traditional voter base from even a temporary reduction in these tax breaks?
I feel unclean even thinking that. But the question has to be asked: why not expect the whole community to share part of the cost through the revenue system? Even the NZ Herald agrees with that.
An interesting piece on Radio New Zealand this morning:
The Government is refusing to release information about how individual departments and agencies are coping with continuing restrictions on their funding.
Radio New Zealand News asked all Government ministers for the advice they had received about how their agencies planned to meet the tougher spending restraints placed on them.
The requests were transferred to Finance Minister Bill English meaning the specific information requested had not been made available.
Chief Ombudsman Beverley Wakem says under the law she cannot require that the requests be referred back to individual ministers, but says the Law Commission recommended in its review of the Official Information Act that the anomaly be closed.
In other words, Ministers and departments transfer OIAs to English. he uses a technicality to refuse to release normal budget documents. Ombudsman says she cannot intervene. Law Commission says it stinks. Which it does.
Labour should support the Law Commisssion’s proposal to remove this anomoly.
In the meantime it has to be asked – what is it that English and Co. don’t want the public to know?
How deep are those cuts that they say they will inflict on the country? How are the tradeoffs being managed?
Enough of deliberate secrecy, of government in the shadows. This is not democracy as it should be.
Part one of this post showed that S&P placed NZ on negative watch because of the savings gap, the huge (mainly private) net international debt and our under-diversified export profile (and consequent vulnerability). It all adds up to lenders perceiving potentially greater risks and seeking compensation through higher interest rates.
How did the Government react to the news? Did it front the issues and explain its “plan”? Not in your life.
Alex Tarrant at interest.co.nz did a great job of covering John Key’s rather bizarre, meandering post-Cabinet press conference here. Interest.co.nz’s coverage if the political debate is here.
Mr Key manages to contradict himself three ways in two paragraphs:
“Nothing has changed from our point of view, in fact if anything, our position looks stronger from our point of view (really?)…
We accept that we’ve had to take the earthquake on our balance sheet, accept tax revenues have been a bit weaker this year than we had anticipated…(corporate was 22.4% below 2010 forecasts, gst 15.8% below!)”
So… nothing has changed, we are stronger, but we are weaker. Classic. He must have been eyeballing three different journos and guessing they wanted three different answers, so why not try to please all of them at once?
The coup de grace is his attempt to pass it all off as Ireland’s fault. True, the Irish are in a bit of a bog, but lets assume S & P can tell the difference between the land of the long white cloud and the emerald isle.
Back in the real world, one thing is for sure, S&P won’t be amused if Messrs Key and English try to talk their way out rather than addressing the fundamental issues: how about trying to grow savings, diversify and lift exports, and reduce private international debt? Who knows, they could even turn it into a plan?
National’s counter-spin on yesterday’s placement by Standard and Poor’s of New Zealand’s sovereign credit rating on negative watch shows increasing desperation, the latest of a torrent of bad economic news. I comment in two parts: the announcement and the counter-spin.
First the announcement’s overview:
The S&P Report’s rationale makes the drivers even clearer:
In other words: New Zealand does not save enough, it has too much private debt, and that debt was used to fund the wrong things (property speculation not real business investment). New Zealand’s exports are under-diversified and New Zealand will continue structural bleeding on our external accounts after the immediate recession.
The logical repsonse to these problems should be;
It obviously should NOT include:
Bill English and John Key declared S&P lifting their previous negative outlook as a” verdict’ on Budget 2009.
They should be straight-up enough to accept that S&P has now reversed its verdict.
After 18 months of National Government policies National can have only itself to blame.
In part II of this post we’ll check whther their rhetoric matches this reality.
No amount of National trying to reinvent the historical record can detract from the ongoing evidence that the “recovery’ is in trouble and that they have no plan for growth and jobs. Here’s the latest data:
“Consumer confidence has fallen in the latest ANZ-Roy Morgan Consumer Confidence survey and a nosedive in confidence has been recorded in responses to a question regarding whether it is a good time to buy a major household appliance.
The survey’s main confidence measure eased three points to 113.6 and its current conditions index dropped 11 points to 92.3.
The current conditions index has dropped below the 100 mark for the first time since December 2009 and is at its lowest point since August 2009….”
Part 1 of this post noted the end of the “Washington Consensus” in economics. Part 2 noted that newly naked economists need some new clothes. In this part I want to stimulate discussion about priorities for the NZ debate going forward.
In the 2010 Budget debate I reckon Labour won the argument that average Kiwis will be worse off after 5.9% inflation next year devours their “tax switch”.
The next stage of the debate will focus on which policies deliver on rebalancing our economy and leaving NZ families better off.
Let’s cut to the chase on “rebalancing”.
The NZ economy is “unbalanced” because:
The heart of the rebalancing process therefore requires:
Policies that would logically achieve that include:
We need a government that has a credible and coherent economic strategy. Confidence is eroded by stop-start, poll-driven initiatives.
Our future is weakened by an underlying agenda that will worsen inequality, driving wedges between Kiwis, their communities and their environment.
Time for a reality check. This is not only a government that has no coherent plan to credibly achieve the rebalancing NZ needs.
Its short-termism and flip flops mask an underlying agenda – whether made explicit or kept implicit – that is individualistic and materialistic.
It does not reflect the Kiwi way, nor embody our highest aspirations.
Their policies are flawed. Their vision is narrow. Their time is limited.
There has been a quiet revolution underway in economics in the wake of the global financial crisis. The “Washington Consensus” is no longer a consensus. The “Great Moderation” has become a Memphis meltdown.
As in most revolutions, pressure begins gradually. Someone then states what is already obvious to all: the “Emperor has no clothes”. Suddenly, orthodoxy crumbles. As shown by the recent Toronto G20 summit, in 2010 orthodox economics stands suddenly naked.
The foundations have been shaking for a while. Assumptions of “rationality” have taken a hit from “behavioural economics”. Stock markets over-react due to fear and greed. Trickle down trickles up. Asset bubbles inflate then burst, as in 2008.
For me the “no clothes” moment for macroeconomics happened in February this year. The Chief Economist of the International Monetary Fund (IMF), Olivier Blanchard, released a ‘position note’ entitled “Rethinking Macroeconomic Policy”.
Early local media pickup focused on monetary policy, noting Labour’s recently announced withdrawal from the previous monetary consensus. This has been comprehensively confirmed in two speeches last week by Phil Goff and David Parker.
Blanchard’s critique of “What We Thought We Knew” is, however, much broader than earlier local reaction:
Welcome to the Washington Consensus: “By the mid-2000s, it was not unreasonable to think that better macroeconomic policy could deliver, and indeed had delivered, higher economic stability. Then the crisis came”.
Recounting “what we have learned”, Blanchard nails with laser-like clarity six home truths for our uncertain new world.
So what does this all mean for the next generation of policy makers? The next era should retain the best of the previous consensus, while creatively addressing the challenges that previously lay outside it.
Part 2 of this post will follow shortly. Comment is welcome on Blanchard’s critique.
