A group of economists have written to the Minister of Finance asking her to rethink plans to aggressively rein in government spending, which they believe is worsening the recession.
The open letter was written by former Productivity Commissioner Ganesh Nana and was co-signed by 14 other economists, researchers, and company directors.
Most of these signatories are known left-leaning thinkers, such as union economist Craig Renney, but they also have led impressive careers.
For example, Girol Karacaoglu was the Treasury’s chief economist and Deputy Secretary for Macroeconomics from 2012 to 2016 — and prior to that he ran the Co-operative Bank.
The letter was also signed by three Order of Merit recipients, Suzanne Snively, Rob Campbell, and Susan St John, who were each recognised for their services to governance, business, and social policy.
In the letter, they argue planned spending cuts will “needlessly exacerbate” the recession and restrictive debt targets will motivate under-investment in infrastructure.
“Failure to correct this course will lead to higher economic scarring, with the costs borne by those with the least ability to pay, as has been demonstrated repeatedly in New Zealand’s history,” they wrote.
Additionally, they said the fiscal plan would risk “hollowing-out” business capacity and was in “direct conflict” with the goal of doubling exports in the next 10 years.
Rationale unclear
Nana told Interest.co.nz the core idea of the letter was that the Government should focus more on the economics of their budgets, rather than just the fiscal aspects.
It was pointless to balance the Crown accounts—and pay down debt—if doing so didn’t reduce the country’s dependence on foreign borrowing, and therefore its economic vulnerability.
“Importantly, private sector debt is being driven upwards by your government’s fiscal policy in pursuit of surpluses for itself and its aim of rapidly reducing public debt,” the letter said.
The current account deficit would not improve if public spending cuts shifted costs onto businesses or households, and forced them to borrow more from overseas lenders.
Similarly, cuts to departmental and capital spending could erode long-run economic resilience and constrain the ability of private firms to scale up.
“There is ample evidence that government spending, including the necessary infrastructure and allied networks, has for many years fallen well short of that required for population growth and demographic changes,” the letter said.
“This under-funding simply passes the burden of adjustments, and investment spending, to future generations”.
Another argument in the letter is that accelerating spending cuts while the economy is in a downturn could cause a vicious cycle, as happened in the United Kingdom during Conservative government austerity.
Continuing to cut spending could further weaken vulnerable sectors like retail, hospitality, and construction, leading to more job losses and a shrinking tax base, which might force yet another round of cuts.
“Arising from this situation is the long-lasting scar of the loss of entrepreneurial aspiration in our communities as the cyclical downturn is unnecessarily prolonged,” the economists said.
They called for any additional spending or infrastructure cuts to be suspended, and seek advice for a clearer economic strategy ahead of Budget 2025.
An icy response
Finance Minister Nicola Willis, who was on a trip to Antarctica, said the letter was consistent with the views of these economists — some of whom were closely associated with the previous Labour government.
“This Government fully appreciates the need for increasing investment in frontline government services and growth-enhancing infrastructure. We will continue to deliver budgets consistent with those objectives,” she said in a statement.
“We will also continue our approach of being careful with taxpayers’ dollars. The wasteful spending approach of the last government contributed to a rapid rise in debt, high inflation and rapidly rising interest rates. We won’t be repeating those mistakes.”
Budget 2024 added $7 billion to the multi-year capital allowance and $3.2 billion to annual operating spending (including the fiscal cost of tax cuts).
Future budgets will include $2.4 billion in new operating spending each year, and a total of $68 billion is expected to be spent on infrastructure over the next five years.
133 Comments
I could imagine that! Because it's certainly not reality. The "financial mess" is an illusion whipped up off the back of consumer sentiment and a needlessly prolonged recession, punishing us with further under-investment and future debt. What looks good for the govt is not good for the country.
No, it won't. Nothing is that short-term, and the problem facing the planet is inexorable; a slow-motion train wreck.
This is also a journalism failure, Interest.co and Dan. The reasons we are entering a period of permanent recession - indeed probably heading for collapse - is physical, not fiscal. Why, then, insist - fiercely insist - on reporting the utterances of non-physical people? They're no better than tea-leaf readers.
Is click-bait more important that truth?
Ask Nana and Co how they anticipate negotiating human overshoot; resource depletion and entropy. How they anticipate re-jigging a money system built to facilitate growth, as we head into a permanent non-growth era. Economists were not trained for this - so ask someone else.
the int.co platform here does let you post and your posts do attract as large readership
Which is exactly where many of us suggested the value-add of the site is. Rather than choke it off, it might be worth considering how to foster, improve and profit from the comments section.
Fellow engineer? You should understand balances. Over any given period, the current account deficit + Govt deficit spend + increase in private debt have to balance to zero.
Our current account deficit is currently around $27bn (near record highs) thanks to higher import prices, a shift in the oil price, increasing use of expensive offshore services, and our usual habit of throwing billions at offshore investors and aussie bank equity owners.
Clearly, we need an economic strategy to address our imbalance, get us out of one of the worse recessions of any advanced economy, and sort out our infrastructure deficit.
A signficant Govt investment could address all of the above. Starving yourself to strength is not a strategy.
As are all who choose to ignore stocks, and just concentrate on projecting past flows.
They're called economists. The ones who thought wider, are few. Malthus, Mill, Soddy, Galbraith, Boulding, Georgescu-Roegen, Daly, Keen, Raworth and that's about it. And they all got ostracised - remember Grimes vs Raworth? A sad wee demonstration...
He already stated them:
first principles and logic
If your first call is for credentials, you're likely out gunned and might consider listening (as I do in the case of PDK because I cannot refute although I might haggle on timing).
Besides, I would have thought any holder of credentials would be perfectly able to argue back with superior logic anyway - so why do they matter here?
"The current account deficit would not improve if public spending cuts shifted costs onto businesses or households, and forced them to borrow more from overseas lenders."
The business sector is generally prudent with its debt management. It's households that will be expected to tick it up all over again while the PM and minister of finance will tell everyone how great they are when they balance the books. Someone has to fund a CAD and if it isn't business or government there's only one option left.
"As is Willis's response."
She has to defend the government's position. This is what they promised their voters. They have to maintain their credibility.
This is the game of politics. This is politicians doing their job.
The consequences of their policy decisions are then felt by the residents of the entire country.
No, its not and appeal to authority. They are authoritative on the subject themselves, they aren't appealing to some famous expert. They are also giving ample evidence and details of what is likely to happen, based on economic doctrine which they are trained in.
Not sure you would want more in charge of the economy and finances, an English Lit major or an Economist?
I suppose you also take your car to a building company when it has mechanical issues? No? Why not? We are essentially doing the same thing by electing unqualified people and putting them in positions of power which require in-depth understanding of the subject they are governing...
"Their practice is driven by large-scale theory so poorly constructed, so over-simple and so close to untestable that it looks more opinion than the science it desperately wants to be."
That's because the average Joe on the street forms this view because the subject matter is complicated. What better way, therefore, - in our Trump times - to excuse one's laziness in understanding the complexities, is there than attacking experts in their field?
Trying to dumb down economics for the average Joe is nigh on impossible. In much the same way as astrophysicists attempting to explain the nature of space and time, or an oncologist attempting to explain how chemotherapy works ... Poor Joe's eyes glaze over and they only hear what they want to hear.
I did economics in university at least first year only, and there suggestion is exactly what that it would imply. No I didn't fail I just thought the whole thing was a bunch of nonsense then to. However not once did was I presented with actual proof that this works. Its all just speculation and naval gazing based on calculating things based on money. The fact is the world is not based on money, people care physical things.
Its a pseudoscience at best no real testing, not real duplication of results by independent parties just assumptions and a bunch of math to support those assumptions. If a physicist tells me something about physics I believe them and there answers will be consistent. If an economist tells me what is going to happen with the economy I might as well flip a coin. Why because of experience.
Borrowing like they are suggesting only kicks the can down the road.
"I did economics in university at least first year only ..."
I very pleases to hear that. They were compulsory subjects? Part of a B.Comm? But take care.
You'd have just scratched the surface. The real fun stuff - and where it gets way harder - is at stages two and three. And that's also where "actual proof that this works" is presented, usually as recommended reading. And you need to do the recommended reading as the b'stards test you on the stuff they mention only in passing in the lectures.
Economics takes NO cognisance of stocks, or limits. It assumes growth is attainable forever, and assumes that at a certain 'price point' a substitute will be found. It takes no cognisance of entropy (funding for depreciation is not the same as earmarking forward sources of energy and resources).
So it flies blind.
Umm, that sounds like a belief system rather than a subject? Why does 'economics' make no cognizance of limits aside from the beliefs of its practitioners? Surely there are economists and economic theories that do understand limits - but it doesn't suit your presented narrative to recognise them?
Too easy to answer; this is a finite planet, growth is exponential.
Therefore at some point, just when you've never been 'doing more', there will NOT be a scalable replacement for a crucial input.
THAT is not taught in economics - their diagram is circular; no inputs, no waste ejection, no entropy.
powerdownkiwi : "Economics takes NO cognisance of stocks, or limits."
Once again, PDK, you display your near total ignorance of the subject. At it's most basic level (suggest you study it) we have the supply and demand curves. Both are subject to limits.
"It assumes growth is attainable forever..."
It makes no such assumptions. Those are your words. And they're b.s. Every Stage One student of economics knows there are limits to growth - however it is calculated.
Grow up and stop ranting about subjects you seem not to (intentionally) understand.
Just as thought experiment for you ... Who benefits most from our economic system? The average guy on the street? Or the billionaires that cream in the spoils? Who is most at fault for the depletion of our planet's health? The average guy on the street or the billionaires that control the governments and the economic imperatives? Think further PDK.
Not disputing your argument Chris, but it seems the economists are not communicating their understanding of the limits to growth. Have the been suborned by your billionaires? why in the face of increasing physical and scientific evidence are economists still talking to politicians about growth, and not shifting their advice towards resilience? Economics is a human creation. It is not natural. Why aren't they changing their advice with an understanding of human psychology and the inevitable denial about what must be seen as a message of doom?
I think PDK is simply arguing what we are all seeing, although he claims to have done some studies.
Correct.
The theories don't adjust themselves to reality, instead continue to believe reality should fit their mathematical models and narrow conditioned beliefs of human nature. Unable to connect any of the dots.
And an economist fully indoctrinated into their economic thinking, their role, creating a self identity will have a hard time questioning that reality.
I was a data analyst for some time and we had a few basic rules that seem to be routinely violated by economists.
If you can't explain something complex in a way it can be understood by executive management, who likely have no experience in your area and zero patience, you likely don't understand it yourself or your data is faulty or your model is flawed - quite possibly all of the above.
Assume Nothing. Test Everything. It has to be repeatable.
The models involve humans: how can their behaviours screw it up? Part of risk management and validity assessment, as well as the laws of unintended consequences.
Don't omit inconvenient variables becasue they don't fit a theory, no matter how much someone senior really really wants something to be so. Messing up that one will give you a real-world hiding and will quite possibly be a career limiting decision.
Complex theories and models are all very very well and good, but they don't usually survive the test of the descent in to the particular. Smaller, more specific models with limited applicability generally are a closer mimic of reality: the trick is in getting the varied, situation-specific models to play nicely together.
On Wikipedia: https://en.wikipedia.org/wiki/Problems_with_economic_models
Great question.
The property Ponzi happened globally, because there was no other way to accommodate the next 'doubling'. Nothing else scaled, and nothing real had the space or materials. And it was mostly existing houses, so no real input required.
There is no scalable substitute - so yes, they will attempt to kick-start the dead motorbike. And pare back everything else. And fail.
It's not exactly a doom loop, more a collective existential crisis.
The masses are aware something's not quite right with everything they've been led to believe, and they don't know who to turn to. Constantly being fed propaganda - by those with a lust for power, and those unwilling to relinquish power - appealing to their base desires and fears, fuelling more division. Having to fight for their bread, entertainment and social media nicely numbing them, feeding them with more propaganda. And then there's those, especially the older generation living out their last year's, where ignorance is bliss. They don't want there worldview upset at this stage of life.
Rome is literally burning, again, all because we chose to emulate the Roman example instead of learning from it. There are deeper issues ingrained in the collective consciousness but they're a little more than humans can comprehend.
Tax receipts also decline when you simultaneously embark on a $4b per year tax cut policy. Not to mention the gradual reinstatement of mortgage interest deductibility, after interest rates have risen from a low base and mortgage debt is at a high base.
Labour's deductibility policy has somewhat insulated our tax take from higher interest rates, where properties were profitable at 2.5% interest rates and break even at 6%, we were still receiving tax receipts.
A lack of wasteful government spending by the coalition partners isn’t to blame - cool so this decision was a good one?
The cost of reinstating full interest deductions for residential property will be $2.9 billion over the four-year forecast period, according to data from the Government.
Their recommendation is that Govt needs to invest in stuff the country needs to get the economy out of the trough - that investment would create many thousands of good quality, private sector jobs. Over ten years, we could build the capability and capacity to sort our infrastructure out. Given your 'Macroview' what is your prescription for resuscitating the economy? Ending wokeness and closing humanities departments?
I read limits to growth while studying in the 80s. The forecasts have been largely borne out. However, we have access to the materials, labour, tech, knowledge and energy required to sort out our infrastructure and make our country a better place to live for future generations. We should do that I reckon.
Depending on how you look at it, you could either see a dissonance or not. We don't know how the future will pan out. Clearly there are physical limits to growth that we are collectively running in to. How far we can stretch remaining resources also depends on how technology development will pan out, as well as myriad other factors/ unknowns.
The way I see it, we still sit in a moment of unprecedented wealth/privilege, and we should collectively divert that wealth away from rampant consumption/wealth accumulation into building the future resilience of our society. Judicious, selective investment into infrastructure in this moment could help us transition into a likely turbulent future. Not aiming to reach business-as-usual levels of energy/resource use, but instead providing the backbone for a lower energy/resource future that likely awaits us.
Otherwise we sit completely unprepared for any potential future shocks, and won't have the infrastructure/culture/knowledge necessary to transition society from one mode to another. However, the investment would need to be made from the framework/mindset that it is for a lower energy/resource consumption future.
The Club of Rome's predictions have not been "largely borne out". See for example https://en.wikipedia.org/wiki/Simon%E2%80%93Ehrlich_wager
In 2016, the UK government established an All-party parliamentary group on Limits to Growth. Its initial report concluded that "there is unsettling evidence that society is still following the 'standard run' of the original study – in which overshoot leads to an eventual collapse of production and living standards".[33] The report also points out that some issues not fully addressed in the original 1972 report, such as climate change, present additional challenges for human development.
In 2020, an analysis by Gaya Herrington, then Director of Sustainability Services of KPMG US,[54] was published in Yale University's Journal of Industrial Ecology.[55] The study assessed whether, given key data known in 2020 about factors important for the "Limits to Growth" report, the original report's conclusions are supported. In particular, the 2020 study examined updated quantitative information about ten factors, namely population, fertility rates, mortality rates, industrial output, food production, services, non-renewable resources, persistent pollution, human welfare, and ecological footprint, and concluded that the "Limits to Growth" prediction is essentially correct in that continued economic growth is unsustainable under a "business as usual" model.[55] The study found that current empirical data is broadly consistent with the 1972 projections and that if major changes to the consumption of resources are not undertaken, economic growth will peak and then rapidly decline by around 2040.[56][57]
In 2023, the parameters of the World3 model were recalibrated using empirical data up to 2022.[58] This improved parameter set results in a World3 simulation that shows the same overshoot and collapse mode in the coming decade as the original business-as-usual scenario of the Limits to Growth standard run. The main effect of the recalibration update is to raise the peaks of most variables and move them a few years into the future.
Not only is there a lot of reviews of the Limits to Growth modelling since it was published in 1972 all confiming the modelling was pretty spot on, there is also the Stockholm Resilience Institute's work showing the we are breaching at least 6 of 9 basic planetary thresholds.
We need to change to the economy of enough from the current neoliberal disaster.
Aka 'catabolic collapse'....worth the google for anyone so inclined.
Conflicted. That's what I feel. Economists have often driven the current mess, but they are also correct in parts of what they have said; "they argue planned spending cuts will “needlessly exacerbate” the recession".
But it also seems clear that the government doesn't really understand either. The economy only really 'works' when people have surplus income available to support their lifestyles. Successive governments have persistently failed to rein in the cost of living, specifically the cost of housing and accommodation. Regulating social housing properly would address a number of societal issues and concerns very quickly. But they don't want to do that. Why? Perhaps because it would have a significant adverse impact on the banks, who I suggest need to be more vigorously regulated and restrained, and taxed harder on clearly excessive profits. Add in a persistent attitude at the highest levels of NZ that wages and incomes need to be restrained. Low wages in themselves restrain the economy as well. Few in positions to influence decisions seem to understand this.
Can the government rein it in without addressing the market flaws? Can it be done without government rethinking their role and purpose? Who and what is being governed? The market must address it's own MO too. That would require a complete rethink of profit, capital, finance and whom is serving whom.
And you know we're not willing to do that, but it is where we are at this point in time. The same ways of thinking and being are not going to work. History gives us all the examples.
WE aren't currently willing to do this until we have a greater engagement in discussion on the issue at a micro and macro level. My thoughts on this are that while the older generations make up the majority of the voting block, and property is still seen as the golden goose for GDP, nothing will ever change unless by sheer force (oil price shock, war, something tangible that impacts everyone on a day to day basis that makes it real for them). it has now been the generational norm for at least 2-3 generations to kick the can and have the next pay for the current. We now have a birthrate decline that, even without depleting resources, makes folly of this model. Btu as mentioned above in the comments, the old don't want to change their world view as ignorance is bliss, and will vote according to an outdated view of the world and society.
Regular visitors to the comments section won't be surprised that I agree with almost all of this. The letter is not making political points, it is basic, bog standard macroeconomics.
An economy with a current account deficit can't generate a surplus and 'grow' without Govt debt and / or private debt increasing. Unless we persuade people to spend down tens of billions of dollars of their savings of course!
The increase in public + private debt has to overpower the current account deficit before it generates a 'surplus' aka 'growth'. That's why countries with persistent current account deficits have persistent Govt deficit spending. Many such countries have not run anything close to budget surpluses for 25+ years.
NZ Govt has only 'achieved' a balanced budget position when import prices have fallen *and* private debt has been increasing at more than 10% of GDP per year. That requires the housing ponzi to be running super hot, or maybe a flock of expensive private finance infra deals to be signed and in delivery phase.
Our economic strategy needs to recognise that Govt deficit spending hass to float to external conditions, and our economic / investment strategy needs to focus on delivering for kiwis and influencing those external conditions. For example, a major investment in green energy and public transport could help us reduce the tens of billions we spend importing cars and fuel (reducing our current account deficit).
This Govt (and the last) are advised by people who don't understand the above.
Agreed. Either government borrow and spends. Or the private sector borrows and spends. (Hopefully on enduring assets, skills, etc.)
When both do ... the economy can overheat (if not managed well). When neither do? ... Walk any high street today for the answer to that one.
Problem is though - just to harp on again - our tax system doesn't reward private sector investment ... And we have a RBNZ locked back in the dark ages copying a model that just doesn't fit NZ's economy, tax laws and/or our continual 'centrist' governments policy.
Enduring assets are people, community and planet, fullstop. The skills are cooperation and trust, wisdom and integrity, empathy and compassion, self governance, response ability, emotional intelligence and interdependence. This is where "investment" is required not our invented financial BS and hierarchical dominance. We either learn how to do this within and using the current system, using new (old) knowledge, or we rebuild from the ashes.
An economy with a current account deficit can't generate a surplus and 'grow' without Govt debt and / or private debt increasing. Unless we persuade people to spend down tens of billions of dollars of their savings of course!
Immigration?
We attract people with savings to come here. Having low taxes and low inflation are prerequisites to attracting wealthy immigrants.
Attracting people with savings basically means a sum of money is converted from a foreign currency to nzd. At the macro level this is like us selling more service exports. It is a one-off hit. The transaction is (I am pretty sure) already counted in our current account balance.
In that year, the planet would have burned its way through 365,000,000,000 barrels of oil, and a coal/gas equivalent. Without mitigating the burn, because it can't spare the energy. That's from a finite resource with no equivalent replacement.
That is the 'means within which we have to live'.
Tell me where that is factored-in? By anyone, left right or centre? Yet that's what builds infrastructure, and that is what will decide what is future-useful, and what is a flat-out waste of effort.
"he planet would have burned its way through..." and how much of that in NZ? less then 1%. we can't stop the rest of the planet doing what it wills. But we can prepare the country to be as resilient as possible for what ever future that results.
Roads are not anti-green. For travel to be as efficient as possible the very best quality and standard of roads is required. Nationally our roads are crap with very few, very limited exceptions. Shoulda been done decades ago, needed to be done 10 years ago, MUST be started now!
We should have the courage to build an infrastructure and economy to build and support national resilience. A solid plan would have a strong focus to ensure environmentally sustainability is a requirement. to argue it can't be done is to admit failure and give up.
No. that attitude is just BS denial. Human beings have travelled since the dawn of time. More, they have travelled using all the available technology. To say travel will not happen in a severely constrained world is to deny human nature. A forward looking plan for NZ must include roads to enable communication, supply, support and aid. Or do you think these things will just happen without roads? Or perhaps Auckland will just exist and the rest of the country will fall off the planet somehow? Have you thought beyond tomorrow at all, and considered what the world will possibly retrench to and how NZ will cope or do you just not care?
For travel to be as efficient as possible the very best quality and standard of roads is required.
Perhaps refer to the Romans, as many of their roads still stand up today vs the predominant oil, based bitumen which will chip, get potholes and wear away with use. We don't make good roads today in comparison, we simply have a cheap resource available to make them from. If that resource was 10x the price, then we would have to look elsewhere for materials and energy to build them from. Then again, there may not be many vehicles using them if fuel was so dear.
Military efficiency? Are you referring to the Pentagon which just failed its seventh financial audit in a row and cannot account for how it has spent its US$800B budget nor where its US$4T in assets is? Which spent roughly US$2T in Afghanistan yet struggles to point to any functioning infrastructure for the country that it built for all that money.
Was that the reason behind Rome's road quality?
If I were to guess, the abilitiy to foster trade with consistent travel times, develop better technology for wagons to traverse these roads, to mobilise forces to defend the expanding empire, and to allow for faster communication for tactical advantage of defending the empire. Add in that it took a lot of planning, resources (people and time) to build such good roads, and as such they wished to do a good job once, instead of a patch job that could lead to a weakness that could be exploited in war times.
"Living beyond our means" is a simplistic way of looking at it, and dumbs it down to the levels of household finances. A government is not a household, and nor is it a business. The dynamics for borrowing and investing are very different. Having said that, it is ironic that the NZ way to personal wealth is now to leverage the hell out of everything, but at the same time the government is expected to save for everything like a kid saving pocket money for a new Playstation.
To the article: The Truss government in the UK announced similar policies - which Luxon and Willis lauded as looking forward to implement here. The business community in the UK - hardly left-leaning - were in uproar, and Truss was soon ousted. Luxon and Willis did not heed that and went through with it anyway... so here we are.
Every nation suffered Covid. But despite NZ having better performance, borrowings and debt levels than many of our peers during and post-pandemic, are now the worst performers because we chose Truss and Greek-style economics. Right when China is shrinking and the USA goes protectionist, too.
It's comical what an own goal our recovery plan is.
Household management was the origin of economics - Greek oikonomia. It was obviously a wider context as to how members of the household cooperated and managed themselves, their busyness, their actions and behaviour, and then extended this into their community.
Obviously it was a time before big business and finance. It also relates to the teachings of one having their own house in order, both as an individuated being and the wider context, before preaching to others.
Goes to show how far off the path of knowledge humanity has wandered.
Personally, I think that it is the government creation of too much (debt) money i.e living beyond our means, that has put us in this position. Creating too much money is inflationary the covid stimulus proved this beyond a doubt. Inflation pushes the cost of living up creating a vicious cycle. We are close to peak, now for families both people have to work and single people usually live in a shared house to make it work finantially, this is not really the fault of few percent who own multiple houses, it's a failed monetary system. In order to keep the wheels on we have to issue more debt.
Another round of facilitating increased private debt is a short-term band-aid, leading to longer term struggles. How are we all feeling after the last increase in private debt through 2020-2021? Better, worse or the same? The horrid social outcomes from ever-increasing house prices damage the meaningful aspects of society. Look at the large increases in social housing waitlisted folk, youth leaving NZ in droves, importing workers for low skilled jobs, NZ slowly losing it's reputation as a worthwhile place to come and raise a family. I say no to this, time we reduce our reliance on the housing market for so called prosperity.
I was going to say Willis, Luxon et al will be hoping and praying that the RBNZ cuts the OCR deeply to save the economy, in lieu of significant government investment. But then I thought to myself ‘nah, they will be in their own arrogant bubble, and that what THEY are doing (or not doing) will result in recovery and set them up for victory at the next election’
So let’s see. IMHO the OCR will need to go sub-2.5 to have a meaningful economic stimulatory impact. Most economists are picking it lands at 3 or 3.5….
The big problem with the RBNZ simply dropping the OCR is that far too much money will go on consumption spending (think imported toys & residential 'property investment') and far too little will go on investment spending (think new plant and machinery, infrastructure, upskilling, etc.)
Simply jerking the OCR around only makes the aggregates look better. The real problems remain ... in fact, they get worse.
"far too much money will go on consumption spending (think imported toys & residential 'property investment') "
A clarification - residential 'property investment' meaning the purchase by non owner occupier owners in the existing residential dwelling market. Purchase by non owner occupier owners in the new build market would be desirable and classified as "investment" I believe.
HW borrowed more money than she needed to for as luxon said "we focus on outcomes " for a worse outcome, i had no problem with reigning back the spend but to borrow for tax cuts that did nothing, it didn't boost the economy, was nuts, to cancel projects wholesale was also nuts even if you don't agree with them, some sure like the light rail made sense to cancel. but they should have gone through them line by line to let the ones carry on that made sense. the rail ferry one will end up costing more than she supposably saves in the long run, could it have been restructured yes, does picton need sorting out yes it does so will still need to be done, does wellington need to be sorted, yes it does, are kiwirail the best to sort it NO, no ship owner owns or runs the ports , it should have been handed off to someone else and negotiated with centreport and Marlborough port to step up
"Cancelling the ferries due to a ~$2b potential cost blow out on the terminal infrastructure, yet handing out $4.5b per year in tax cuts."
The Budget 2024 tax relief package will cost $14.725 billion over 5 years to 2027/28
https://www.bdo.nz/en-nz/microsites/budget-2024/tax
$14.725 billion is approximately 3.6% of annual GDP
https://www.rbnz.govt.nz/statistics/series/economic-indicators/gross-do…
Perhaps the government could have spent the $14.725 billion more effectively?
Then there was also the $2.92 billion tax benefit given by the government to the non owner occupier owners of existing residential real estate.
That would total $17.645 bn over 5 years.
Imagine how that $17.645 bn could have been otherwise spent on repairing existing infrastructure, investment in new infrastructure, tax incentives for specific industries, health care, etc.
Remember, the tax cuts were announced when the popularity contest began - about 15 months ago when the economic environment and economic conditions were vastly different to current economic conditions. The current government needs to follow through on those previously announced policies during the popularity contest to maintain credibility with their voters. Those policies may have been appropriate for the then conditions but may be unsuitable for current conditions leading to potential policy error for the economy.
No need to imagine, we have very clear examples of how our government spends on infrastructure. The government has spent about $1 billion not buying a ferry, about $250 million not building light rail in Auckland and $150milllion on not building a second harbour bridge.
Dunedin hospital.
AKL/HAM/TGA high speed rail link.
Billions have been spent on zero infrastructure by our government.
No need to imagine, we have very clear examples of how our government spends on infrastructure. The government has spent about $1 billion not buying a ferry, about $250 million not building light rail in Auckland and $150milllion on not building a second harbour bridge.
Dunedin hospital.
AKL/HAM/TGA high speed rail link.
Would the current government have won the popularity contest if they had campaigned on cutting government spending and invested the savings in infrastructure instead of the tax benefits? (i.e tax cuts and re-introduction of interest deductibility for non owner occupier owners in the existing residential dwelling market)
That one made me chuckle. If everyone did take business class flights - 'growth' in the airline industry would be significant. But money going to airlines would be 'de-growth' in other places. Measuring 'growth' using money - while the easiest way - is far from the most accurate. Or indeed, the most meaningful.
An important message being delivered here, but one that dosnt include vital caveats.
The first being that the switch in debt needs to promote domestic supply so that any increase in exports is compounded by reduced imports...another being distributional factors that slow/reverse the holding of the debt to the lower quintiles and spread it wider....and (one for PDK) any spending recognises the needs for resilience in the face of declining access to resources into the future.
I am not hopeful that neither the politicians (especially the current crew) nor the public are willing (yet) to accept what this would require.
Why does this article have a bunch of links to other interest peices but no link to the "open" letter itself? I'm more interested in the actual content than journalists' take on it, considering it seems to be making an argument from authority as professional economists.
Every other media article was the same, I eventually found it here via Bernard Hickey's Substack, for anyone interested.
Apologies, we don't have an easy way to embed documents on the website right now and the letter hadn't been publically published anywhere when this was written.
EDIT: We probably could have included the letter in full, or republished it as a stand-alone story or something. I'll keep that in mind for next time.
https://www.nzherald.co.nz/nz/finance-minister-nicola-willis-and-a-firs…
Finance Minister Nicola Willis, the economy and a first-year economic report card: Robert MacCulloch
Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He previously worked at the Reserve Bank, before travelling to the UK to complete a PhD in Economics at Oxford University.
"A group of economists have written to the Minister of Finance asking her to rethink plans to aggressively rein in government spending, which they believe is worsening the recession. "
I'm hoping this group mentioned inflation in their letter and that it is fully under control. Inflation hasn't appeared in this article attributed to the group, other than Willis and a commentator.
Government fiscal spending combined with corporate fiscal spending. Not in "efficiency" investment, stock buybacks, financial assets, technology, but to the bottom half of workers.
There is a need to reduce the borrow and spend mentality. We're only borrowing from the future. There is a need to kill the credit creation and get the existing money tokens flowing through and around, not entering the bottom and siphoning up.
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