The British had Thatcherism, the Americans the Reagan Revolution. We had Rogernomics, followed by Ruthanasia and the Cullen Fund. The media focuses on the man of the hour, but it is on the padded shoulders of Nicola Willis that the future of Aotearoa rests.
The economy is slowing. Between the Half Year Economic and Fiscal Update in December and March, Treasury has downgraded their forecast for GDP growth and estimates the Crown will miss out on nearly $14 billion in tax over the next four years.
Inflation remains above the desired rate, productivity continues to lag behind comparable nations, the cost of paying for the debt is rising and the demands of her Cabinet colleagues for spending are unrelenting.
Mark Mitchell announced nearly one and a half billion of new spending for prisons, David Seymour a similar amount to better fund Pharmac and there is a projected increase in the cost of benefits, mostly driven by rising numbers eligible for NZ Superannuation, by $3.5b in the current year.
Those retirees are a problem, with the number jumping from 890,000 to 1,020,000 by 2028; and it isn’t just the pension, it is the cost of patching and propping them up. Being old is expensive; let me tell you.
And let’s not gloss over the $7b Treasury has allocated for capital expenditure and maintenance. Where does that come from?
Willis isn’t going to balance the books by culling a few tea ladies in the Ministry of Administrative Affairs. The real spending is in welfare, health, and education, at $41b, $28b and $18b in 2023 respectively; and reduction in these areas is politically difficult.
To make life more interesting, the cost of interest on the current debt is projected to reach nearly $10b in her first Budget. The current forecast is for a $6b deficit, and in the election campaign National promised nearly $15b in tax cuts. What’s a prudent Finance Minister to do?
Well. I doubt Willis will take advice from me, and given some of my life choices she’d be wise to look elsewhere for inspiration. So. What would Margaret Thatcher do?
Thatcher, on getting elected in 1979, faced an almost identical set of challenges. A structural deficit, persistent inflation and high interest rates and, like Willis, she was burdened by a pre-election promise to cut taxes.
Much to the electorates’ surprise, she raised taxes in her first Budget, while at the same time taking a scythe to spending. In subsequent years she cut back on the level of taxation but her first instance was to balance the budget. She went on to win three elections.
Across the pond Bill Clinton, elected in 1993, followed a similar path. In his first Budget he began raising taxes and trimming spending, culminating in several years of fiscal surplus which saw him leave office with a higher approval rating than he had when elected. The drama of Clinton’s transformation from a big-spending deficit liberal to fiscal hawk is brilliantly told in Bob Woodward’s book The Agenda, which all members of Cabinet should take a weekend to read.
There is no point reducing taxation if spending remains unchanged. It is government spending that takes goods and services out of the community, not the means by which Wellington pays for it.
Debt is tax.
If the Crown borrows real money it increases the demand for loans. Rational lenders will prefer dealing with the state than a private borrower. When Treasury makes a stand in the market it diverts capital away from private firms who would have built things and employed staff.
Directly or indirectly there is an economic price for debt, and of course we then have to cover the direct cost of this through higher taxes in the years to come. In effect, we pay for this twice.
Of course, the Crown can go to its central bank and ask that nice Mr Orr to print some money we pay through inflation and devaluation of our cash holdings. It’s also regressive as wealth is transferred from the poor to the wealthy by increasing property values and rewarding businesses who can increase their prices at the expenses of workers who cannot.
If Willis is unwilling or unable to cut spending, she should maintain enough tax revenue to cover the annual expenses plus some to repay debt. If the Prime Minister wants to cut taxes, he needs to deliver to his Finance Minister comparable reduction in spending.
A strong Finance Minister, such as Douglas or Richardson, enforces discipline, while others enable poor behaviour of their colleagues. If Willis succumbs to the allure of credit to avoid the pain of reducing spending she will rewarded with brief popularity but her credibility will decline as the economic numbers remain poor. Fiscal discipline is hard but we have seen that it is consistently rewarded with strong economic performance that translates into political authority...The full article is published HERE
Inflation remains above the desired rate, productivity continues to lag behind comparable nations, the cost of paying for the debt is rising and the demands of her Cabinet colleagues for spending are unrelenting.
Mark Mitchell announced nearly one and a half billion of new spending for prisons, David Seymour a similar amount to better fund Pharmac and there is a projected increase in the cost of benefits, mostly driven by rising numbers eligible for NZ Superannuation, by $3.5b in the current year.
Those retirees are a problem, with the number jumping from 890,000 to 1,020,000 by 2028; and it isn’t just the pension, it is the cost of patching and propping them up. Being old is expensive; let me tell you.
And let’s not gloss over the $7b Treasury has allocated for capital expenditure and maintenance. Where does that come from?
Willis isn’t going to balance the books by culling a few tea ladies in the Ministry of Administrative Affairs. The real spending is in welfare, health, and education, at $41b, $28b and $18b in 2023 respectively; and reduction in these areas is politically difficult.
To make life more interesting, the cost of interest on the current debt is projected to reach nearly $10b in her first Budget. The current forecast is for a $6b deficit, and in the election campaign National promised nearly $15b in tax cuts. What’s a prudent Finance Minister to do?
Well. I doubt Willis will take advice from me, and given some of my life choices she’d be wise to look elsewhere for inspiration. So. What would Margaret Thatcher do?
Thatcher, on getting elected in 1979, faced an almost identical set of challenges. A structural deficit, persistent inflation and high interest rates and, like Willis, she was burdened by a pre-election promise to cut taxes.
Much to the electorates’ surprise, she raised taxes in her first Budget, while at the same time taking a scythe to spending. In subsequent years she cut back on the level of taxation but her first instance was to balance the budget. She went on to win three elections.
Across the pond Bill Clinton, elected in 1993, followed a similar path. In his first Budget he began raising taxes and trimming spending, culminating in several years of fiscal surplus which saw him leave office with a higher approval rating than he had when elected. The drama of Clinton’s transformation from a big-spending deficit liberal to fiscal hawk is brilliantly told in Bob Woodward’s book The Agenda, which all members of Cabinet should take a weekend to read.
There is no point reducing taxation if spending remains unchanged. It is government spending that takes goods and services out of the community, not the means by which Wellington pays for it.
Debt is tax.
If the Crown borrows real money it increases the demand for loans. Rational lenders will prefer dealing with the state than a private borrower. When Treasury makes a stand in the market it diverts capital away from private firms who would have built things and employed staff.
Directly or indirectly there is an economic price for debt, and of course we then have to cover the direct cost of this through higher taxes in the years to come. In effect, we pay for this twice.
Of course, the Crown can go to its central bank and ask that nice Mr Orr to print some money we pay through inflation and devaluation of our cash holdings. It’s also regressive as wealth is transferred from the poor to the wealthy by increasing property values and rewarding businesses who can increase their prices at the expenses of workers who cannot.
If Willis is unwilling or unable to cut spending, she should maintain enough tax revenue to cover the annual expenses plus some to repay debt. If the Prime Minister wants to cut taxes, he needs to deliver to his Finance Minister comparable reduction in spending.
A strong Finance Minister, such as Douglas or Richardson, enforces discipline, while others enable poor behaviour of their colleagues. If Willis succumbs to the allure of credit to avoid the pain of reducing spending she will rewarded with brief popularity but her credibility will decline as the economic numbers remain poor. Fiscal discipline is hard but we have seen that it is consistently rewarded with strong economic performance that translates into political authority...The full article is published HERE
Damien Grant is an Auckland business owner, a member of the Taxpayers’ Union and a regular opinion contributor for Stuff, writing from a libertarian perspective
1 comment:
Surely it is Javier Milei's example we should be following!
The story I loved was, that his abolition of rent control (you know, the laws that protect tenants from greedy landlords) resulted in a 25% drop in rental prices! A huge number of new properties came on to the market. It turns out people preferred their homes empty, rather than occupied under a rent control system.
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