In 1981, some 364 economists warned against UK Prime Minister Margaret Thatcher’s fiscal policies. She quickly proved them wrong by restoring fiscal and monetary discipline and balancing the budget.
A group of University of Auckland economists wrote an open letter criticising Ruth Richardson’s 1991 budget. The recession was bad, but the economy quickly turned around and showed substantial growth from 1992 onward. And a strong fiscal track was maintained for decades after.
Open letters may be less informative than broad surveys of economists, for obvious reasons.
Getting the books back in order after a period of largesse – fiscal consolidation, as economists tend to describe it – is rarely painless. The best advice is to avoid getting into messes in the first place. But if your predecessors have put you there, it’s better to rip off the bandage.
About a fortnight ago, a group of some fifteen economists, led by Dr Ganesh Nana, urged an “immediate end” to public-sector spending cuts.
I hope I do no disservice to the letter’s substantive propositions in summarising some of them – though I will be more than somewhat critical.
Fiscal and Monetary Policy Coordination
Their letter warns fiscal policy (government spending) is working against the Reserve Bank’s shift away from tightening. A year ago, the Reserve Bank was having to work to get inflation back under control. Now, tighter fiscal policy could require the Reserve Bank to work harder to avoid a longer recession.
However, current government spending can hardly be described as austere. Treasury points out, in increasingly urgent tones, that the government is running a structural deficit. Even if the economy were running at full-steam, with reduced spending on unemployment benefits and higher tax revenue, a deficit would remain.
The structural deficit is hardly surprising. Public service employment in June 2024, at some 63,500 staff, was about where it was in June 2023, though lower than it was in December 2023. Public sector staffing in June 2019, the year of the Great Wellbeing Budget, was about 52,600.
In 2019, Treasury expected Core Crown expenses for 2023 would amount to 28.8% of GDP. Instead, they reached 32.3% of GDP. And Budget 2024 expected continued increase. Spending remains the problem.
Deficits can be fine. Structural deficits are not. And the Reserve Bank’s job is to fill in the gaps.
The open letter warns against a fiscal consolidation that has not yet begun. Treasury considered Budget 2024’s fiscal impact as being similar to Budget 2023’s.
Infrastructure spending
The open letter notes the country’s infrastructure deficit and says taking on debt to build infrastructure can be laudable.
But the Infrastructure Commission warned that the country’s substantial problem is value-for-money in infrastructure spending. While New Zealand spends about as much as other high-income countries on infrastructure, relative to the size of the economy, we don’t get very much for our money.
Throwing money at that kind of problem makes less sense than getting costs under control and improving the way we make infrastructure decisions. Taking on debt to fund roads with low benefit-to-cost ratios seems like a bad idea.
There is no crisis in government debt
The letter very correctly notes that there is no crisis in government debt levels and that other governments have much higher debt levels.
But getting back to prudent debt levels after a period of deficit-spending, is what maintains the government’s ability to deal with the next crisis when it comes.
If the Alpine Fault rips open during a recession, or during a foot-and-mouth outbreak, the government needs to be able to take on a very large amount of debt in a hurry. Those crises would be large relative to the size of our economy. That means we need to maintain more debt headroom than other countries, if we do not want to face punitive borrowing terms come the crisis.
The government correctly focuses on its own fiscal balance for this reason.
Export objectives
The letter urges the government to shift from its target of doubling export earnings to targeting net export earnings.
The government’s export target never made a lot of sense. Exports are the terrible price that the country must pay to be able to afford wonderful imports. Shifting to a net export target seems worse. And while the letter warns against low-value exports, exporters are not stupid. If they could earn higher returns by processing things here, they would do so.
Overall, the letter urges entrenching the higher levels of government spending that occurred during the Covid crisis and increasing them further. It would be difficult to build political support for a large fiscal response to the next crisis if nobody could trust that the response were, in fact, temporary.
I expect that the government will give the open letter as much attention as it deserves
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
Getting the books back in order after a period of largesse – fiscal consolidation, as economists tend to describe it – is rarely painless. The best advice is to avoid getting into messes in the first place. But if your predecessors have put you there, it’s better to rip off the bandage.
About a fortnight ago, a group of some fifteen economists, led by Dr Ganesh Nana, urged an “immediate end” to public-sector spending cuts.
I hope I do no disservice to the letter’s substantive propositions in summarising some of them – though I will be more than somewhat critical.
Fiscal and Monetary Policy Coordination
Their letter warns fiscal policy (government spending) is working against the Reserve Bank’s shift away from tightening. A year ago, the Reserve Bank was having to work to get inflation back under control. Now, tighter fiscal policy could require the Reserve Bank to work harder to avoid a longer recession.
However, current government spending can hardly be described as austere. Treasury points out, in increasingly urgent tones, that the government is running a structural deficit. Even if the economy were running at full-steam, with reduced spending on unemployment benefits and higher tax revenue, a deficit would remain.
The structural deficit is hardly surprising. Public service employment in June 2024, at some 63,500 staff, was about where it was in June 2023, though lower than it was in December 2023. Public sector staffing in June 2019, the year of the Great Wellbeing Budget, was about 52,600.
In 2019, Treasury expected Core Crown expenses for 2023 would amount to 28.8% of GDP. Instead, they reached 32.3% of GDP. And Budget 2024 expected continued increase. Spending remains the problem.
Deficits can be fine. Structural deficits are not. And the Reserve Bank’s job is to fill in the gaps.
The open letter warns against a fiscal consolidation that has not yet begun. Treasury considered Budget 2024’s fiscal impact as being similar to Budget 2023’s.
Infrastructure spending
The open letter notes the country’s infrastructure deficit and says taking on debt to build infrastructure can be laudable.
But the Infrastructure Commission warned that the country’s substantial problem is value-for-money in infrastructure spending. While New Zealand spends about as much as other high-income countries on infrastructure, relative to the size of the economy, we don’t get very much for our money.
Throwing money at that kind of problem makes less sense than getting costs under control and improving the way we make infrastructure decisions. Taking on debt to fund roads with low benefit-to-cost ratios seems like a bad idea.
There is no crisis in government debt
The letter very correctly notes that there is no crisis in government debt levels and that other governments have much higher debt levels.
But getting back to prudent debt levels after a period of deficit-spending, is what maintains the government’s ability to deal with the next crisis when it comes.
If the Alpine Fault rips open during a recession, or during a foot-and-mouth outbreak, the government needs to be able to take on a very large amount of debt in a hurry. Those crises would be large relative to the size of our economy. That means we need to maintain more debt headroom than other countries, if we do not want to face punitive borrowing terms come the crisis.
The government correctly focuses on its own fiscal balance for this reason.
Export objectives
The letter urges the government to shift from its target of doubling export earnings to targeting net export earnings.
The government’s export target never made a lot of sense. Exports are the terrible price that the country must pay to be able to afford wonderful imports. Shifting to a net export target seems worse. And while the letter warns against low-value exports, exporters are not stupid. If they could earn higher returns by processing things here, they would do so.
Overall, the letter urges entrenching the higher levels of government spending that occurred during the Covid crisis and increasing them further. It would be difficult to build political support for a large fiscal response to the next crisis if nobody could trust that the response were, in fact, temporary.
I expect that the government will give the open letter as much attention as it deserves
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
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