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Thursday, December 5, 2024

Professor Robert MacCulloch: Holiday Reading Advice for Finance Minister Willis....


Holiday Reading Advice for Finance Minister Willis: go buy a book on 'Expansionary Fiscal Contractions'.

This week at a Select Committee Hearing the Finance Minister was asked whether she knew of any evidence that fiscal consolidations could expand an economy. Willis couldn't answer. I'm not sure why a Blog has to do the work of her many advisers & several hundred folks in the NZ Treasury, but what the heck, here goes.

She may not be doing flat out austerity-style government spending cuts, but Willis is firing civil servants & touting herself as the Minister of Fiscal Restraint determined to balance the Budget. A bunch of leftist NZ economists (including the Chancellor of AUT & recently made redundant former Chair of Productivity Commission) have written the FM and PM a letter arguing the Coalition should borrow & spend to get the economy moving. Why leftist? First, define what GDP is made up of:

GDP = Consumption, C + Investment, I + Government Spending, G + Exports, X - Imports, M

If governments borrow and spend, they can increase the component, G, of GDP, but it often will only be a temporary boost. Another strategy is to cut, or at least constrain government spending, and reduce red-tape, to the extent that the private sector view the country as a great place to do business. Although G may fall, the rise in investment, I, and consumption, C, can more than offset it, leading to a rise in GDP. In economics language, its called an "expansionary fiscal contraction". That is what the PM & Finance Minister should be going for in NZ. The classic example given in economics was Ireland in the 1980s. The idea that fiscal contractions can stimulate economic growth, via confidence effects & establishment of a credible framework for fiscal stability, is contrary to Keynesian wisdom. Its that "Keynesian wisdom" to which the letter-signing economists were trying to appeal. The present Chief Economist of the Bank of England, Huw Pill, who I used to see a bit of when in the US, wrote a Harvard Business School case study called "Fiscal Policy and the Case of Expansionary Fiscal Contraction in Ireland in the 1980s". The concept that fiscal contraction can result in growth is also known as "expansionary austerity".

My opinion as to why our economy is floundering is that investors don't see the Finance Minister's claims that she is reigning in the size of government, "G", as credible, and so "C" and "I" aren't booming, and the overall economy remains stagnant. An expansionary fiscal contraction is not happening. Her conservative Bill English style is going nowhere. People still see large outgoings for ferries, Wellington tunnels, healthcare, pensions & infrastructure everywhere they look, with little credible prospect of lower taxes in the future. And now the Main Stream Media, in cahoots with Labour, are trying desperately to tout the prospect of ever more taxes, in the form of capital gains & wealth taxes, in a couple of years time should Labour win. With "G" being restrained, and Huw Pill's confidence effects that NZ will be a lower taxed, lower red-tape country lacking credibility due to the snail's pace, steady as she goes, tentative quality of the new Coalition, the explanation for our stagnation has become clear. The sooner PM Luxon & Finance Minister Willis defriend John Key, Bill English, Paula Bennett, Murray McCully, Steven Joyce & the entire raft of washed up former Nats, including Peter Goodfellow, still vying for influence the better.


Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.

3 comments:

anonymous said...

Thanks to Prof MacCulloch for the succinct master class on GNP = CIG +XM.

As usual , the "woke Left" has a different view. It says : there are other ways ( undefined ) of measuring GNP ". They really mean (your) wealth redistribution and zero productivity - and then national bankruptcy - but with full protection for an ancestry -based elite.

The gullible formed by a Te Ao- based education will never grasp the fallacy of this so-called argument .

Bill T said...

We can only hope that ACT and NZF lift their support above National so as to allow change to be demanded.

CXH said...

'The sooner PM Luxon & Finance Minister Willis defriend John Key, Bill English, Paula Bennett, Murray McCully, Steven Joyce & the entire raft of washed up former Nats, including Peter Goodfellow, still vying for influence the better.'

Thank you. This is so obvious to most of us outside of Wellington. Why can they not see it. Unless they can shake off the old guard they will be a one term wonder and the country is toast.