As I explained last week government policies that include the central banks directly printing money and the government running budget deficits are the central reason we have broad-based inflation in major advanced capitalist economies, including New Zealand.
But under capitalism, it makes complete economic sense to run budget deficits in a counter-cyclical way moderate the impact of the business cycle going into a downturn.
This is actually what the National Government did in 2008-13 and it is what the current Labour government has done in response to the Covid shutdowns in economic activity.
The economic consulting agency Berl compared the size of the responses by each government.
Our results suggest that over the five-year period 2008-13, the GFC/earthquake crises saw a fiscal response in the form of an increase in net core Crown debt of an estimated $62 billion. This was the equivalent of 33 percent of GDP in the beginning (2008) year.
Over the five-year 2019-24 period, we estimate the fiscal response to be an estimated $142 billion increase in net core Crown debt. This is the equivalent of 47 percent of GDP in the beginning (2019) year.
While the absolute size of the fiscal responses is noticeably different ($62 billion compared to $142 billion), its ratio to GDP provides a better reflection of the respective sizes of the two fiscal responses. In particular, 33 percent compared to 47 percent suggests the current administration and Treasury officials expect the COVID-19 recession to be less than one-and-a-half times that of the GFC/earthquake crises.
But Berl does note the different ways the two governments did the fiscal response – National through tax cuts for their rich mates and Labour prioritising government spending.
The fiscal response to the GFC/earthquake crises was dominated by a reduction in tax revenue equivalent to 20 percent of base-year GDP. That is, nearly two-thirds of the fiscal response comprised the Government taking in less tax than it would otherwise have taken. This response was the net result of combined income tax cuts and an increase in GST, alongside reduced economic activity. On the spending side of the fiscal response, increased government spending accounted for the equivalent of 15 percent of base-year GDP.
In contrast, the fiscal response to the COVID-19 crisis is unambiguously led by Government spending. The projected increased government spending is the equivalent of 35 percent of base-year GDP. This accounts for more than three-quarters of the COVID-19 fiscal response. However, there is only a seven percent (of base-year GDP) reduction in tax revenue, a result of reduced economic activity as there are no projected tax rate changes.
In summary, the nature of the two fiscal responses unsurprisingly reflect the political hue of the administration of the day. The blue response preferred reducing the Government’s relative tax take, the red response prefers to lift the Government’s relative spending efforts.
I am a socialist who wants to end capitalism but I don’t want to see an economic collapse dues to simple mismanagement. It is technically possible to run government budgets with modest deficits, or big ones in a major downturn, without unleashing inflation if you are willing to tax the rich.
But what annoys me is that the leaders of the Labour and national parties pretend they still pretend to adhere to the dogma of permanently running budget surpluses unless there is a big crisis.
It is also extremely annoying that when a Labour government is running deficits and literally printing money they don’t prioritise the welfare and housing needs of the poorest in the country who rely on benefits to survive. Instead the money has been given to businesses to save jobs. This was probably necessary but clawbacks could have been enabled if it wasn’t actually needed. The Reserve Bank also printed money but they then handed billions of dollars to banks who then onloent to to property speculators . This was not necessary and drove up prices by 30% in one year.
This government of New Zealand has said it wants to go back to budget surpluses as soon as possible. Currently, they are predicting to do so in the 2024-25 fiscal year. This is economically illiterate. It is akin to a religious dogma rather than economic science.
This is not economically necessary in New Zealand which has one of the lowest debt to GDP ratios of any advanced capitalist country. A modest deficit is even possible permanently without increasing the debt to GDP ratio so long as the economy is growing.
Government surpluses have a negative impact on the economy by withdrawing money from circulation and contracting rather than expanding economic growth.
Also, the deficit could be reduced from the current high levels by increasing taxation of wealth to supplement all the taxes workers currently pay but that is very unlikely in the foreseeable future.
There are also two funds with $100 billion between them held by ACC and the Superannuation for future payments. These could instead be directed to fund for the massive infrastructure deficit the country currently has because they were created for ideological, not economic reasons.
ACC used to be a pay-as-you-go system funded from current levies and taxation. The ACC fund was created by the 1990-99 National government to prepare it for privatisation. This requires an insurance-type fund to cover future claims. The privatisation was stopped by Labour in 2001 but they didn’t disestablish the fund so ACC retained the penny-pinching insurance model to deny entitlements. Working people were over-taxed to build up the fund and no reason was provided why that money couldn’t be returned or used for other purposes.
The Super Fund was established in 2001 by the Labour Government Finance Minsiter Michael Cullen. The only reason I can see for it was to allow the ever bigger budget surpluses he was running to be hidden it away in a manner that couldn’t be accessed for normal spending. Infrastructure spending was starved. To justify the decsison, a fictitious panic was promoted that National Super would become unaffordable and we need a special fund to save money today for the future expenditure. No government in the world thinks it is so incompetent that it cannot prepare for the future by spending appropriately now on infrastucture to make the economy more productive to be able to increase the tax take in the future – especially if they could tax wealth and chose not to.
Refusing to tax wealth at all includes nearly all forms of capital gains in New Zealand. This encourages a huge weight being given to and taken up by the property market in the New Zealand economy.
Real house prices have gone up 300% since 2000 – an OECD record. The USA and OECD average is half that. Our household income to price ratio is also one of the worst
The value of New Zealand’s housing stock has gone from $250 billion to $1600 billion since 2000. It has gone from 2 times GDP to 4.8 times GDP in the same epriod. This compares to 1.7 times in the US.
The Sharemarket is only worth 0.6 of GDP compared to 2.2 in US.
Current household debt as a share of income has doubled in the same period from 80-160%.
In addition, recent lending has been trending upwards to risky levels in in terms of debt to income
“The likes of Ireland and the UK have DTI caps between three and a half and four and a half times income. In New Zealand, customers with DTI of more than six account for 39% of recent borrowing, Barrenjoey found after analysing Reserve Bank data.
Auckland was higher, with 51% of recent borrowers taking out home loans at DTIs over six, and a fifth borrowed at DTIs over eight.
In the 1980s in NZ price to income was about 2.
This makes the likelihood of a major housing downturn as part of the New Zealand recession almost inevitable.
There Is simply no escape route from the capitalist point of view. They must and will attack inflation. Budget cutbucks and interest rate rises are the principal tools they have at their disposal.
They must and will attack inflation. Budget cutbucks and interest rate rises are the principal tools they have at their disposal. This will reinforce the existing recessionary tendencies that come from the working of the ten-year business cycle.
For a period we will have “Stagflation” where we combine economic stagnation and continuing inflation. This is the worst of all possible worlds for working people.
A left-wing policy that protects working people is theoretically possible without unleashing inflation. But we need a different type of government that prioritises working people and the planet over private profit.
Such a government would put the monopolistic economic sectors like energy and finance under public ownership and control. The banking system will be having another crisis worldwide. They were rescued in 2008 by the government rescuing the banks by bailing out the people who had created the crisis in the first palce.
The only alternative today will be to nationalise the banks under democratic control of working people. Much of the debt mountain they have created will have to be written off to protect home-owners, many farmers and small businesses.
An alternative democratically developed economic plan for a Green New Deal to save people and the planet then needs to be implemented. The alternative economic plan cannot be dependent on commodity production for profit which requires the relentless and endless depredation of the planet. The oligarchies who control our lives must be overthrown and their wars of empire to exploit and degrade life and the planet ended for humanity to survive.
Charity starts at home, reduce MPs/PM eye watering salaries, and perks ASAP…
@ N.
Well, there’s that. But what I believe would be far more ‘interesting’ would be to follow a farmer-dollar from AFTER the farm gate, silo and shed to make it’s loooooooooooooooong and convoluted journey back to Remuera. The little dollar would wave good by to the deliberately and terminally indebted farmer to a whole new and fancy urban lifestyle. It’d go through the producer boards then out the back door to politicians, exporters, sundry lenders and marketeers, the stock market, the banksters, grifters and scammers including the IRD, [ Spare a quick thought for Frothy Goff the gap toothed GST peddler. But I bet you’re ok phil. You’ll be GST registered unlike wage earners.] then it’d get excreted out the arse holes of retail bankstering, most of whom are now foreign owned and showing us multiples of billions of dollars in net profits going off-shore. I bet that wee dollar could tell a story about who’s pockets it now resides within. Maybe, as an example, graham hart’s pockets could tell a story or two. Or perhaps micky fay, or david richwhite? Or Alan Gibb or SIR jimmy wattie, or fletcher holdings which includes The Rural Bank etc, etc.
If we’re feeding forty million people and there’s only 5.2 million of us then where’s all those lost and lonely little dollars earned from the POST FARM GATE sales of farmerie stuff and things? And then there’s wool and trees and fushes and everything. And we’re still financially fucked. ( So they keep telling us.I repeat. So. They. Keep. Telling. Us. Let that sink in. Our wonderful politicians work so, soooo tewibly hard to keep us safe from the ravages of them damn foreign nations who will soon literally kill for our farmers foods and wool. Banksters!? Be still, your beating little black hearts, aye boys? ) That little dollar… Cute little dollar. It went away all innocent and misty eyed down that dusty country road and came back a gangster. A used and abused killer with no conscience and a thirst for the blood sweat and tears of those most at risk who are, ironically, those least to blame for our little dollars’ horrific, life changing experiences.
Our reality is so far from the imaginations of you mere mortals that you won’t believe the next bit of my story.
You non farmerie people could easily be paid a living wage to simply be. You’d not need to trudge to your logical fallacy ‘job’. You’d not need to panic every time a bill for essential services like electricity or data came in.You could simply be… We have a lot of money. And we have an absolute wealth, almost beyond imagination of essential life sustaining resources and there’s far more of it than we could ever eat or generally consume. Unfortunately, most of you have been brainwashed with carbolic soap into believing a false narrative so that those who took that little baby dollar and sold it on to the slave traders in those big shiny bankster buildings in the middle of every town and city in Aotearoa/ New Zealand get clean away with your lives which could be better lived.
The hardship you’re enduring right now? It’s as fake as the banksters and producer boards are. You’re all being fucked without the kissing. But don’t take my word for it. Go and ask any farmer what they get for their produce, deduct their costs, then compare what’s left with what it sells for off-shore. Then get out the calculator and work out the difference between what farmers get and what you pay for the food you must eat.
Try this film. It’s an oldie but a goodie if I remember correctly.
’Twenty Bucks.’
https://en.wikipedia.org/wiki/Twenty_Bucks
P.S. Tourists. Please do not eat the tourists. Yes. They are edible, but please do not. Unless you’re broke-as and stuck in a snow drift in your car with your partner and the kids. Then, it’d be ok so dig in! I hear middle class, office-worker bum cheeks are delish’. Garlic, freshly ground black pepper, lemon juice… Even if you just ate one cheek… They’d probably never even miss it. It might become chique` to be a mono cheek. Cooler than going back home with a tattoo. Can fart sideways!
I don’t think given the role, the lifestyle, the abuse/threats that MPs/Pm etc are paid eye watering salaries at all. It’s just so many other private citizens have shiite pay. Is 376k for PM of a country of 5 million odd people eye watering when the head of Watercare in Auckland (as example) is probably closer to 600K?
I get the argument that relative to salary they feel inflation, house prices etc less but would paying peanuts for even lesser monkeys be the answer? Don’t forget the PM would be paying a around 127k p.a. in income tax (and actually paying that)
Yeah agree its a pittance for all the shit a PM has to put up with and our local council CEO is on 350k and the last water man in Auckland before the 600k man was on 800k and at a time when Auckland had no water.
A lot of the “crazy conspiracy theorists” that Stuff likes to run hit jobs on are getting into self-sufficiency, home gardens, off grid living, etc.
This seems like a good idea to me, if you have the time and resources.
Looks like you are saving by not having spell check? While I tend to agree with you the system appears to be set in place with elections changing the occasional government but those running the system stay in place which ensures that nothing much changes. When I see a cleanout in major government departments then something useful might happen.
Socialism is the solution. The centre-left is the problem.
Is there a route out of the crisis we are facing?
Transcendence, drug or alcohol use, boat dwelling, lots of existing escapes from Babylon
With the Dooms Day Clock set at 100 seconds to midnight.
Probably not.
During the Cuban Missile Crisis, it was at 3 minutes to midnight.
Things aren’t looking too good from whichever angle you look at it.
Our Government who propped up the banks and the banks propped up the speculators now needs to rein them both in.
very good point nate..apparently their wages don’t contribute to inflation, true because largely because it’s invested overseas..wonder what the inflation rate is in the caymen islands
I don’t think given the role, the lifestyle, the abuse/threats that MPs/Pm etc are paid eye watering salaries at all. It’s just so many other private citizens have shiite pay. Is 376k for PM of a country of 5 million odd people eye watering when the head of Watercare in Auckland (as example) is probably closer to 600K?
I get the argument that relative to salary they feel inflation, house prices etc less but would paying peanuts for even lesser monkeys be the answer? Don’t forget the PM would be paying a around 127k p.a. in income tax (and actually paying that)
Thanks Mike.
The real political fight is for the middle ground and those on low incomes pay the price.
“I am a socialist who wants to end capitalism but I don’t want to see an economic collapse dues to simple mismanagement.”
I’m confused by that sentence. But the first clause is clear at least – you’re a Marxist. Nuff said.
The union movement in the U.K and how they are responding to their own class war.
” this is what we are: wage earners, retirees, homemakers, unemployed, students, immigrants …. Men and women – above ideological, racial, gender, age, professional category differences … – who join forces to face our adversaries.
We are the organized Working Class. Our most precious assets are Freedom and Dignity. We are not afraid of anything. Let’s change the world.
https://www.thecanary.co/uk/analysis/2022/08/21/unions-and-campaign-groups-are-mobilising-as-rishi-sunak-and-liz-truss-wage-class-war/
‘Much of the debt mountain they have created will have to be written off to protect home-owners, many farmers and small businesses.’
And the rest of the…population…get???
Might I suggest that there is no way out of here with current thinking. If you take any transaction it will have a energy component. For 200 years since we discovered fossil fuels we have had the benefit of driving the energy costs of a transaction downward. That’s ended, we are now in energy decline as a proportion of a transaction. Until we start accounting with energy we will be staring at ever increasing issues that seem incomprehensible. Id posit that economists are surplus to requirement, the people with any solutions to this are those who understand how to get the most out of declining energy and how to reach self sustaining economies. Spoiler alert: don’t look for high tech, its going to be post medieval if we are lucky. But we are creative, all hope is not lost.
Yeah agree with ya Wheel its a pittance for all the shit a PM has to put up with and our local council CEO is on 350k and the last water man in Auckland before the 600k man was on 800k and at a time when Auckland had no water.
You’re a way more deeper thinker than me, I’ll go with you, thought not quite fully comprehended — which I never do for the powerful.