I was proud to take a stand with 14 other economists, led by Ganesh Nana against current fiscal policies that are both unnecessary and highly damaging. There is widespread agreement, for example, PSA says, spending cuts need to stop describing these policies as ‘reckless’. Martyn Bradbury outlines how This Government’s Austerity Agenda is killing New Zealand economically, culturally and literally. Every day there is new reports of cuts to social services, including the foodbanks, used as a place of last resort. Expect us to follow what is happening in the UK in poor social outcomes with many more desperate and unwell on the streets.
Treating the state like a household who must balance its budget flies in the face of what we know about how economies work.
In a well-functioning economy, budget deficits automatically widen in a recession and reduce, or turn into surpluses, in the recovery phase of the business cycle. The automatic stabilisers of lower tax, and higher transfers like working for families and the jobseeker benefit, come into play to help moderate the downturns and importantly make sure we don’t descend further into a depression. We know this is a deep recession:
Since the September quarter of 2022, per capita GDP has fallen by 4.6%, making this a larger per-capita recession than the Global Financial Crisis of 2008-2010 (HEFU 2024).
It is worse than poor economic reasoning to try to continue to close the deficit by raising tax or cutting spending. The contractionary effects of spending cuts to close the deficit are more severe than tax rises, especially if those tax rises are on the rich. Yet this government chose to reduce taxes on the rich to be funded by deep cuts to public spending with a devastating effect on employment and hardship. Spending cuts in order to achieve spurious debt/ tax/spending % GDP ratios have very damaging multiplier effects that shrink the economy further, and just like in 1991, do not even succeed in reducing the deficit.
We don’t have an abundance of well-paid useful private sector jobs for people who have been thrown out of work, and the work that is out there will never compensate for the loss of experienced people who no longer work in the public sector and/or have left NZ. All we have left is a smaller and more fragmented economy, lower productivity and more ill health and outright poverty.
There is another issue: the accounting framework for the state is now very complex and few understand what a government deficit, government debt, or government spending actually measures. This really matters when we have a government ideologically determined to close the ‘deficit’ and return to surplus.
I wrote here for example about the effect of ACC deficits on the Crown balance: Bigger deficit for Christmas from the deficit buster. Expect higher ACC levies Daily Blog, 26th October.
Here’s the small bright light. Today the government made a very sensible decision to exclude ACC in its deficit measure (Budget Policy Statement 2025), see Box 2
Over the last three years, ACC’s deficit before gains and losses rose from $1.0 billion in 2021/22 and $2.2 billion in 2022/23 to $4.1 billion in 2023/24. Its deficit is forecast to average around $4 billion per annum over the forecast period. This prominence in OBEGAL creates incentives for undesirable, and unnecessary, short-term policy responses. Ministers approve ACC levies and should not be tempted to set levies at higher rates than justified by the scheme’s funding policy, simply to improve OBEGAL. Similarly, Ministers should not contemplate raising taxes or reducing spending, either of which would have an enduring impact, to compensate for ACC deficits in pursuit of a short-term OBEGAL intention. Government will therefore use a new measure of OBEGAL excluding ACC revenue and expenses – “OBEGALx”.
Good though this is, the underlying philosophy of small government is best prevails, and remains very dangerous. And, ironically, it seems we are still going to get ACC levy hikes regardless of the fine words quoted above.
I witnessed the havoc of the 1991 budget and its cuts to the incomes of those who could least afford it, right at the time when the economy was tanking, all in the name of balancing the budget. Child poverty and third world diseases soared shortly after. Have we learned nothing at all? It is critical for economists to call out current flawed approaches and demand a change of direction. Otherwise, what is the point of economics?
In contrast to 1991, low-income families’ balanced sheets are already shockingly eroded, fewer own their own homes, many have crippling debts. We are already seeing reports of increased child and adult hunger and other social distress. All this in a world where many homes sell at multi-million dollar prices and the roads are clogged with expensive cars.
This is why we wrote the open letter. We must fight the unnecessary social devastation for which we all will pay.
And to think I had imagined the ferries fiasco to be Nicola Willis’s greatest misjudgement. PS Terrific cartoon find (“déjà vu all over again.”)
Chris
Thankyou. Just as now it came as a surprise that deficit busting in a recession was procyclical and made things worse. The cartoon was from my teaching files of the 1990s. I agree re the ferries fiasco being a major blunder but the impact of her cuts to social services on families and children, our future, IMO is even worse
Between the COC and treasury we are heading down the drain fast.Willis has no idea ,and trying to say the country should be run like a house hold is stupid when we look at the amount of debt house holds have .
If we follow that mantra the government debt should be 562 billion because household debt is 148% of gdp where currently government debt is around 40% of gdp .
I see they are counting on house prices to rise to the insane levels when the squashed middle went on a buying rampage in 20/21 years .I can not see that happening as real wages are falling and unemployment is rising and SMEs are crashing daily .Where will the money come from for people to pay crazy prices again .I also not that Stanford has lowered the thresh hold for businesses to employ imported labor over local labour while we are scrapping jobs at record rates .How does that help when as the government is now finding,having record unemployed is boosting government spend not reducing it .She has to borrow another 20 billion to cover these costs .
Then we have dreamer Luxon thinking he is going to wave his magic wand and double exprots in the next ten years .Where will this come from,more cows or vegetables ?one problem with that is where will the required water come from we dont have enough now and cows need clean water not the polluted stuff that is in the drying up rivers now or the under ground sources that are high in nitrates that will kill them if they drink it .
I can see no plan or the possability of this COC shit government acheiving much ,other than racial disharmony .
B’ B’ but how can it be bad? We have KPI’s!
you can still have KPIs that show you have failed from my experience with having used them in my job .But clearly Luxon does not know how to read them .
This country is not building anything significant at the moment other than what was started by Labour and people wonder why we are in the shit. We are going nowhere fast and will soon reach the point of no return. We will be the Srilanka of the pacific unable to afford to keep the lights on . Watch all the benefits shrink to keep the wealthy donors happy.
Excellent article. My assumption is that this government want a long and deep recession and this is not an accident of mistaken economic policy. It is not an unorthodox or radical view to state that government deficit spending is a requirement of healthy economy – low unemployment, improving productivity, robust levels of business activity and good opportunities for younger generations.
MMT motes that if you look at historic data of government deficits (US has good records) from the 1900’s until now, surplus are very rare and, in each case, precede major economic down turns. This is because (when you apply double entry book keeping) the private sector cannot save when the government runs a surplus. If surplus are such a great idea the this should be reflected in the historic economic record.
– government deficit (liability) = private sector income (asset)
– ergo: government surplus (asset) = private sector debt (liability)
So if this is the intended and planned outcome of the government – my question is why and who’s benefiting?
What is fascinating is the similarity in actions and rhetoric between Milei in Argentina, Willis in NZ and Reeves in the UK and now the new US administration. A form of global economic synchronicity. The Austarians are back with a vengeance.
Thanks Susan. When you mention “[t]reating the state like a household…” My simple understanding of the differences are:
1.) Households can lower their expenditure without adversely affecting their income. Governments can’t.
2.) Governments have a claim on the future income (through tax) of all current and still unborn citizens. Households don’t.
Haven’t we known these two things much longer than since 1991? Maybe nearly 100 years since the Great Depression?
And finally:
3.) Governments that control and spend in their own currency are constrained in that spending not by any lack of money, but by needing to ensure that there are idle resources (labour, skills) in the economy to productively deploy any new money the government creates. Otherwise, it’s inflationary. Households in contrast cannot create money.
This one is more contentious and perhaps may be less true for a small national economy than a large one. But is it also becoming more accepted?
Great comment AB. Point 2 – MMT tells us that tax revenue doesn’t fund government spending which is done through money creation by the reserve bank. Taxation is used to withdraw money from the economy to prevent inflation.
Further to point 3 – MMT states that for the private sector to be able to save – and to make sufficient income to do so – the government must run a deficit, nearly all the time, to maintain demand and economic activity. The historic economic data (where available) supports this thesis.
that is a very interesting point. We hear all the time that the structural deficit should be zero- ie the balance at full employment should be zero. But why should it be? Trying to close the structural deficit in a recession/depression just compounds the problem
Strange that the two meanest finance ministers in NZ have been women .The fact that they have been in charge of kicking people while they are down beggars belief .
If we look at the women ministers in this government as a whole we find they are all tared with the same brush .Not one minister in the current government gives a toss about any one else even the kids which are our future .They are totally focused on being disgusting spiteful lowlifes.
I has been well proven that average Nu Zilders love being kicked in the head by the gummint and shat on by the rich. So long as there’s someone even less fortunate than themselves for them to shit on in their turn.
@ RC
Yep, we like our racism casual and our punching to be downward on these torrid isles.
Agree Richard and Leftorium, a dark strange lot in this lightly populated country that should be a land of plenty for all, not just the usual suspects.
Austerity for thee but not for me – this lot are setting us up for an ideological sell off and they are looking at doubling exports alright. Exports of $NZ dollars to foreign investors in PPP rorts. When Luxon says foreign investment – he doesn’t mean private equity investing in or as private companies – he means National Government picked winners for PUBLICLY funded projects. We are being grifted.
“Treating the state like a household who must balance its budget flies in the face of what we know about how economies work. ”
Who says they know about how economies work? Who says they care? Sometimes I think that cruelty is a feature rather than a bug with these people. And austerity an article of faith.
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