We have been saying it on the blog for some time. This government is crashing what was, only a short time ago, a very well managed economy. The signs have been there for a while, but one of the most worrying aspects of recent times is that interest rates are continuing to fall. This means that the Reserve Bank has limited options to stimulate the economy if things get really bad.
I am not an economist, but I have been surprised at how keen Adrian Orr has been to cut interest rates over the last year or so. It seems we might be heading towards zero interest rates… which presents a whole raft of problems for the economy that we have never seen before.
So, what do we do? It seems the answer is to give away free money.
No… I am not joking.
New Zealanders could be in line for a cash payout, alongside temporary tax cuts if the economy crashes, according to advice from Treasury.
Treasury warned Finance Minister Grant Robertson that he would have to shoulder a large responsibility for getting the economy back on track, given the Reserve Bank, which New Zealand usually leans on in a financial crisis, has limited capacity to cut interest rates.
This is how this government is going to ruin this country. They seem to think that money just grows on trees, and can be happily splashed around as they see fit. Welcome to the Greece of the South Pacific.
Treasury’s plan for Robertson would mean temporarily cutting taxes and increasing spending to pump extra money into the economy until things improved, but some economists are concerned it doesn’t go far enough.
In January, Treasury briefed Grant Robertson on the best way to maintain New Zealand’s living standards through an economic downturn.
Because New Zealand, like the rest of the world, has arguably not fully recovered from the last recession, Treasury warned that a conventional response to a GFC-style shock is “likely to be impossible”.
That means two things: the Reserve Bank might try “unconventional monetary policies, currently untested in New Zealand,” and Robertson could open up the cheque book, spending billions of dollars on building new infrastructure, including “increased capital spending, tax cuts, and/or cash transfers to households”.
So the government is in such a good cash position that it can afford to give tax cuts and throw cash at people? Really? So why did they cancel National’s tax cuts then, when obviously, there was no need? And if they can afford to pay for all the much-needed infrastructure projects, why were so many Roads of National Significance cancelled? Why have extra fuel taxes been imposed to pay for transport projects when the government doesn’t need the money?
There is something very strange and very wrong about these Treasury proposals. I cannot decide if it is all simply pie in the sky, or if Gabriel Mahklouf was a total idiot, determined to bankrupt the country with no holds barred.
After all, it was under his watch that Treasury went through its ‘moon feelings’ project… not to mention that hacking of the website that wasn’t and that probably tells you all you need to know.
Treasury doesn’t give specific details of what it recommends, but says that “effective fiscal stimulus should be timely, targeted, and temporary”.
It says the “best case” stimulus would focus on tax cuts and stimulus, alongside spending money on building infrastructure, which would also boost the economy.
It recommends giving money to households, particularly those in need, saying that tax changes or cash transfers (meaning a payment of some kind, possibly a benefit) meet its policy objectives of boosting the economy, but in a way that achieves equity.
Long before we get to this point, the tax take will have already fallen, and government coffers will not be as full as they once were, which gives the government only one alternative. They will have to borrow heavily.
Usually in New Zealand the heavy lifting during a financial crisis is done by the Reserve Bank. It will cut interest rates, essentially making it cheaper to borrow money.
But New Zealand, like most other developed countries is in a bind this time round. Unlike the last recession, where New Zealand’s Official Cash Rate was 8 percent before being cut, New Zealand’s OCR is just 1.5, giving the Bank very little room to cut should it be required.
This is because the last decade of recovery has been far weaker than other recoveries. At every point the economy threatened to tip back into recession, so interest rates were kept low.
I don’t believe splashing around cash is the answer, and spending on large infrastructure projects, while it may have worked in the 1930s, is a different prospect these days, with the extremely regulated environment in which we now live. It will take years to get these projects moving, and will not, therefore, stave off the inevitable economic consequences of a major downturn quickly enough.
If the government’s answer is to simply throw cash around, then heaven help us. We will be repaying the debt this government racks up well into the 22nd century.