Kerr on Fiscal Stimulus

February 16th, 2009 at 5:59 am by David Farrar

Roger Kerr makes some excellent points in his NZ Herald op ed:

The Government is being urged to increase its spending to “stimulate” economic activity.

What seems to be overlooked is that the huge rises in core Crown spending in recent years – some $25 billion since 2000 – saw New Zealand “lead the world” into recession.

A very timely point. And that going into recession a year before most other countries has greatly affected our options.

Hundreds of economists in the United States are saying the Obama Administration’s so-called “stimulus” package is reckless.

The imperative now is to switch resources into the internationally trading sector so as to increase exports and cut imports. By marking down our exchange rate, the rest of the world is telling us that is what we have to do.

It looks likely to drive the US Budget deficit to about 12 per cent of gross domestic product, create huge public debt, and necessitate big tax increases or spending cuts down the track.

And NZ is already facing a decade of deficits. And if these deficits remain, tax increases are also inevitable in NZ.

For a small, open economy like New Zealand further increases in would worsen the balance of payments rather than do much to increase output, even in the short term. Longer term they would raise future tax and debt burdens and risk a resurgence of stagflation.

High levels of Government spending, already projected to be 45 per cent of GDP on the OECD’s measure (which includes local government), contributed to the balance of payments problem by driving up domestic costs, making exporting and competing with imports less profitable, and dragging resources (of capital and labour) away from those activities.

The imperative now is to switch resources into the internationally trading sector so as to increase exports and cut imports. By marking down our exchange rate, the rest of the world is telling us that is what we have to do.

Yep.

Australia’s overall Government spending ratio is projected by the OECD to be 35 per cent in the coming year, compared with New Zealand’s 45 per cent ratio.

The Government needs to reduce the Government spending share of the economy over time to below Australia’s level – and more like the ratios in Hong Kong and Singapore which are below 20 per cent – to match Australia’s performance.

The Governments of those countries are able to ensure the provision of high-quality public goods and maintain strong social spending programmes with Government spending at far lower levels than NZ.

The benefits include lower taxes and levels of wages and other incomes that are now much higher than ours.

This is key. Reducing Government spending as a percentage of GDP does not mean you are spending less money. If you get higher GDP growth, then you can still maintain social spending. The trick is to have spending increase at a slower rate than GDP growth.

Beyond those exercises, the Business Roundtable strongly supports the proposed Taxpayer Rights Bill which would cap increases in spending at the rate of inflation plus population growth, unless taxpayers agree to higher increases in a referendum.

That’s a great idea. The same should apply to local Government!

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10 Responses to “Kerr on Fiscal Stimulus”

  1. PhilBest (5,125 comments) says:

    Good on ya for posting this, DPF, Roger Kerr is right, as he usually is.

    I have said this more than once before, and it is not my original idea, that Keynes idea of a “stimulus” was designed in an era when the State took up 10-20% of a nation’s GDP; a “stimulus” on top of this was something proportionlly significant. But countries where the State already takes up 45% of GDP are already at or beyond the point Keynes envisaged a temporary stimulus package taking government spending. What is more, most of that is very low quality spending, and most of it is “entitlements”.

    Where an economy is thus already choked in State churn of its wealth, any “stimulus” is going to be of reduced effect, even if it is high quality spending; which largely it is not. The USA is setting a very bad example in this respect. The Wall Street Journal recently called the Obama/Pelosi/Reid “stimulus package”; 90% social policy and 10% economic policy. Mark Steyn called it “business as usual, with 3 extra zeroes tacked onto the end…..”

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  2. PhilBest (5,125 comments) says:

    It is tragic that people like Roger Kerr, and Roger Douglas, and Don Brash, are regarded as poison by so many voters. Thus democracy shoots sitself in the foot again and again.

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  3. getstaffed (9,186 comments) says:

    The imperative now is to switch resources into the internationally trading sector so as to increase exports and cut imports.

    That’s it in a nutshell for me. Call me old fashioned, but real growth will only come from having newly acquired wealth in our pocket, rather than moving the same, tired old tenners from one pocket to the next al la the stimulus package.

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  4. LUCY (359 comments) says:

    Excellent! and Philbest/ getstaffed couldnt agree with you more. The world keeps appyling solution that were fine for way back when but wont work in this world

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  5. Nigel Kearney (1,047 comments) says:

    It is a good idea, but it is neither logical nor sensible to accept current spending as the baseline.

    National should go back to the level of spending in 1999 when National was last in office, adjust for inflation and population growth, and set spending at that level. The amount that could be returned to taxpayers from doing this would be about $12,000 per family per year.

    Accepting the massive spending increases under Labour and just limiting future increases will not be enough to stop our economy circling the drain.

    [DPF: Yes we should hop in the magic time machine and pretend the last nine years have not happened. Just turn the clock back – it’s so simple]

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  6. Redbaiter (13,197 comments) says:

    “It is tragic that people like Roger Kerr, and Roger Douglas, and Don Brash, are regarded as poison by so many voters. Thus democracy shoots sitself in the foot again and again.”

    Democracy perverted by a left wing media who largely project the Labour party view as their default position, and accordingly enthusiastically aided in the vicious demonisation of good men with good ideas.

    Someone famous once said “For democracy to work, the population needs to be informed.” (or something like that)

    Thats the problem in NZ. The public are continually misled by a cowardly lying partisan mainstream media, yellow so called journalists who are a vile stain on the concept of democracy.

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  7. OECD rank 22 kiwi (2,753 comments) says:

    Nigel Kearney says at 9:28 am:

    National should go back to the level of spending in 1999 when National was last in office, adjust for inflation and population growth, and set spending at that level. The amount that could be returned to taxpayers from doing this would be about $12,000 per family per year.

    Sounds good to me.

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  8. freethinker (694 comments) says:

    “Beyond those exercises, the Business Roundtable strongly supports the proposed Taxpayer Rights Bill which would cap increases in spending at the rate of inflation plus population growth, unless taxpayers agree to higher increases in a referendum.”

    The Whanganui experiment in asking ratepayers in a referendum what level of rate increases they want with 3 choices is a good starting point and if the council were required to resign on proposing a rise greater than inflation then “Our elected representatives” would no doubt prioritise expenditure more appropriately or risk being kicked out – a win win situation I believe.

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  9. GMDI (70 comments) says:

    It amazes me that the Idiots at the standard think we can borrow our way out of a recession. if we want to meet their own dear ex-leaders goals of top half OECD rankings, we need the govt spending/gdp ratio to be in the bottom half of the rankings, thats it. simple. more real wealth in real new zealands pocket.

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  10. Nigel Kearney (1,047 comments) says:

    We don’t need a ‘magic time machine’ to undo the damage Labour has done.

    We just need a government that is committed to doing what’s best for the country, instead of one that is focused on maximizing its chance of winning elections.

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