Kerr on Fiscal Stimulus

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 Government spending 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!