The economy

News that the Reserve Bank of Australia has dropped their official cash rate by a huge 100 basis points gives some inidcation of how weak various economies are.

NZIER released their quarterly survey of business confidence yesterday. On the basis of it they predict the recession will last for at least another two quarters. A net 32% of firms have reported a decline in trading activity and a net 13% expect trading activity to fall further in the next three months.

It is in that context, and the decade of deficits announced by Michael Cullen on Monday, that National have modified their tax package which will be announced later today. This is both necessary and responsible. The public want a tax package that takes account of the last few weeks, let alone the last few months.

The scary thing with the PREFU numbers is they were finalised five weeks or so ago, so do not include the latest shocks from the US. As the Herald says:

Party leader John Key yesterday admitted that the pre-election opening of the books by the Treasury showed a picture that was much worse than he had expected.

“We’d always expected a slowdown, but I don’t think anyone saw deficits for 10 years and such a deterioration in the accounts.”

The economic and fiscal update showed cash deficits forecast to reach $7 billion and budget deficits for the next 10 years. …

No-one at all was expecting it to be that bad.

Also behind the decision is the fact that the forecasts revealed by the Treasury this week do not take into account the tumultuous events of the past month, in which banks have collapsed, the US Government has approved an enormous bail-out deal for Wall Street, and the flow of credit internationally has virtually seized up.

Who knows where it will end. Now this is no reason not to have tax cuts at all – they are important as one factor in lifting economic growth. But some caution around size and timing is essential.

Prime Minister Helen Clark yesterday cast doubts on National’s statement that it had scaled down its tax cut plan.

“I believe they over-promised on their tax package and they are now using the excuse of the books to try and talk down expectations,” she said.

I am tempted to call the PM a moron for that comment, but I know she is not a moron so all I’ll say is she is playing dumb. If she really thinks a decade of deficits is simply an “excuse” then she is in la la land.

But here is what is really interesting. We have seen National says “Yes we will modify our plans in wake of the financial crisis” while Labour says it is not going to change anything. Dr Cullen ruled out any change to tax or spending in the PREFU lockup. At most they might delay some of WInston’s new bureaucrats. Labour are happy to have ten years of deficits and debt rising from under 20% to 30% of GDP.

Labour have had it easy for the last nine years. They have never had to make tough decisions, and now the economy is in reecession they have no idea and no plan as to what to do to prevent a decade of deficits. Their biggest problem for the last decade has been what new schemes to dream up to spend our money on – hey lets put a billion more into Working for Families, no no lets buy some trains for a billion, no no let’s give pensioners free bus trips, no no let’s give public servants a pay rise but only if they join the PSA etc etc.

Because the economy, helped by strong commodity prices, has been so strong they have been able to say no to measures that would boost labour productivity and economic growth. Many of these measures (such as RMA reform) will be unpopular with some lobby groups, so why bother to take the heat, when hey we have enough money without such reforms.

But now Labour has run out of money. They are content to run ten years of deficits. They are not willing to take any hard decisions about lifting our economic growth, let alone paring back any of their spending schemes.

We’ll hear later today what National’s plan is. I think it will be measured, significant and popular. It will of course be attacked by Labour and the unions. National could announce the second coming, and Labour and the unions will attack it. Hopefully at some stage, somone may ask Labour what their plan is? Their plan is to not change tax rates and not change spending significantly. Their plan is a decade of deficits.

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