DPF’s 13 economic recovery principles

Tomorrow we will see the Budget. I’m won’t be in the lockup myself, but a colleague Neil Miller will be in there and will do a post for Kiwiblog on what is in the Budget, appearing just after 2 pm.

What I thought would be useful is to elaborate some principles for how we should recover from what is probably the worst economic shock since the Great Depression.

1 – We shouldn’t cut spending

For at least the period we are in recession we should increase government spending to cushion the impact of the recession, just as happened under Key and English during the GFC. Cutting spending in the midst of a recession will probably just deepen it.

2 – We shouldn’t increase taxes

Increasing taxes during a recession will also deepen the recession. We want households and businesses to have more money, not less. Many households and businesses will be struggling and the last thing they need is more taxes.

3 – We should run a deficit in the short to medium term

The aim should be to be in surplus over an extended period of time, but that doesn’t mean you have to to run a surplus every single year. During a recession it is almost impossible to run a surplus as you have both tax revenue drop and non discretionary spending (welfare benefits and interest on debt) increase.

4 – Debt should increase

As a consequence of running a deficit, debt should and will increase. We are able to do this because despite howls of austerity and false claims of health spending cuts from Labour, the last National Government managed to impose enough fiscal discipline to get back into surplus within five years of the GFC and start reducing debt again. They inherited a projected decade or more of deficits.

5 – There must be a path back to surplus

While most of us accept there must be deficits and growing debt for a while, there must be a path back to surplus and reducing debt. In 2008 National inherited no path to surplus – it was a structural permanent deficit.

It may take five to six years again, but it is vital that decisions in this Budget do not make it impossible to get back into surplus again.

The reason we need to get eventually back into surplus and repaying debt is there will be another global economic downturn again at some stage – generally every 10 – 12 years. The history is:

  • 1973 – oil shocks
  • 1987 – Black Friday sharemarkets (14 years)
  • 1998 – Asian Crisis (11 years)
  • 2008 – GFC (10 years)
  • 2020 – Covid-19 (12 years)

6 – Extra spending should not be permanent where possible

If we want a chance of getting back into surplus one day, then the vast majority of extra spending during the recession should not be permanent. The decision to permanently hike welfare benefits was a reckless one as it imposes a permanent cost increase we don’t have revenue for. The additional winter energy payment for one year was a more sensible response.

Basically the only areas that should get significant additional permanent funding is those related to Covid-19 such as Vote Health, Vote Civil Defence etc.

7 – Capital Expenditure generally preferred over Operational Expenditure

Capital Expenditure tends to be on infrastructure that provides longer lasting benefits to the country. A great example is National’s spend on fibre to the home -it has given us a broadband network that has made a real difference.

Likewise enhanced transport routes, more modern hospitals and schools etc can all be valuable investments.

8 – Expenditure must make economic sense

Any idiot can spend money on infrastructure projects. The test needs to be projects that produce benefits in excess of the costs of building them. Now is not the time for spending on low quality projects.

9 – Capital expenditure should be on projects that can commence soon

The reason we want to spend more on capital expenditure on infrastucture is to generate more economic activity while we are in recession, to soften it, create or maintain jobs etc. Projects that won’t actually commence until 2023 or 2024 etc will not meet that criteria. Claiming that building a rail line between 2024 and 2029 is a solution to a recession in 2020 is nuts.

10 – Low quality spending must be ruthlessly reprioritised

We want to eventually get back into surplus but also increase spending in areas such as Vote Health and on infrastructure projects. That will require a formidable level of fiscal discipline. Low quality high cost spending such as free tertiary fees and the provincial slush fund should be redirected to areas of more need.

If you are unable to do this, then you will not be able to get back into surplus one day.

11 – Don’t try and pick some sectors to be winners

Some politicians are saying we need to reshape our economy as we can no longer be reliant on tourism. It is true that tourism revenues are likely to be lower for years to come.

But the idea that three or four Cabinet Ministers will make the best decisions about where our future earnings will come from is fanciful. The reality is the future is uncertain.

The Government should resist doing specific corporate welfare packages for handpicked sectors such as racing or the media. Any support for businesses should be across the entire economy, rather than those who make the most noise or donate the most.

12 – Costs on businesses must be decreased, not increased

When times were good, government could increase costs on businesses with more modest impacts. But when times are bad those extra costs will mean businesses will close, shed more jobs, new businesses won’t start up etc.

The Government needs to seriously focus on reducing costs for businesses. That could mean a 12 – 24 month freeze on new regulations, no further minimum wage hikes until unemployment gets below a certain level, reducing compliance costs, freezing rates etc.

13 – We need economic growth

Over the next year we are going to have a huge deficit – well over $30 billion and the following year will probably be well over $10 billion. This is almost unavoidable due to lower tax revenue, increased welfare payments, temporarily higher spending, and increased interest on debt.

The way you get back to surplus is to have substantive economic growth which will allow businesses to grow, exports to grow etc. This will increase company tax revenue. It will increase GST. It will lead to more jobs and increase income tax and reduce welfare payments.

You can’t spend your way back to surplus. You can’t tax your back to surplus (without decreasing economic growth). You need to grow your way back to surplus.

So most important of all we need policies that will not just get us through the recession but lead to a strong growing economy for the decade that follows.

So that’s my 13 principles for sensible economic management. We’ll see tomorrow what the Government does.

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