Gordon Campbell on National’s economic vision

Chances are, if someone said they were planning to raid their children’s piggy banks in order to pay the rent – mainly because they just couldn’t resist the impulse to spend the rent money down at the TAB – we wouldn’t be applauding them, and we certainly wouldn’t be lining up to let them run the country. Yet in stark essentials, such is the economic vision for New Zealand over the next decade unveiled by Bill English and John Key at the National Party conference on the weekend. “Vote National: Mortgage Your Children” was the message in a nutshell.

The details can be gleaned from the speeches by Bill English here and by John Key here

Essentially, National’s plan will have three main components. First, a Key government will bring forward the second and third round of tax cuts currently envisaged for 2010 and 2011 by Labour. Secondly, it will embark on a $5 billion spending programme on infrastructure over the next six years. Thirdly, there will be a cutback in red tape and regulation, notably to ensure that the resource consent provisions of the Resource Management Act do not hinder the roading and other infrastructure projects National has in mind.

Neither Key nor English explained in any detail how this programme will be financed – though passing reference was made to private public partnerships and infrastructure bonds. By its own admission, National plans do entail more overseas borrowing. Apparently, it is willing to saddle future generations with more overseas debt in order to maintain public services in the meantime, and help finance its infrastructure projects.

And why, beyond ideological reasons, do Key and English feel the need to do so? Because by then, National will have spent the rent money on tax cuts at a level and pace the country can’t sustain from its current income and reserves. In that sense, this plan represents a historic high water mark of spending by the Key/Clark boomer generation – a generation that never faced user pays disciplines for their own education or healthcare, and that has never since learned how to defer the gratification of the needs that it seems to regard as its rightful due. Simultaneously, it has few qualms about placing a heavier and heavier load of repayment and/or cost cutting onto subsequent generations, further down the track. .

Certainly, Michael Cullen’s tax cut package this year – it kicks in with its first round on October 1st – was also a shameless election bribe. But it was more affordable, going forwards. As usual, we still don’t know the full details of National’s plan. So as yet, it is not possible to compare which groups in society will benefit the most (and when) from the tax cut programmes on offer from the two major parties.

For now, all we know is that National plans to finance its programme in part, from a rise in overseas borrowing. In a hair -raising analogy, Key calls this “ taking the brakes off the New Zealand economy.” Given the scale of what it is proposed, National’s estimate that this will entail merely a 2% rise in the gross debt ratio – currently around 18% of GDP and rising – looks highly optimistic.

Keep in mind that National is planning this $5 billion boost in government spending on infrastructure over the next six years, while still promising to keep all the other big ticket items ( Kiwisaver, Working for Families, the Cullen Fund, superannuation levels, interest free student loans etc) essentially intact.

What this means is that the public/private partnerships that are the favoured format for delivering the Think Big projects that National has in mind will have to function to near perfection in order to fit within the extra 2% debt ratio parameters. This is unlikely. Why ? Because a Key government is also planning to cut back its regulatory oversight of the economy – just as the PPPs will need to be highly and competently regulated in order to save taxpayers from being rorted by their big business project partners. All up, something like a 25 % debt ratio seems a far more realistic figure in future This will add significantly – a billion a year, the Labour-Green supporting Standard website estimates – to debt servicing costs. In each successive year, such costs alone will create a chronic pressure to cut social services.

This year, both major parties are offering tax cuts as election bribes. National however, by pressing on with bigger and faster tax cuts even after the cupboard has been all but emptied by Cullen, does seem to be the more reckless player – in that only its plans deliberately embrace further overseas borrowing in order to pay for them. This is credit card economics, as Cullen has already pointed out.

Alternatively of course, National could reduce those extra borrowing costs by further sales of state assets – such as Kiwibank or TVNZ in its second term – as the bills start mounting. In other words, the future sale of Kiwibank will not have been due to any shortcomings in performance on its part – ultimately, it will have been required to pay for National’s election bribes during 2008. Cut taxes now, and strip mine state assets later…yes, it will be interesting to watch Key trying to defend the indefensible over the course of this election campaign.

Such a death spiral is so unnecessary. With a more balanced set of tax cuts – or none at all – New Zealand could afford far better public services, make far better investments in productivity and pay for the forms of infrastructure that it will require in the looming context of peak oil and global warming. In that respect, the commitment by National on the weekend to outspend Labour on roading is a depressingly head–in-the-sand 20th century response, to the biggest challenge facing the 21st century.

In fact, a striking omission from the Key/English vision statements was the lack of any programme to boost productivity – beyond cut taxes, borrow from foreign bankers to cover the shortfall, cross your fingers and hope. Between them, the Key and English speeches do not appear to have a clue about how the free market actually works – or that the government needs to intervene at regular intervals in the market in order to ensure that it remains free and competitive. The Americans have known this for nearly 100 years, ever since the federal government intervened to break up Standard Oil’s stranglehold on the energy industry in 1910.

The National Party has never grasped the point of anti-trust regulation. Nor did Richard Prebble in the 1980s, when he sold Telecom. Looking ahead, this means that National’s vision of private public partnerships is very likely in practice to resemble a series of corporate welfare handouts. National’s planned $1.5 billion investment in broadband for instance, will do little more than re-entrench Telecom’s ability to screw New Zealand consumers. In the process, it will roll back the hard won benefits of genuine competition that government regulation has recently and belatedly brought into existence within this vital sector of our economy. National’s approach is more akin to that of an indulgent parent – it seems to believe in applying a – no smacking ‘ approach to whatever its corporate darlings say they want. National describes this as a ‘light handed’ approach to regulation. Offhand, it is hard to think of a step less likely to foster a modern productive economy than putting Maurice Williamson, and Telecom back in control of our telecommunications sector.

Finally, young voters should now be seriously thinking about starting a Youth Party for their own protection. As young offenders are packed off to boot camps, the rest of their generation will be faced with a rising bill for the boomers’ last big tax cut party. Quite clearly, this combo of major tax cuts, rising debt levels and quality public services is unsustainable.

You’d think that in return for handing out this lethal cocktail to young voters, National and Labour would at least be offering them a tempting universal student allowance in the meantime, if only to ensure they become more productive drones in future. But no, apparently not. Beyond a privileged few, young voters will not only get the scraps from the table – they will also get to foot the bill.