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One bonus of being a branch office of the Australian economy is that we can shelter at times in the shade of their relative good fortune. Frankly, how the Australian economy fares over the next twelve months will have more relevance to our wellbeing than any of the ideas from the jobs summit last Friday, or the projects announced to date in our stimulus package.
For that reason, John Key’s visit today with Kevin Rudd in Canberra is pretty crucial. After all, one of the main ideas presented at the jobs summit was a fund to supply capital to New Zealand firms, created by the Aussie banks and our government acting in partnership. It sounded like an interesting idea with something in it to offend almost every conceivable ideological hue: bankers and politicians picking winners, as Aussies extend their control of the New Zealand economy.
How has Australia been doing? Better, right into January, than former stellar performers such as Singapore – which is currently battling with Japan for the title of the sickest economy in Asia – or Ireland, whose use of a low tax regime to attract business and labour was touted for so long as a model for New Zealand to follow. This year, Ireland’s economy is predicted to contract by 5%, amid warnings from the European Commission about its high deficit (9.5% of GDP this year) and its rising debt levels.
Ireland is now something of a cautionary tale. Last September as the global financial system showed its first signs of collapse, the Irish government tried to steady the country’s banking system by issuing a guarantee for bank deposits. Once Australia had done likewise, New Zealand dutifully followed suit. Unfortunately, such steps didn’t stop the near collapse in January and subsequent nationalisation of Ireland’s third biggest bank – an event partly due to the recession, and partly thanks to a fraud scandal involving the bank’s top two executives. Newsflash : de-regulation of the financial sector is fraught with peril.
Australia’s turn to be hit by the recession will come once the demand for its mineral resources dries up, yet its GDP growth figures for the last quarter of 2008 were second in the region only to China. Total credit growth across the Australian economy was still increasing at 0.6% in January, according to figures from the Australian Reserve Bank – thanks apparently, to a pick up in business spending, amid slightly higher personal spending and investment in housing ! Even if this is just the last spark from the party before the hangover, such signs have simply not been visible anywhere else. As this analysis suggests, there has been a pattern to this crisis, with countries reliant on manufactured exports and/or trade in financial services being first and hardest hit.
The one common thread so far in this slump is that countries depending on exports of manufactured goods and lots of services (especially financial services) are being hit surprisingly hard. That’s why Germany, Ireland, the UK, [and I would add, Sweden] Japan, South Korea and Taiwan are feeling a lot more pain than say, Australia.
Australia, and its Kiwi subsidiary will now begin to feel the pinch. After all, many of the main customers for Aussie exports and inbound tourism are in Asia, and the outlook for most of these countries is shockingly bleak. South Korea, Taiwan and Singapore are in steep decline, while Japan seems in virtual free fall, as this report indicates. According to Standard and Poors, Japan is in its worst recession since WWII, with the economy expected to shrink by about 4% this year. That’s’ twice the contraction it experienced during the Asian downturn of 1998. A similar report here succinctly signals the scale of Japan’s problems:
The Japanese economy shrank 3.3 per cent in the last three months of 2008 – its worst contraction since the 1970s – as exports declined rapidly. Japanese exports plunged 45.7 per cent on an annualised basis last month.
Given those dire numbers, it is only a matter of time before the Asian downturn in demand washes ashore in Australia, and thence to New Zealand. If we can believe official figures – and that’s a big qualifier – China is doing better than its neighbours. However, given China’s role as the final point of assembly for much of their manufacturing, the downturn there may also be just a matter of time. Hold your hats.
Are personal tax cuts still affordable ?
No. Both the Labour and National programmes of tax cuts were essentially backward facing devices. They were seen by the public as the long overdue reward for an economic boom already well and truly on the wane last May, when Michael Cullen finally succumbed to the political pressure for major tax cuts. Superficially, the timing back then could be rationalised as a stimulative shot to an economy already heading down the slope of the normal business cycle.
We’d earned it, was the sentiment. Then the global financial crisis hit, and that changed – or should have changed – the whole equation, because the premise on which the tax cuts were based has changed. The retail bounce from the consumption they were supposed to stimulate and the tax revenues they were subsequently expected to generate, belong to a bygone era. It would interesting to know how much less the Treasury thinks the government will be collecting in tax revenues this year, thanks to the global financial crisis. In Australia, it is estimated that the crisis has wiped $115 billion off budget revenues.
Formerly a three year cycle of tax cuts could (perhaps) be justified as a good use of resources if (a) the benefits were fairly and equitably shared and (b) they would be stimulative enough to sustain the revenue side of the equation at something like the balance that existed before the crisis hit. Neither of those conditions apply to the government’s current tax cut programme – or to Cullen’s either, for that matter – though his version was more fairly balanced towards low and middle income earners.
To be fair, tax cuts have not entirely gone the way of the dinosaur. As some people are sure to point out, the Obama stimulus package does include a huge $300 billion package of tax cuts, the biggest in US history – but equally, his longer term plans for cutting back the deficit also include some $1 trillion in new taxes spread out over the next ten years, once recovery has begun to take hold. Those increases include a plan to boost top tax rates for high income earners from 35% to just under 40%. So far, the Key government has not been promising any tax increases down the track to help Finance Minister Bill English rein in the deficit, and our debt levels. How will the government cope next year with the widening gap between the tax cuts it seems committed to doling out, and the steep losses in revenue it can reasonably expect ? Oh, that’s right – by being more efficient. That’s sure to work.
It should scrap the future rounds of tax cuts, on social as well as economic grounds. Mainly because the main benefits from the entire tax cut programme will be reaped by people on higher incomes – such that more than two thirds of taxpayers will get to share less than one fifth of the money being doled out, with the remaining four fifths going to the few on higher incomes. [Hat tip to No Right Turn here for his tabulation of these figures.] Meanwhile, there is renewed talk of Bill English tinkering with the piggy bank at the Cullen Fund, thus reducing our ability to pay for the future costs of an ageing population. The stupidity of even thinking about taking such a step at a time when the financial crisis is wiping out retirement savings beggars belief.
Can any government facing such a crisis afford to place so much reliance on tax cuts ? We seem totally out of step on this score. Elsewhere in the world, targeted government spending, increased regulation and tax increases further down the track is the mix on offer as the best escape route from the recession. Here, it is as if the financial meltdown and related failures of de-regulation had never happened. In a prime example of time warp, one of the 21 ideas to emerge from the jobs summit last Friday was an attack on further regulation : “ Stop all new regulations unless approved by Ministers.” Incredible.
No one can yet do the figures – but I’m pretty sure that come Bill English’s first Budget in May, we will find that crisis-related spending will have accounted for precious little of the deficit deterioration since Budget 2008. As Australian commentators are predicting over there, the less-than-projected growth in tax revenue will account for almost all the cyclical deterioration, as the economy switched from its healthy growth levels into a sharp downturn –and thereby rendering unaffordable, one would have thought, the next tranche of tax cuts.
Well, at least you’d think so. Unless of course, the crisis is being used to advance the ideological cause of small government. Currently, tax cuts are the unacknowledged elephant in the room that is limiting the government’s ability to spend appropriately to respond to the crisis. The effects of postponing this appointment with reality will soon become apparent.
Instead of planning say, extra staff and resources to help people cope with the recession, the government is talking of staff cuts in welfare, and seems intent on capping public service staffing in general. All so, that the relatively few people on higher incomes can get the lollipops they were promised back in 2008, before the crisis. So much for sharing the pain equally.
The TVNZ dividend
Looking for a further example of how petty the government’s response to the financial crisis has been ? Look no further than last week’s demand that, crisis or no crisis. TVNZ should continue to deliver a dividend this year to government – even if this requires $25 million in savings by TVNZ, and a further round of job losses. Oh yeah, this was announced in the same week that the nation was being asked to come up with ideas on how to save jobs !
Every other sane shareholder in any other company would recognise these are the last conditions in which to expect dividends as usual. It gets worse, though. This month, the government has also chosen to suspend and re-evaluate the worth of the two year regulatory review of the digital realm, due to be completed in August.
This move not only risks a total waste of the millions of dollars in time and energy already expended on this exercise. This review was a necessary and welcome attempt to create a fair, modern and balanced regulatory environment for state and private broadcasting in the digital age.
By threatening to abandon the effort at this point, Broadcasting Minister Jonathan Coleman is dog whistling to Sky that the bad old days of Maurice Williamson’s ‘light handed regulation’ are back. Having no plan, and no clue at how to foster a genuinely competitive environment is being presented once again as a virtue, with the attendant risk that New Zealand will once more be held hostage by a powerful player. State broadcasting is to be slowly throttled
Much sympathy is due to CEO Rick Ellis, who has just rescued TVNZ from its previously parlous financial position, only to be hit by the financial crisis, and this double whammy from a vindictively moronic government.