The Treasury Update, And Calls for Austerity

Any future built on Treasury forecasts is on shaky ground, but lets assume the relative optimism expressed by Treasury in yesterday’s half yearly fiscal update is well founded. Should Finance Minister Bill English respond by keeping the screws on government spending – and by spending we mean not only on the provision of services, but on wage rounds for health and education workers? Yesterday, English made it clear that the tight settings devised to meet Treasury’s earlier, much harsher outlook will remain in place, regardless.

It is always hard to tell whether such decisions are being made on ideological grounds, or for sound economic reasons. Is the current regime of austerity being maintained (a) because business tax revenues are down ( b) because of fears about another inflationary spiral or (c) because the government wants to be able to afford to put its tax cuts programme back on the table in election year 2011?

To the extent that (c) is a factor, nurses and teachers are being asked to subsidise a future round of tax cuts that will make dubious economic sense, and no sense at all on social equity grounds. At the very least, there will be further unemployment next year thanks to yesterday’s continued message of austerity. Given the shakiness of the economic recovery – globally, this recovery has been a product of stimulus packages by government rather than virtuous effort by the private sector, and those packages are now running out – there is still an argument for erring on the side of stimulus, not austerity.

Yesterday was also something of a holding action. After all, there is a more immediate reason why English is not wanting to tip his hand just yet. The Buckle tax review recommendations are due to be released to the public during the third week of January, and the government will be wanting to use any good news from yesterday’s figures to rejig the trade-offs between the various changes in taxes and tax rates likely to emerge from that exercise. Any state wage rounds next year will be made secondary to that process, and are probably being factored in as nil items – whatever the effects of such austerity for domestic economic activity.

That seems more like ideology talking, rather than economic sense. The recovery is still largely a phantom. The economy is still being expected to contract in the year to March 31,2010 – but by .4 per cent, not the 1.7 per cent predicted by Treasury in this year’s Budget. From there, growth is expected to pick up by 2.4 per cent, 3.2 per cent and 3 per cent in succeeding years. Even so, English warned yesterday, “we’re not going to get back to pre-recession levels until late 2010.” So that’s official, then : no genuine return to anything resembling normality for the next 12 months.
The political spin though is that we are on the brink of the good times again. The sober reality is that 2010 is not going to be a happy year for most middle income and lower income New Zealanders. Why, given the high kiwi dollar and our current levels of debt, Treasury is not expecting any growth in exports until the March 2012 year.

This must mean that the initial recovery (if it happens) will be being driven by the ordinary business cycle and by the same domestic spending that English (and the Reserve Bank) will be doing their best to choke off, in order to dampen down the fires of inflation. Yes, nurses, teachers and the unemployed will be being used next year as unpaid frontline fighters in the battle against inflation. That is, until the next round of worship at the altar of tax cuts throws austerity and inflation control out the window once again,


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