Later this month, New Zealand will be subjected to its second austerity Budget in a row. Zero budgeting is being presented as the only path of virtue. This is despite the fact that – elsewhere in the real world – it has been a very bad week indeed for the politics of austerity. Voters in France and Greece have just delivered a strongly negative verdict, based on experience, on the economic policies to which they have been subjected. They’ve decided that you can’t continue to cut jobs and slash government spending and assume this will somehow, magically make firms and individuals willing and able to spend more, consume more, and invest more. When you’re in a recessionary hole, eliminating jobs and cutting back on spending just tends to prolong and deepen the recession.
Yet amusingly, Prime Minister John Key has treated the election outcomes in Greece and France as an endorsement of his government’s policies, rather than as a rejection of them. The way he saw it, France and Greece just didn’t want to give up the good times. As he told Newstalk ZB earlier this week : “If you don’t take the hard calls up front, and you allow them to accumulate, then it becomes harder and harder and harder because people just don’t want change….In the case of France, I think they’ve had some real luxuries for a long period of time. Ultimately they don’t want to let those good things go,” he said. “It’s the same thing with places like Greece. They’ve built up massive amounts of debt. Now they’re being forced by the IMF and others to go through an austerity package they don’t want.” No hint that voters were not exactly clinging to the good times – but were refusing to be made the fall guys in the bad times being visited on them by the same bankers, politicians and elites who were responsible for the recession in Europe, and elsewhere. The people clinging to the good times are yesteryear’s advocates of de-regulation, who are now the prophets of austerity for everyone else.
New Zealand, Key claimed, was “a million miles away from that…[And] that’s why the government’s having a zero budget this year, it’s why we had a zero budget last year, it’s why we’ve spent very little new extra money in the four years we’ve been in office,” Key said. Right. In fact, austerity has been very selectively applied in New Zealand. At the outset of those four years in office, Key and his government embarked on a patently unaffordable tax cutting programme that benefitted the relatively affluent few, while – as usual – failing to deliver the economic growth that the tax cutting ideologues always promise, yet never deliver. Since then, we have been subjected to a random package of asset sales, public service job cuts, diversions (convention centres, Hobbit deals etc) and hope that a prosperous China or Ausrtralia will float our boats, too. Menwhile, thanks largely to the policies of austerity – and the tax cut for GST trade-off, bound to fail in a recession – the tax take keeps on undershooting.
The main advantage that the New Zealand currently possesses in the post -2008 global environment—i.e., our relatively low levels of government debt—is one which the government inherited, and for which it can take no credit. While the then-government was using the mid 2000s boom to reduce government debt, National was clamouring for it to be dished out in tax cuts. We can only thank our lucky stars that National didn’t win the 2005 election – because this would have almost certainly sent us into the global recession having just squandered our current best asset. That track record does make National an unconvincing advocate of austerity, though. But no matter, because time is running out for the economics, and politics of austerity.
Is zero budgeting working for anyone? It isn’t for virtuous Ireland, as Paul Krugman pointed out earlier this week:
Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favor of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong that members of Europe’s policy elite keep proclaiming that Irish austerity has indeed worked, that the Irish economy has begun to recover. But it hasn’t. And although you’d never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany. So what are the alternatives?
The route of salvation, Krugman maintains, is to restore cost-competitiveness and boost exports, mainly via the devaluationary option that is currently inhibited by the euro:
As a counterpoint to Ireland’s sad story, consider the case of Iceland, which was ground zero for the financial crisis but was able to respond by devaluing its currency, the krona (and also had the courage to let its banks fail and default on their debts). Sure enough, Iceland is experiencing the recovery Ireland was supposed to have, but hasn’t.
But surely hasn’t austerity and thrift worked for Europe’s big kahuna, Germany? Not really. Its dominant position was not achieved by Teutonic thrift but via expansionary policies, both at home and amongst its neighbours. Krugman, again:
Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don’t like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates….So Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth. The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do.
Likewise, we continue to cling to the same failed strategies. Our government battens down the hatches, cuts jobs, slashes spending, sells public assets to our mates, and hopes and prays for prosperity among our trading neighbours…while maintaining, largely for ideological reasons, a floating exchange rate that is removing the possibility of the devaluation that would actually throw a lifeline to our exporters.