OnPoint: The Master Plan
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This part of the coming election is becoming clear now. There will be a spending spree, and there will be a lot of effort to portray the spending spree next year as, oh, I don't know, "the last ditch attempt by a tired, directionless government desperately trying to hang on to power", that sort of thing.
I'm kinda hoping we might have an election campaign where debate over government spending is pitched slightly above the level of Prono-nomics -- where size trumps all else every time. Or should I put that in the fantasy file, along with the candle-lit dinner a deux with Viggo Mortensen?
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WH,
Great piece Keith. You should be writing for the Herald instead of Ralston.
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Ralstonomics 101:
To fight inflation we must cut taxes and lower interest rates.
WH is right Keith: public discourse on economics would be far better served if you wrote for the Herald and Bill Ralston was confined to commenting on Deborah Coddington's blog...
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WH is right Keith: public discourse on economics would be far better served if you wrote for the Herald and Bill Ralston was confined to commenting on Deborah Coddington's blog...
Giggle. But yes. Ralston can write well, but seems to be a disaster around anything that touches on economics. As you demonstrated Keith, that column was gibberish.
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Nice analysis, Keith.
Craig, you're going to have to fight me off first for that dinner with Viggo.
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Now, finally, everyone can STFU about the goddamn surplus
Heh. Good luck with that one Keith. I'm betting "no".
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This part of the coming election is becoming clear now. There will be a spending spree, and there will be a lot of effort to portray the spending spree next year as, oh, I don't know, "the last ditch attempt by a tired, directionless government desperately trying to hang on to power", that sort of thing.
...by people who will themselves be promising an enormous (and probably bigger) spending spree, but wit the benefits flowing to different (and almost certainly fewer) people.
Irony is clearly dead.
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Giggle. But yes. Ralston can write well, but seems to be a disaster around anything that touches on economics.
Meh... I don't know if Bill Ralston and churning out two columns a week is a happy marriage, full stop. (And that's not meant as a snide bitch at Ralston -- I couldn't do it either.)
Russell is right, he can write well, and if I was a publisher I'd be trying to get a book contract with his name on it. Something great (and enormous fun) could result if BR had to sit down and develop a well-constructed, thoroughly researched and intelligently edited thesis at more length than a 800 word column.
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Craig: By God, I enjoy your writing even though I have been on the end of a couple of your barbs. Don't agree with your politics but hey..I still enjoy reading your colourful prose. As for Bill, I cannot say I enjoy any column he writes. I just get the feeling he has been promoted 1 step beyond his capabilities
Keith: Well done, I just the feeling though that the masterplan will be well over the heads of voters who wouldn't see past their current frustrations come election time. Mike Moore in the latest Listener remembers they had to convince voters where the money was coming from, now we debate how is it best spent. How much has changed under MC's watch.
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There is an article in today's BusinessDay (not yet online AFAICT) arguing that core interest rates are running at 1.9% which is not all that high. My understaning of the argument is as follows.
This figure excludes fuel and food. The argument for focusing on core rates is that we try to keep interest rates low in order to remain competitive in a global economy. Given *all* nations are facing similar fuel / food inflation we should not worry about that impact when controlling inflation through mechanisms such as interest rates.
Indeed, in other countries with similar inflation levels interest rates have been dropped. In summary, NZ's higher rates are making us uncompetitive for no good reason.
I think Cullen has scope for his splurge even if the downturn is not as bad as predicted.
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Don I take it you mean core inflation not 'core interest rates'?
There's actually an interesting debate to be had about just how harmful moderate levels of inflation are, but I think the problem with the argument you cite is that international competitiveness is unlikely to be the most important reason for wanting to fight inflation.
Stagflation, if that is what it is to be, does offer a real dilemma though - and there's certainly a case to be made for living with some inflation rather than kicking your economy when it's down.
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Sounds pretty bogus to me - I don't think it's actually possible to control inflation to a 3-6% range without running the risk of it spiralling to double figures before you know it.
But National's core constituency (new Holden V8, beach house, speedboat, mortgaged to the eyeballs) would *welcome* inflation as it would devalue their debts and get them out of the rapidly rising poo.
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Terence - yes, inflation rates. Sorry.
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Keith I can’t see what basis you could have for concluding that the Cullen has a “master plan” for discretionary fiscal policy. The idea that he has been running surpluses for seven years in anticipation of a looming economic crisis is nonsensical.
Fiscal policy under Cullen has had two distinct periods. In the early years, the government was making a concerted effort to increase the surpluses in order to implement the New Zealand Superannuation (“Cullen”) Fund. But in the later years, the government has found itself with surpluses much larger than required. This was not a policy decision; this was a direct consequence of Treasury underestimating revenue. The high surplus era is an accident of history.
If we ignore Cullen’s rhetoric and look at the Budget projections from 2005 onwards (the cash balance in particular), it is clear that the government has always intended to reduce the surplus (and dish out a massive fiscal stimulus), even as it paid lip-service to inflation warnings from the Reserve Bank. It is only continued revenue surprises that have frustrated the government’s plans (and averted the stimulus).
It is perhaps fair to characterise Cullen as a conservative finance minister, in the sense that he’s targeted fiscal surpluses (in addition to the Cullen fund), and used revenue surprises to permanently pay off debt. But in both these respects he was effectively continuing the policy preferences of the National finance ministers who preceded him. And the exceptional revenue growth over his tenure has meant that no trade-off was required between maintaining rapid rates of spending growth (by historical standards) and running large surpluses. Even on the spending side, Cullen’s conservatism is overrated: the easing budgetary pressures from falling social welfare and debt-servicing expenditure (as a share of GDP) left plenty of room to increase discretionary spending.
But to return to your main point, you don’t need to be running constant fiscal surpluses to be able to provide a fiscal stimulus. The standard fiscal target is a budget that is balanced over the economic cycle, not surpluses large enough to ensure that you remain in surplus all the way through the economic cycle.
And to put the potential fiscal stimulus required in perspective, the US (with real economic problems) just enacted a one-off stimulus of 1% of GDP. The government’s projected fiscal stimulus for the 2008 and 2009 June years (as per the HYEFU) is already around 1% of GDP per year already, despite Treasury forecasting completely normal GDP growth over this period.
Nor is it the case that fiscal stimulus is or would be good economic policy (with the exception of the automatic stabilisers, unemployment benefits and the like). Conventional thinking still puts fiscal policy as a last line of defence required only if monetary policy has failed (or seems likely to be ineffective).
Fiscal spending is slow to enact, which makes it a very clumsy method of boosting the economy. If Cullen waited until we definitely “needed” fiscal stimulus, it would tend to be too late; if the stimulus is provided early and the recession doesn’t eventuate, it’s hard to take the spending back and, as you say, you’d have an inflation problem. And most government spending programmes created with the intent of providing stimulus tend to be poorly suited for the task (e.g. road-building etc). If you want stimulus, giving out the cash directly (via tax cuts/rebates and increased welfare payments) is probably the best way to do it, even though there will inevitably be some leakage to savings.
Keith, if you have evidence that Cullen is an avowed Keynesian who believes that discretionary fiscal expenditure should play an important part of economic stabilisation policy, I’d be interested in hearing it. Otherwise I’d regard the idea of fiscal stimulus as a convenient canard that allows the government to again justify doing what it has been planning to do for four years now.
Having said all that, I am no problem with the government reducing the surpluses from an inflationary perspective. Pages 6 and 7 of the most recent Reserve Bank monetary policy statement give a good overview of how the Reserve Bank responds to fiscal policy. The key point is that a decrease in government savings (ie fiscal stimulus), whether expenditure or tax cuts, would require a transition period (not permanent) of higher interest rates to increase private savings. In a miracle world the reduction in government savings would be timed to coincide with an endogenous increase in private savings (as you’d expect in a recession) thus eliminating the need for higher interest rates. In reality, this timing is nigh on impossible. If we accept that the government is running structural surpluses that exceed requirements (since there is no debt left on a net basis), then a transition period of higher spending and higher interest rates becomes inevitable.
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I've been really impressed by Cullen's non-spending, save for a rainy day economic plan - it's what we all ought to be doing in our private economic life, save and pay down debt when things are doing well, borrow some to tide you over when things are tough - the problem of course is that, just like our private economics, it's so much easier to spend than save or pay off debt, especially when you're getting a bit flush, and borrowing when things are tough can be a real trap
Anyway I'm impressed - politicians usually don't have this much self control
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PS: (I'll be equally impressed if the Nats do the same thing)
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Yikes - hefty contribution there, Christopher. You make excellent points.
About the surpluses, yes, they are partly a result of Treasury's underestimation of revenue, but the government was budgeting for a surplus anyway - the accident of history just added to the scope.
And yes, they're partly a result of decreasing costs in social spending, too, but I don't think that the action of automatic stabilisers detract from Cullen's cred as a Keynesian economist.
And I didn't suggest that he needs to run a constant surplus. The whole point of running a surplus is so that you can spend it at some point down the line. I think you mistook me on this point.
But the point we're trying to address here is whether Cullen ran a surplus with the specific intention of saving up for a fiscal stimulus package at some point down the line, right? That this point wasn't at 2006 or 2007 and that revenues remained strong doesn't detract from that.
The point I'm trying to make is that there was money that could have been spent that wasn't - that Cullen's political efforts ensured that the surplus was higher than it would otherwise have been under a National or even another Labour Finance Minister, and that this effort was part of his active interventionist outlook. I can't read his mind, of course, so it could well be political expediency rather than doctrinal adherence that's driving him, but my point is that this was a long time coming.
In support of your argument, I've just reread this interview I did with him in 2005, where he says:
I believe that one of the secrets of fiscal management is to allow the automatic stabilisers to work as best as you can, rather than actually acting consciously pro-cyclically or counter-cyclically, which assumes you can pick when the turning points are.
It's bad enough the Reserve Bank having to make those decisions, it's terrible if you've got someone else in the economy trying to make them as well - and probably making different ones.
The thing that went wrong with Keynesian fiscal management in the post-War era - and you can see it in this election campaign - it very easily degenerates into one-sided Keynesianism, where you spend at the top of the cycle, because you can afford to do so, and you borrow at the bottom of the cycle, because you need to to stimulate the economy - and so you're *always* turning towards a deficit! [laughs] And so you're always building up debt, and never paying it off! [laughs]
Will have more of think about this.
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WH,
The idea that he has been running surpluses for seven years in anticipation of a looming economic crisis is nonsensical.
Fiscal policy under Cullen has had two distinct periods. In the early years, the government was making a concerted effort to increase the surpluses in order to implement the New Zealand Superannuation (“Cullen”) Fund. But in the later years, the government has found itself with surpluses much larger than required. This was not a policy decision; this was a direct consequence of Treasury underestimating revenue. The high surplus era is an accident of history.
Keith can answer for himself, but I personally doubt that the surplus era can be fairly described as an "accident of history".
First, Labour originally won power on a promise to raise taxes and thus improve the government´s fiscal position. Second, Cullen has maintained the surplus by resisting strong and ongoing pressure to increase spending and/or cut tazes at a rate proportional to the increase in government revenue. Third, New Zealand is better off because Cullen has run a contractionary fiscal policy and has not balanced spending over the business cycle as you propose. Fourth, Treasury is known to make conservative estimates of revenue (perhaps underestimating revenue under Labour and overestimating it under National, but I don´t have the figures to support this).
The question of whether the New Zealand economy will require further fiscal stimulus in the light of recent events remains moot. There would appear to be scope for changes to monetary policy should stimulus be required (ignoring for present purposes the problems in the housing market). However, economic growth is not the only consideration of government policy and IMO there are powerful social equity reasons to prefer government spending to tax cuts, a point that is clearly not lost on Cullen.
owever, there is now overwhelming political pressure (generated by years of debate about tax cuts) to reduce the size of the surplus, and this pressure can no longer be ignored, even if many of us wish it could be. If fiscal stimulus is needed - and I am not suggesting that it is - the New Zealand Government would appear to be well placed. Ralston´s column was poorly argued and Keith was right to point that out.
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Firstly, I agree that Cullen initially targeted higher surpluses in order to implement the Cullen fund, and it is probably fair to say that the Cullen fund is a policy decision that is hard to envisage under alternative finance ministers.
Using the surpluses as a measure of fiscal conservatism tends to be misleading. Looking over the fiscal accounts, I think it is clear that Cullen views a balanced budget as a fiscal position that results in government debt remaining constant as a % of GDP. In effect, this means running a cash deficit of around $2bn (given current level of GDP and nominal growth rate). Spend any more than this on an ongoing basis and the debt ratio would start to climb.
The table below has the Budget projections for the cash position (and the debt ratio to GDP) for each of the last four budgets. The outlook at each budget was remarkably similar: Cullen intended to (substantially) reduce the cash surplus over the next few years, to the point where the cash deficit was such that the debt trend would be flat. In other words, to spend all that he could without going into deeper into debt. The fact that he didn’t succeed is due to upside surprises in revenue and hence spare cash.
Year 1 is actual, year 2 is an estimate, years 3- forecast
Budget 2004
FY 2003 2004 2005 2006 2007 2008
Cash 1217 135 -808 -1176 -1466 -1541
Debt 28 24.7 22.6 22.3 22 21.8Budget 2005
FY 2004 2005 2006 2007 2008 2009
Cash 520 2413 30 -1606 -2776 -1391
Debt 26.2 23.7 23.2 21.9 21.8 21.2Budget 2006
FY 2005 2006 2007 2008 2009 2010
Cash 3104 1755 -1468 -2110 -2706 -1101
Debt 23.2 23 21.9 21.9 20.7 19.4Budget 2007
FY 2006 2007 2008 2009 2010 2011
Cash 2985 1720 -976 -1687 -1649 -1426
Debt 22.6 23 23.3 22.5 21.3 21.8To reiterate my earlier point, these decisions to spend to the limit were made against a backdrop of excellent fiscal conditions (which allowed for strong spending growth without reducing the cash surplus) and an inflationary outlook that argued for restraint.
So, Cullen fund aside, I don’t see this as consistent with the idea that “Cullen’s political efforts ensured that the surplus was higher than it otherwise would have been… and that this effort was part of his active interventionist outlook”. In fairness, it is true that the National 2005 election fiscal strategy would have involved lower surpluses and higher debt (relative to the budget projections of the time, actual revenues have been higher than the Nat’s assumed).
In fact it would seems that the main rationale for Cullen’s recent budgets has been to put the opposition in a position where they must either increase debt or cut (intended) spending in order to implement tax cuts. There’s nothing inherently wrong with this fiscal strategy from Cullen, but it’s neither fiscally conservative nor meritorious from a Keynesian perspective.
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WH,
http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10491097
Cullen´s speech touched on many of the points you raised.
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A lot of points I could address: I'll confine myself to a few:
1. A boost of some sort - either extra spending or tax cuts - has already been budgeted for. Cullen set aside an extra $3 billion unallocated spending for the next financial year (roughly $1.2 billion of which will go in the company tax cut on April 1) and another $2 billion for each of the ensuing two years.
This unallocated spending practice was begun some time ago: the idea is the minister sets aside a sum for new measures the following year and/or as a buffer. The highest it ever got was $800 million under Birch, so having several billion is a huge hike. It's an election war chest. Note, the current sum was set before the dairy price surge, which will add about $400 million in tax revenue.
Secondly, the biggest single reason for the govt's fiscal 'surprises on the upside' is the economy is performing better than anyone - not just Treasury but private sector economists - expected. This began with the post-Asia Crisis recovery in early 1999 - we got over it far quicker than we recovered from earlier, similar crises. The main reason seems to be businesses are a lot more flexible now. As for why that is, quite a bit of credit has to be given to the reforms of the 80s and 90s.
Thirdly...as a matter of historic record, Cullen is right when he says we've historically practiced one-sided Keynsianism. We started that in the Holyoake years; then Kirk and Muldoon intensified it.
But...when you continually collect billions more than you need in tax - there should be some adjustments to the tax thresholds. That has to be done carefully if there are already inflationary pressures in the economy.
Tax cuts don't cause inflation, despite what some are assuming. But they can add to inflationary pressures if those pressures are already there.
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WH,
the biggest single reason for the govt's fiscal 'surprises on the upside' is the economy is performing better than anyone - not just Treasury but private sector economists - expected... As for why that is, quite a bit of credit has to be given to the reforms of the 80s and 90s.
The obvious alternative explanation - the argument Cullen is making in his speech - is that centre-left economic policies result in greater (and more fairly distributed) economic prosperity than centre-right economic policies. The idea that the ´reforms`of the 80s and 90s´explain our current economic performance, but that Cullen´s policies have nothing to do with it, is, IMO, kinda flawed.
Incomes in New Zealand aren´t great, and I can understand why everyone wants more money in their pocket by way of a tax cut. The regressive features of tax cuts can be mitigated by good design, so as long as we aren´t sacrificing our long term interests (improving education, electrical and telecommunications infrastructure and Aucklandtown) for short term gain (which I suspect we are) then how can I reasonably object.
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improving education, electrical and telecommunications infrastructure and Aucklandtown
I was with you, right until the end, and then you lost me.
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The idea that the ´reforms`of the 80s and 90s´explain our current economic performance, but that Cullen´s policies have nothing to do with it, is, IMO, kinda flawed
Not quite what I said. I did say the reforms had to be given quite a bit of credit for it, and I'll stand by that. Partly its the greater business flexiblity, partly its the commitment to low inflation; also the steadier fiscal policies (a product of both the Reserve Bank Act and the Fiscal Resp. Act); also the cheaper imports because of low/no tariffs.
The fact Labour hasn't really rolled any of those reforms back (one major exception being the ECA) should tell you something. Shit, for all their outraged rhetoric about the benefit cuts of 1991, Labour hasn't reinstated those benefit levels.
And as I pointed out, the surge in growth began early 1999, post-Asian Crisis. The economy was already on the upswing when Labour came into office.
Poltitically, that is ideal for any new government. National benefited from this in 1949 and again in 1960: so did Labour in 1935. It means you can blame all the bad stuff on the previous mob. It's good for the partisan raspberry-blowing side of politics, if you like that sort of thing, but we shouldn't base policy analysis on it.
I also didn't say Cullen's policies have contributed nothing.....He's been careful to avoid the more obvious traps of previous left wing governments. But specific, new policies which have contributed to economic growth? Hmm. He's put quite a bit of money into infrastructure, which was one major imbalance which needed redressing. Linked to that is the policy of encouraging state owned enterprises, esp the electricity companies, to be more aggressive.
Arguably, this could have been done more easily -eventually - by selling them off, but that's a separate argument.
He's also done wonders for the funds management industry, although I'm not sure that is showing up in GDP just yet (although it will be in the tax take).
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You've said that Cullen/Labour have stuck with the RBA, but I think rather crucially, they eased the Bank's target from 0-2 to 1-3% and got rid of Dr Brash- whose tenure in control of the RB was not marked by rapid growth.
I've talked to a few business people who reckon Brash killed sparks like a vigilant firefirghter. One said he had his boot on the economy's throat, and any sign of life, he stomped down hard. Brash- and the RBA- certainly got inflation down, from a runaway level.
But easing up from 0-2 (and getting rid of Brash) came at a moment when commodity prices took off- and there was plenty of (relatively) cheap credit to be had. It was like adding just a little petrol to the fire. I think that was something Cullen pondered deeply in opposition, and it seemed to help significantly.
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