New Zealanders, Bill English says, are “not brittle. They are resilient. They will do what has to be done.”
And what does he think has to be done? Weather the credit freeze. “By winter next year we will still be talking about the credit crisis.”
Compare 2005. At this point in the 2005 election campaign National and Labour were arguing about how to spend a huge budget surplus. John Key produced fiscal numbers which he said justified milk and honey for every taxpayer, with plenty left to bankroll the health and education systems.
Back then every time the Treasury redid its numbers another billion popped up. From here on for a time (this was written before yesterday’s pre-election economic and fiscal update release) the reverse is more likely.
The extra billions in years past were too good to be true. They came from the magic potion of swelling private debt which fuelled consumption, real estate, financial asset and business booms and so lots of tax.
Michael Cullen doesn’t go big on magic. He offset the private dissaving with heavy public saving. He ran up huge budget operating surpluses, siphoned some into his superannuation future fund, built roads with cash and paid down government debt.
But eventually he, too, joined in the party. In the 2005 campaign he promised big spending to outbid Key’s determination to spend the inflated surplus on tax cuts.
The party is over. A different politics is now required, the politics of austerity.
Households have to get their debt-swamped balance sheets back in order. They have to stop dissaving and, if they can, start saving. To help ease the adjustment pain, most parties agree the government should replace private disssaving with public dissaving — that is, run budget deficits.
In normal times running moderate deficits in tough times and balancing them with moderate surpluses in sunny times is good countercyclical fiscal management.
But these are not normal times.
The painful adjustment needed in private debt and the strong government balance sheet Cullen has accumulated may well tempt kindly governments into vigorous palliative care of a tender electorate. The risk is that they will thereby make the deficit structural — that is, so deep that when the upturn comes the deficit stays.
We already have a whopping structural deficit in our balance of payments current account. Adding a structural budget deficit would have unpredictable effects on the exchange rate and the country’s credit rating.
The way out of structural deficits is hard, as we found in the post-Muldoon 1980s and 1990s. English and Cullen both know that from experience. So does anyone over 40. The under-40s might be about to learn.
How do tax cuts fit in that frame? Cullen’s come to $10.6 billion over the next parliamentary term. English’s, to be announced tomorrow, are bigger. Is this the politics of austerity?
The economic theory behind tax cuts is that they accelerate economic activity. The political theory is that they buy and hold votes.
The economic theory is seldom debated outside economics forums. (ACT is the political exception.) Mostly the political argument is about what should be done by the state and what left to individuals and firms. Essentially National says a bit less of the former and more of the latter and Labour the reverse.
Do tax cut promises buy votes? Yes. The classic example was Labour’s win in 1957 with: “Do you want 100 pounds or not?” But they can also lose votes. Labour ran into a fiscal fix and lost the next election.
The problem for generous politicians is voters’ inclination to bank tax cuts — and spending increases — and then ask what’s next?
National has been promising that faster economic growth will square the circle of bigger tax cuts, no cuts in social services and no danger to the government balance sheet. But faster economic growth than in the past five years is not on the menu this next three years. National’s risk is that it may have generated over-expectations which will not be met.
The alternative is the tack British Conservative leader David Cameron took at his conference last week. He said an incoming Conservative government would be forced to take difficult and unpopular decisions and would need to “keep our nerve and say ‘No’, even in the teeth of hostility and protest”.
We have yet to hear such language here (except from the Greens, who apply it to a different paradigm). Helen Clark has said her spending promises will now be phased and scaled (but not dropped) and pitches for her “experience” as the safer bet in hard times. English has begun to shift: “If we can’t borrow it, we are going to have to earn it.” But Gerry Brownlee on Agenda on Sunday was still very soothing on the spending side and English himself is “confident” of about post-recession growth prospects.
Of course, it is election time and horses must not be frightened. But voters are not dumb animals. More plain talk might actually be good politics — in the longer term.