Economics: Pride and austerity
By Bob Edlin
While European voters were expressing their disapproval of economic austerity early in May, Finance Minister Bill English was tidying his 2012 Budget for unveiling later in the month. Maintaining an austerity programme was high in his considerations.
He told Parliament – in reply to a patsy question from a party colleague – the Government was committed to attaining surpluses, because that would stop the rise in public debt. It also wanted to achieve a competitive economy and better public services, because in the long run better public services would reduce its costs and a competitive economy would generate more revenue, more jobs and more growth.
A competitive economy was needed to help lift incomes by selling more products to the rest of the world at higher value. And it was important to get the Budget back to surplus so the Government could make its contribution to reducing our economic vulnerabilities by preventing a further rise in public debt.
Prime Minister John Key tackled a more hostile question from Labour leader David Shearer, who asked him if he recalled saying – in 2009 – that New Zealand would be coming out of recession reasonably aggressively by early 2010. If so, had it come out of recession reasonably aggressively?
Key did remember making the statement. He had also said this was “subject to a lot of flux in Europe”.
This prompted Shearer to ask how the Government could continue to blame earthquakes and the financial crisis for the way things had turned out. Six months earlier, he teased, the Treasury had forecast revenue being $1.5 billion higher than the latest figures showed. It had based that expectation on stronger employment, wage growth and business profitability than had been realised.
Key rejoined that the rest of the world had been badly affected by the global financial crisis. That was why Europe’s unemployment rate was around 11 percent, unemployment in Spain was around 24 percent, and the unemployment rate in the UK was over eight percent.
It was also why the UK was back in recession and why Australia had recently cut interest rates. Key wished he could live in a world that could just ignore what is happening in the rest of the world, “but that is not the real world”.
In the real world, European Union leaders were about to hold an emergency summit after voters in France and Greece added their heft to an anti-austerity backlash, threatening to break the Eurozone.
Newly-elected French president François Hollande was demanding a change to the EU’s economic policies and a shift from austerity to growth. In Greece, voters overwhelmingly rejected austerity measures that were a condition for bail-out arrangements.
Those developments and the uncertainties they heightened were reflected in the Reserve Bank’s latest “Financial Stability Report”.
It supported the Government’s aim to restore its Budget surplus, contending this would help contain the national debt and ensure the Government can respond to future downturns. But it identified global financial instability as a source of risk and warned that renewed financial market turbulence could increase the costs of borrowing.
That, English argued, was another reason for consolidating the Government’s fiscal position while borrowing costs were relatively low.
In other words, he would stick with an austerity programme and restore its Budget surplus so the Government could contribute to reducing the country’s vulnerabilities by preventing a further rise in government debt.
But events in Europe were showing the debt and currency crisis was taking a political toll. Of 17 governments in the Eurozone using the single currency, The Guardian observed, 10 had been drummed out of office in little more than a year, more often than not directly because of the crisis. The mass voter rebellion against incumbents had begun in Ireland in February last year. Not all countries had gone to the polls since the austerity path was taken.
The Key Government has less than 30 months in which to main its slender grip on public support while also keeping a tight lid on public spending. M
Bob Edlin is a leading economic commentator and NZ Management’s regular economics columnist.
© NZ Management magazine June 2012