When the new government manoeuvred its way into power in New Zealand last year I was prepared to give it the benefit of the doubt. The coalition agreements signed by the parties didn't look too extreme - they were promising to spend a lot more money but they weren't proposing to raise income taxes in this term. Their regional development policies, anti-immigration stance and ambivalence on the Trans-Pacific Partnership trade agreement actually looked a lot like Donald Trump's populist platform (although there is little in the latter that I support). The problem is that what was said in the coalition parties' manifestos and agreements was only part of the picture, as is now being revealed.
This government believes it can govern by fiat - the prime minister, Jacinda Ardern, demonstrated this when she announced her ban on oil and gas exploration without even taking it to cabinet. Other policies that her government has announced include new petrol taxes, the introduction of a Zero Carbon Act (which, based on the government's own numbers, is estimated to reduce our GDP by between 10% and 22% by 2050), increased welfare payments across the board, and raising the minimum wage to one of the highest in the Western world. The government is also reviewing tax, through its Tax Working Group, and all indications are that it is likely to introduce a capital gains tax.
New Zealand used to be known for its light-handed commercial regulation but even under the previous National Party-led government, businesses faced a raft of new, expensive and intrusive regulations such as a new and far more onerous health and safety act, an emissions trading scheme, and further controls on development in the growth-killing Resource Management Act. While the previous government lowered company taxes early in its term, most Western countries have reduced theirs further with the result that New Zealand is now one of the most highly-taxed countries for business. All of this precipitous policy-making has understandably caused a crisis of business confidence and the new government's response has been to chastise business leaders for their lack of enthusiasm. Their bewilderment at the sudden loss of business confidence shows they are a bunch of dogma-driven, wilfully-ignorant, arrogant fools.
Sooner or later, as Ayn Rand said, Atlas shrugs. Most people are happy to go along with being taxed and regulated, accepting the view that some government intervention in the economy is the cost of a democratic society, but there is a tipping point at which the productive members of society refuse to continue to be the milch cows for the unproductive. This tipping point is recognised in economics by the Laffer Curve - the empirical observation that continuing to increase tax rates ultimately results in lower revenues. Of course socialist governments often solve the problem by bringing out the guns - as we have seen in Venezuela - but history proves that free men and women are far more productive than slaves and that liberal, capitalist societies outperform repressive ones on every measure. Wise governments recognise this and backoff on the socialist policies - as the government of Sweden has done in recent years.
I have written before about how New Zealand's so-called 'rock star economy' wasn't worthy of the name even before the current jitters. It will be interesting to see whether this coalition government backs off on some of its ill-considered, dogmatic policies. If it doesn't, I think New Zealand will continue to slide into economic ignominy.
Showing posts with label Economy. Show all posts
Showing posts with label Economy. Show all posts
Tuesday, August 21, 2018
Saturday, June 22, 2013
Frailty of Global Economy is Obvious
This week we have seen the signs that the global financial crisis (or "GFC" as it has become known after five years of familiarity) is far from over. The US stock market lost more than two percent of its value on Thursday, the Australia market suffered similar losses, China is reporting that business purchasing for the year is much lower than expected, and here in New Zealand our own stock market was down 1% (on top of news that GDP growth is an anemic 0.3% for the March quarter instead of the predicted 0.6%).
What caused the market jitters? Well, US Federal Reserve chairman, Ben Bernanke, made an announcement on Wednesday that set the cat amongst the financial pigeons. Those of you who follow the US economy will know that the Federal Reserve has been 'printing' money and injecting it into the economy at a rate of $85 billion per month (that's a trillion dollars, or around $3000 for every man, woman and child in America, per year). Ordinarily, printing money at that rate would produce fairly massive inflation but Bernanke, who is almost too clever by half, has been buying huge amounts of Treasury Bonds and mortgages (to the extent that the Federal Reserve is by far the largest purchaser of both), thereby keeping interest rates down and containing US Dollar inflation.
Of course, all this money printing and economic sleight of hand can't go on forever. You can't keep writing yourself cheques and expect everyone you buy stuff off to keep honoring them - well, not unless everyone else is completely stupid. There have been signs recently that the world is starting to regard the US economy as much too risky and the US Dollar as something less than the iron-clad reserve currency it has been for many decades. The reason the Federal Reserve has to buy all those Treasury Bonds is that China no longer wants them - not at the low interest rates the US Treasury expects to pay at any rate - and we're seeing the impact in the declining value of the US Dollar.
So what did Bernanke say that spooked the market? Did he call an end to his trillion-dollar a year printing of money? Well, not exactly. He signaled that he might start reducing it towards the end of this year with a view to ending it by the middle of 2014. Hardly what you would call cold turkey, but enough for the markets to suffer their biggest fall this year.
I've been predicting in this blog that the world economy is going to get a lot worse before it gets better. The economic situation in Europe is not improving and the US is plainly addicted to printing money. There is no way out of this except for a major correction that restores equilibrium between the money supply and real market demand for capital. Interest rates must go up signficantly to bring about this correction and that will force a corresponding correction in asset prices, particularly in major capital markets such as real estate and stocks. This loss of equity will have huge flow-on effects for a while on on business investment. In other words, before this is all over many more people are going to lose their savings, their houses and their jobs and we're all in for more pain before things get better.
What caused the market jitters? Well, US Federal Reserve chairman, Ben Bernanke, made an announcement on Wednesday that set the cat amongst the financial pigeons. Those of you who follow the US economy will know that the Federal Reserve has been 'printing' money and injecting it into the economy at a rate of $85 billion per month (that's a trillion dollars, or around $3000 for every man, woman and child in America, per year). Ordinarily, printing money at that rate would produce fairly massive inflation but Bernanke, who is almost too clever by half, has been buying huge amounts of Treasury Bonds and mortgages (to the extent that the Federal Reserve is by far the largest purchaser of both), thereby keeping interest rates down and containing US Dollar inflation.
Of course, all this money printing and economic sleight of hand can't go on forever. You can't keep writing yourself cheques and expect everyone you buy stuff off to keep honoring them - well, not unless everyone else is completely stupid. There have been signs recently that the world is starting to regard the US economy as much too risky and the US Dollar as something less than the iron-clad reserve currency it has been for many decades. The reason the Federal Reserve has to buy all those Treasury Bonds is that China no longer wants them - not at the low interest rates the US Treasury expects to pay at any rate - and we're seeing the impact in the declining value of the US Dollar.
So what did Bernanke say that spooked the market? Did he call an end to his trillion-dollar a year printing of money? Well, not exactly. He signaled that he might start reducing it towards the end of this year with a view to ending it by the middle of 2014. Hardly what you would call cold turkey, but enough for the markets to suffer their biggest fall this year.
I've been predicting in this blog that the world economy is going to get a lot worse before it gets better. The economic situation in Europe is not improving and the US is plainly addicted to printing money. There is no way out of this except for a major correction that restores equilibrium between the money supply and real market demand for capital. Interest rates must go up signficantly to bring about this correction and that will force a corresponding correction in asset prices, particularly in major capital markets such as real estate and stocks. This loss of equity will have huge flow-on effects for a while on on business investment. In other words, before this is all over many more people are going to lose their savings, their houses and their jobs and we're all in for more pain before things get better.
Wednesday, September 19, 2012
The Economic Outlook for New Zealand
This morning I went to a breakfast lecture given by ANZ Bank chief economist, Cameron Bagrie. The high point of the morning was the excellent buffet breakfast, which is not to say Bagrie didn't speak very well - it was just that his message was very downbeat. That makes him an unusual beast in the economist herd at the moment, with many of his profession both here and overseas being little more than mouthpieces for their profligate governments.
The message was simple: New Zealand is one of the most indebted nations in the world (when public and private debt is included), up there with Spain and Greece. While New Zealand is enjoying economic growth in the 1 - 2 % range, even that modest level growth is built on record high commodity prices in recent years, which are now heading south very quickly. Add to that the very slow recovery of our second largest city, Christchurch, from its devastating earthquakes and the fact that all our key export markets are in a worse economic state than ourselves, and you have solid evidence for a poor economic outlook.
Bagrie saw the solution as being conservative economic management combined with growth from natural resource-based industries such as mining, water and energy. He said that finance markets saw both Finance Minister Bill English and opposition finance spokesman David Cunliffe as fiscally conservative and I suppose when you compare them with Ben-$400Bn-QE-per-month-Bernancke in the United States and the new President of France who wants to increase the government's share of GDP from 50% to 60%, they do look pretty conservative. Personally, I see Bill English's expectation of a balanced NZ government budget by 2014/15 (on the condition that we achieve 4 - 5 % economic growth) as a long odds gamble, but it's all relative, I suppose.
The problem with Bagrie's solution to our grim economic outlook is that he was preaching to the choir. The audience was made up of ANZ Bank's business banking customers. These are predominantly owners and managers of small to medium sized businesses. I imagine that almost everyone in the audience agreed with Bagrie - let's exploit our natural resources to drive economic growth. But New Zealanders in general, and the National Government in particular, do not seem to really care about economic growth and would rather be dictated to by minority interest groups to whom exploiting natural resources is heresy. In the past three years that it has been in power, John Key's Government has:
So, where does this leave us? I don't think there is much doubt that Bagrie's prognosis, in the absence of a radical increase in political courage by our leaders and a sudden Road to Damascus economic enlightenment on the part of the New Zealand voting public, is correct. We are a train headed for a broken bridge - an economic wreck in the making. And the problem with economic wrecks, as the likes of Greece, Spain and Portugual are discovering (or re-discovering in the case of all three countries), is that they quickly become social and political wrecks too, with riots on the streets and the rise of opportunistic political despots.
New Zealanders are complacent. We think we're immune to the economic 'flu that ails the rest of the world. You don't need to be a noted economist to know that we're not. We are going to catch a very serious cold at least, and we are very poorly prepared to deal with it.
The message was simple: New Zealand is one of the most indebted nations in the world (when public and private debt is included), up there with Spain and Greece. While New Zealand is enjoying economic growth in the 1 - 2 % range, even that modest level growth is built on record high commodity prices in recent years, which are now heading south very quickly. Add to that the very slow recovery of our second largest city, Christchurch, from its devastating earthquakes and the fact that all our key export markets are in a worse economic state than ourselves, and you have solid evidence for a poor economic outlook.
Bagrie saw the solution as being conservative economic management combined with growth from natural resource-based industries such as mining, water and energy. He said that finance markets saw both Finance Minister Bill English and opposition finance spokesman David Cunliffe as fiscally conservative and I suppose when you compare them with Ben-$400Bn-QE-per-month-Bernancke in the United States and the new President of France who wants to increase the government's share of GDP from 50% to 60%, they do look pretty conservative. Personally, I see Bill English's expectation of a balanced NZ government budget by 2014/15 (on the condition that we achieve 4 - 5 % economic growth) as a long odds gamble, but it's all relative, I suppose.
The problem with Bagrie's solution to our grim economic outlook is that he was preaching to the choir. The audience was made up of ANZ Bank's business banking customers. These are predominantly owners and managers of small to medium sized businesses. I imagine that almost everyone in the audience agreed with Bagrie - let's exploit our natural resources to drive economic growth. But New Zealanders in general, and the National Government in particular, do not seem to really care about economic growth and would rather be dictated to by minority interest groups to whom exploiting natural resources is heresy. In the past three years that it has been in power, John Key's Government has:
- Backed down on opening up even very small areas of our national parks to mining
- Allowed various interest groups to hold up the partial privatisation of energy companies, thereby stymying new investment in the sector
- Brought in an emissions trading scheme that has made investment in the energy sector far less attractive
- Got into a fight with Maori tribes about ownership of water rights.
So, where does this leave us? I don't think there is much doubt that Bagrie's prognosis, in the absence of a radical increase in political courage by our leaders and a sudden Road to Damascus economic enlightenment on the part of the New Zealand voting public, is correct. We are a train headed for a broken bridge - an economic wreck in the making. And the problem with economic wrecks, as the likes of Greece, Spain and Portugual are discovering (or re-discovering in the case of all three countries), is that they quickly become social and political wrecks too, with riots on the streets and the rise of opportunistic political despots.
New Zealanders are complacent. We think we're immune to the economic 'flu that ails the rest of the world. You don't need to be a noted economist to know that we're not. We are going to catch a very serious cold at least, and we are very poorly prepared to deal with it.
Sunday, March 18, 2012
New Zealand's Precarious Economic Position
The New Zealand Government has announced in its Budget statement for the last two years that it expects to balance its books by 2014. This seems increasingly unlikely. Like a sunny weather forecast that is corrected as the storm approaches, the Government has been revising its numbers as 2014 approaches. Last year the Government spent nearly 1/3 more than it took in revenue. This year it is projecting still to spend more than 20% more than it takes in revenue and the numbers are still getting worse.
The main problem with the Government's financial outlook is that it is dependent on economic growth. Last year the Minister of Finance was saying GDP growth would reach around 4% by 2014. This seems increasingly optimistic. Our current GDP growth is around 1% and even that is dependent on the highest commodity prices New Zealand has ever experienced. Commodity prices are starting to decline and the trend is likely to accelerate. Add to this the fact that Europe and the United States are still in the grips of economic stagnation in spite of a very tentative recovery in consumer spending and jobs and you have a very risky economic scenario for New Zealand.
The Government has proclaimed that it expects the Christchurch earthquake to add 1.25% to economic growth every year from 2012 to 2016, which is based on a economic misunserstanding known as the broken window fallacy. Rebuilding Christchurch only diverts investment from other potentially more productive areas of the economy and adds costs to everyone (look at the rise in your insurance premiums this year, if you don't believe me).
I am normally an optimistic person but I am more pessimistic about New Zealand's immediate economic prospects than I have been since the late 1980s. If everything goes our way, we may have a modest economic recovery over the next few years, but it won't see the 4% economic growth by 2014 the Government hopes for. And if the world economy does not recover strongly and if commodity prices continue to fall, we will see a significant worsening of our terms of trade with a consequential negative impact on every area of our economy.
New Zealanders need to prepare for very tough economic times ahead.
The main problem with the Government's financial outlook is that it is dependent on economic growth. Last year the Minister of Finance was saying GDP growth would reach around 4% by 2014. This seems increasingly optimistic. Our current GDP growth is around 1% and even that is dependent on the highest commodity prices New Zealand has ever experienced. Commodity prices are starting to decline and the trend is likely to accelerate. Add to this the fact that Europe and the United States are still in the grips of economic stagnation in spite of a very tentative recovery in consumer spending and jobs and you have a very risky economic scenario for New Zealand.
The Government has proclaimed that it expects the Christchurch earthquake to add 1.25% to economic growth every year from 2012 to 2016, which is based on a economic misunserstanding known as the broken window fallacy. Rebuilding Christchurch only diverts investment from other potentially more productive areas of the economy and adds costs to everyone (look at the rise in your insurance premiums this year, if you don't believe me).
I am normally an optimistic person but I am more pessimistic about New Zealand's immediate economic prospects than I have been since the late 1980s. If everything goes our way, we may have a modest economic recovery over the next few years, but it won't see the 4% economic growth by 2014 the Government hopes for. And if the world economy does not recover strongly and if commodity prices continue to fall, we will see a significant worsening of our terms of trade with a consequential negative impact on every area of our economy.
New Zealanders need to prepare for very tough economic times ahead.
Sunday, May 22, 2011
Neither Government nor Opposition Will Solve NZ's Economic Problems
We have finally seen a response to New Zealand's economic problems in the National Government's Budget (problems that were clearly illustrated in the Budget document). But it is hardly a brave and decisive response, delivering only small changes to the state's subsidies for the KiwiSaver savings scheme, slightly less generous conditions on borrowing under the Student Loans scheme (but it is still interest free) and slight adjustments to the Working for Families welfare-for-all scheme that Prime Minister John Key called "Communism by stealth" when he was Leader of the Opposition. None of these things will go far in addressing the New Zealand Government's huge operating deficit. The Government claims it will go into surplus in 2014 but this is dependent on achieving 4% p.a. growth in GDP - an unlikely prospect if the country's recent economic performance is anything to go by.
And what of the Labour Party's policies? Since the Budget Phil Goff, Leader of the Opposition, has announced that Labour will:
1) Establish a Ministry of Children
2) Restore research and development tax credits that National abolished
3) Pay for the above by bringing agriculture into the comprehensive Emissions Trading Scheme (ETS) two years earlier than planned.
Of these policies only the second is likely to have any beneficial economic effect. Establishing a Ministry of Children will be a cost with no benefits (not even to children's welfare, in my opinion) and extending the ETS earlier than planned will only increase the direct costs to the economy of this pernicious scheme, again with no benefits (given New Zealand produces just 0.2% of total global anthropogenic carbon emissions).
So neither party's policies are going to address New Zealand's slide into the sort of economic hardship of the type currently being suffered by the PIIGS countries (as discussed in this blog). This is because neither party contains any politicians with the intestinal fortitude to tackle the problem. Our politicians of all persuasions are pathetic, poll-driven, moral pygmies who would rather see our country become destitute than risk their popularity to implement the reforms that are necessary to generate economic growth.
I believe our politicians grossly underestimate New Zealanders' intelligence and integrity. I believe most New Zealanders understand our current economic plight, especially since the Christchurch earthquakes, and are willing to accept far greater austerity measures than this Government has introduced with its Budget. But it would take a leader with more courage than John Key or Phil Goff have ever shown to risk his or her political career to do what needs to be done.
And what of the Labour Party's policies? Since the Budget Phil Goff, Leader of the Opposition, has announced that Labour will:
1) Establish a Ministry of Children
2) Restore research and development tax credits that National abolished
3) Pay for the above by bringing agriculture into the comprehensive Emissions Trading Scheme (ETS) two years earlier than planned.
Of these policies only the second is likely to have any beneficial economic effect. Establishing a Ministry of Children will be a cost with no benefits (not even to children's welfare, in my opinion) and extending the ETS earlier than planned will only increase the direct costs to the economy of this pernicious scheme, again with no benefits (given New Zealand produces just 0.2% of total global anthropogenic carbon emissions).
So neither party's policies are going to address New Zealand's slide into the sort of economic hardship of the type currently being suffered by the PIIGS countries (as discussed in this blog). This is because neither party contains any politicians with the intestinal fortitude to tackle the problem. Our politicians of all persuasions are pathetic, poll-driven, moral pygmies who would rather see our country become destitute than risk their popularity to implement the reforms that are necessary to generate economic growth.
I believe our politicians grossly underestimate New Zealanders' intelligence and integrity. I believe most New Zealanders understand our current economic plight, especially since the Christchurch earthquakes, and are willing to accept far greater austerity measures than this Government has introduced with its Budget. But it would take a leader with more courage than John Key or Phil Goff have ever shown to risk his or her political career to do what needs to be done.
Thursday, May 12, 2011
Spending like there's no tomorrow
While New Zealand's Prime Minister has been telling us to prepare for an austere Budget 2011, these are the sort of pre-Budget announcements that have been coming out from ministers over the last month:
09 May 2011
Hon Nick Smith
Budget 2011: New fresh water clean-up fund
Environment Minister Nick Smith today announced the establishment of a new contestable fund to help councils and communities clean-up nationally significant water bodies polluted by poor historic management.
09 May 2011
Hon David Carter
Budget 2011: Lifting investment in irrigation
Agriculture Minister David Carter today announced an expanded irrigation fund to support the development of new water harvesting, storage and distribution infrastructure.
05 April 2011
Hon Tony Ryall
Budget 2011: $54.5m extra for mothers, babies
The Government today announced new initiatives for maternity services and to help new mothers and their babies.
04 April 2011
Hon Paula Bennett
Budget 2011: Helping young people into jobs
The Government is investing $55.2 million to get young people into jobs, Social Development and Employment Minister Paula Bennett says.
Have they not got the message? The New Zealand Government is expecting a $16B spending deficit this year - that's $4,000 overspent for every man, woman and child in the country in this year alone - and all they do is announce how they're going to spend more money? What needs to happen before they will get the message that New Zealand cannot afford to keep on spending more from the public purse - national bankruptcy of the type faced by Ireland and Greece?
09 May 2011
Hon Nick Smith
Budget 2011: New fresh water clean-up fund
Environment Minister Nick Smith today announced the establishment of a new contestable fund to help councils and communities clean-up nationally significant water bodies polluted by poor historic management.
09 May 2011
Hon David Carter
Budget 2011: Lifting investment in irrigation
Agriculture Minister David Carter today announced an expanded irrigation fund to support the development of new water harvesting, storage and distribution infrastructure.
05 April 2011
Hon Tony Ryall
Budget 2011: $54.5m extra for mothers, babies
The Government today announced new initiatives for maternity services and to help new mothers and their babies.
04 April 2011
Hon Paula Bennett
Budget 2011: Helping young people into jobs
The Government is investing $55.2 million to get young people into jobs, Social Development and Employment Minister Paula Bennett says.
Have they not got the message? The New Zealand Government is expecting a $16B spending deficit this year - that's $4,000 overspent for every man, woman and child in the country in this year alone - and all they do is announce how they're going to spend more money? What needs to happen before they will get the message that New Zealand cannot afford to keep on spending more from the public purse - national bankruptcy of the type faced by Ireland and Greece?
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