A fiscal sugar rush
Australia's economy is giving new meaning to the phrase, Lucky Country. It is unique among developed countries in staving off recession, a fact for which Prime Minister Kevin Rudd is happy to take credit.
Rudd, quoting an Australian Treasury paper, says his stimulus package, including a cash handout to taxpayers, was responsible for the nation avoiding recession. Economists such as TD Securities' Annette Beacher and our own Tony Alexander, from the BNZ, say the Rudd government's chest-thumping is not altogether undeserved. The boost to retail spending was probably the difference, they say. This was enough to get the economy over the line in March, avoiding a technical recession.
It was one hell of a stimulus some A$83 billion (NZ$101b), and it certainly put the New Zealand Government's estimated $10b rescue effort in the shade, even allowing for Australia's greater size. Having just been across the ditch, I can report that the mood is bullish. In other economies people talk of green shoots; in Australia's economic garden, they are admiring the large stalks sprouting all over the place.
Some Australian commentators dispute the effectiveness of the government spending; others say Rudd's stimulus was too large, that it will buy big problems down the track with inflation and public debt.
It's an interesting debate, one that is absent in New Zealand. But then we didn't really have the same order of cash injection to turbocharge the economy, begging the question: did the Government do enough? New Zealand has endured five consecutive quarters of economic contraction and a sixth for the three months to June seems likely. Surely the Government, like its Australian counterpart, could have pulled out a few more stops on the fiscal pump organ to boost domestic consumption?
Finance Minister Bill English seems to be barely raising a sweat and perhaps should be peddling harder. A spokesman for English points to the former Labour government's tax cuts in October, followed by another tranche in April. Then there's the infrastructure spending, totalling $7.5b over four years. About $500 million in planned infrastructure spend has been brought forward to provide economic impetus now. An extra $1b is to be spent on roads by 2011, most of the work, save a Christchurch motorway, to be conducted north of Taupo.
A range of new tax measures affecting small to medium-sized enterprises will change provisional tax thresholds and ease compliance. These should generate about $250m in savings for these businesses, English's spokesman says.
English says he has to walk the line between providing appropriate stimulus and support for jobs and prudence, given the size of public debt. The Government, he notes, is borrowing an extra $40m to meet its existing obligations and new spending promises. European nations, Britain and the United States may have enjoyed a bigger fiscal "sugar rush", but New Zealand also faced a possible ratings downgrade, which would have increased the cost of capital and pushed up interest rates.
New Zealand also did not face the same problems as those countries, Alexander says. "More wasn't needed," he says of the Government's efforts to date. Fiscal and monetary policies have worked well in concert. Interest rates have come down rapidly and much of this has been passed on, although not as much as the Reserve Bank would like.
Alexander is also right in his call earlier this year about the housing market's new stability, while the AA-rated solvency of the banks mean the Government could spend less supporting the finance sector compared with overseas countries. It is critical for New Zealand to maintain its international debt rating, Alexander continues. Even Kiwibank, which previously sourced its funding domestically, now has to go to international markets for money. If the Government gave the New Zealand economy too much sugar, it risked a credit downgrade and rising interest rates at a cost to everybody.
Unlike Rudd's critics, Alexander is less concerned with the prospect of inflation. "Beating inflation is a piece of cake," he says, as long as central banks are nimble enough to quickly tighten as the economy recovers. If inflation does threaten, then recession brought on by a much higher official cash rate is a lesser ill, in his view.
Castigating the Government because it didn't spend as much as Rudd's is a fruitless exercise. Australia's reserves of minerals, oil and gas were always going to provide a stronger basis for economic recovery. As Alexander notes, the difference between New Zealand and Australia's economic performance is not as great as that between Godzone and other Western economies. A small blessing, but let's take it.
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"growth" resulting from government deficit spending is not real growth at all, it is merely consumption borrowed from the future."
http://www.chrismartenson.com/blog/stimulating-train-wreck/25946
So the Aussies borrow 8% of GDP from the future and spray it round the place and call that GDP growth? To get a true growth figure you need to deduct that 8% from the 1% of so called growth. That's a 7% contraction by my reckoning.
When are we going to realise what a bunch of BS we're being fed?
GDP is calculated according to the following formula: GDP = C + I + G + (EX - IM) where C = private consumption I = private investment G = government expenditure EX = exports of goods and services IM = imports of goods and services
Bill Bonner "GDP growth during the Bubble Epoque was really a measure of how fast people were ruining themselves. Seventy percent of the GDP was consumer spending; as consumer spending went up so did debt. The result was a paradox and a shame – at the end of one of the longest periods of uninterrupted GDP growth in history, the typical householder was poorer than he was than when it began".
So the answer? If consumers is unwilling to go further into debt, the Government is. You and your kids will be paying but who cares, that's in the future. Has anyone thought this through?
@David the real economy of New Zealand depends no less on "psychology" or the confidence of the consumer - so long as people are not scared off from buying the economy rolls on
Wall St/the White House are trying to convince the world that the "recession is over" - it's a hard sell, since Americans are in shock -every American knows someone who has lost their money, their jobs, their businesses
too often, we overlook at how people are feeling which is the basis for the economy
by the way... New Zealand Telecom and your other telecoms are spending BIG BILLIONS -is this not a huge (private) stimulus package for New Zealand?
(New Zealand Telecom alone is spending 2.5 billions over two years)
@Steveusa, I don't doubt the PTB are trying to get consumers to spend, problem is they are in deep debt already and incomes are insufficient to resume consumption at previous levels. No amount of la la land green shoots nonsense is going to change that simple reality.
"A similar, if more extreme, picture applies in the USA, where private debt is now 300% of GDP. In contrast to Australia, the USA’s debt ratio began to rise as soon as WWII ended: on average, US private debt rose 2.9% faster than GDP every year until 2008, taking the debt ratio from 45% at the end of the War to 300% now. Deleveraging from this level of debt must exert a substantial break on economic performance, by diverting income from expenditure to debt reduction".
"So the confidence that the vast majority of economists have that the GFC is now behind us, and the “normal” trend rate of growth will resume, is fundamentally based on the belief that credit and debt dynamics do not matter."
"Though the enormous government stimulus has attenuated the immediate impact of debt deleveraging, it has done nothing to reduce the outstanding level of private debt. Instead even sub-par growth has become dependent on continuing government stimuli, and whenever those stimuli are removed, the economy will falter." Steve Keen
http://www.debtdeflation.com/blogs/
Private or Government infrastructure investment that provides real future productivity growth is fine as is bringing forward some projects such as new schools. I have a real problem with borrowing to bail out failed business, direct handouts, cash for clunkers etc. This is completely unsound and will only delay or prolong the inevitable. The economy needs to correct decades of debt build up and malinvestment and that is what will happen, like it or not.
Cheers, David.
Marc Faber what's going on and the likely result of ongoing attempts to stimulate the demand side of the economy. Chilling.
Marc Faber, August 26th on Aussie's "Lateline".
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"begging the question: did the [NZ] Government do enough?"
I'm just glad I'm not an Australian tax payer (or an American or British taxpayer, either, for that matter), they will be paying this back for years.