Can you fix it?: Austerity is not the answer

Last updated 05:00 23/10/2012

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The economy is a complex beast, one that even economists barely understand. This is shown by the vague words they use to describe what needs to be done to "fix" it, or even what they think is wrong in the first place.

That there is a problem is clear - statistics show a shrinking middle class with the country's wealth continuing to consolidate into the hands of the very rich. What is less clear is what can be done about it.

Firstly the dollar - with a high dollar comes cheap imports. Cheap imports of items we don't produce in New Zealand are a good thing, but free trade agreements mean that we can't discriminate between those items, and cheaper versions of locally-produced goods. That puts a lot of pressure on local makers and growers who have to compete.

At the same time exports to other countries are relatively expensive in those countries due to the high kiwi dollar, and local businesses have to discount their products to compete in that marketplace too.

How did the dollar get to where it is? With the international perception that the New Zealand dollar is a stable, well-performing currency, international speculators have been buying into our currency.  This currency speculation has driven up the dollar (currently it's over US80 cents) to the point that it is estimated to be overvalued by 15 per cent. The speculators will likely keep going until they think the dollar must undergo a "correction", at which point it will likely crash.

How can we fix the dollar? There are so many approaches, so many buttons to push and levers to pull that this can seem an insurmountable problem. Some have suggested printing money - artificially inflating the dollar to bring its value down. The problem with this approach is that the cost of food will quickly rise to adjust to the newly devalued dollar, while salaries will likely lag behind. Printing money will actually hurt our buying power in the short term.

One approach that doesn't seem to have been considered is directly addressing the speculators. Taxing the transfer of money from Kiwi dollars to other currencies seems on the face of it to be backwards - making it harder for Kiwis to buy imports cheaply - but that can be fixed with tax rebates for importing goods that match up with the currency tax. In essence, for the majority of us nothing would change except tax would be a little bit more complicated for importers. Where this would help would be that the gap between the effective "buy" and "sell" rates for the Kiwi dollar would increase for the speculators. They would need to keep their money in New Zealand longer to get a return and that return would be lower. Less speculation in the Kiwi dollar should be the result.

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Now, there is some risk to this - speculators might get spooked and pull their money out causing the dollar to undergo a correction - but the risk of letting the dollar get to an even higher value before a correction is worse by far. We can reduce the risk by introducing the tax at a very low rate and gradually increasing it to somewhere around 1 per cent. If we're lucky, speculation will gradually tail off. If not, we're pulling off the plaster quickly and at least we are masters of our own destiny.

Next, the gap between rich and poor. This one is quite simple to fix, if unpalatable to the rich. We need to reduce unemployment, increase tax revenue and increase social services. To see why the rich don't like the idea is quite simple: Unemployment is actually quite good for businesses, providing a willing pool of workers who will work for lower and lower wages - it's one of the forces pushing down salaries. Increasing tax revenue is something for which the rich will have to shoulder the majority of the burden. Worse, increasing social services is the government spending money on something that the rich don't need.

So how do we reduce unemployment? We create jobs. How do we create jobs? We create demand for products and services. How do we create demand? We put more money in the majority of people's hands. So, we reduce the tax burden on those who have less money. This means we need to increase the tax income brackets, so that people can earn more money before they need to pay higher taxes.

How do we increase tax revenue? We have already said we're going to have to increase the tax income bracket levels, which reduces tax revenue - so now we need to increase the tax rate a bit to make up for that. We don't want to reverse the gains we made in getting more money into the pockets of the demand-creators, so we start with the two top brackets and increase taxes there - say, two per cent and three percentage points respectively. That would change the top brackets from 30 per cent and 33 per cent to 32 per cent and 36 per cent, still lower than before National's tax cuts. To help ease people into this, these rates could be phased in 1 per cent at a time, and we could allow them to temporarily reduce their kiwisaver contributions until their finances have adjusted.

How do we increase social services? Just putting more money on the job seekers' benefit isn't a great idea, we need to think smarter. The unemployed shouldn't be treated as just some burden to other taxpayers - they are a vast untapped workforce. There are hundreds of thousands of people around the country, most of whom are willing to work if they had the chance and were treated fairly.

So, we should use those on the job seekers' benefit to improve our infrastructure. The Government is in a unique position as an employer; it can hire people for a much lower cost than anyone else because when it takes PAYE out of a person's pay, it gets to put it back in its own coffers. To give the best chance to the highest number of people, and to be fair to other people who aren't on a benefit but who want to return to work, all these jobs should be part-time and require that you be unemployed when placed. Priority should be given to long-term unemployed.
Some people suggest lowering taxes or cutting government-funded services, but this is shortsighted. Lowering taxes reduces the government's ability to deal with the economic problems of its people and lowering government spending by slashing services is a recipe that has flopped most places it has been tried, notably including Greece.

There are easy things and hard things that need to be done to fix the economy. Austerity is not the answer - we need to look carefully at the budget and tighten our belts a little, but if you want to lose weight you need to watch what you eat and exercise, not look in the knife drawer.

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