Prudence still the watchword
The appearance of Finance Minister Bill English before Parliament's finance and expenditure committee this week was probably the most comfortable English has had since getting the job eight years ago. Rather than having to defend his actions in coping with the worst recession to hit the country since the Great Depression 60 years ago, he was able to talk of an economy that is looking benign and getting better by the day. The economy grew by more than most of our trading partners last year and is set to do the same this year, tens of thousands more people are in jobs than there were last year and the unemployment rate is falling, the prices of the commodities we sell to the world have recovered and our terms of trade are back to the high levels of a few years ago, and inflation remains under control.
The Government also expects to deliver a Budget surplus for the year. It will only be a tiny one but, as English said, all the indicators show that the Government can now shift its focus from managing a growing economy rather than managing a recession. Last year's bugbear - that the country was in some sort of manufacturing "crisis" - has faded. This year all the talk is of inequality.
As the economy picks up, many wage and salary earners will be hoping to benefit. In the last few years, wages and salaries have risen slightly ahead of consumer price inflation but many wage earners have felt the squeeze as things not caught by the consumer price index, such as house prices, have risen much faster and pay packets have shrunk as businesses have cut overtime and working hours to try to avoid laying people off.
English made some ritual noises to the effect that employees could be expected to feel entitled to share in any pick-up in the economy that may be coming. The Government, of course, has little say in what businesses will pay their employees, but this was a timely nudge to remind business people that the fruits of prosperity should not accrue disproportionately to the owners of capital.
One difficulty with that is that not all businesses are the same and not all sectors of the economy are flourishing equally. Overall growth may be healthy but it is patchy. The Government's efforts to diversify the economy may have been more intense than those of any government in recent times, but the results have been fitful. A disproportionate amount of the present economic vitality is still the product of high overseas prices for dairy products and the inflow of insurance money to pay for the rebuilding of Christchurch. One will taper off once the rebuilding is done and the other is subject to the vagaries of international markets.
One sign that this is no time to be carried away by economic over-exuberance was the Reserve Bank's decision yesterday not to raise its central interest rate. One of the reasons was that while inflation was a bit higher than expected in the December quarter it is still within bank's target level. More importantly, while the economy may be getting near to its long-run capacity, slowdowns in China and Australia, our two biggest export markets, may yet affect New Zealand.
For the Budget on May 15, this all means the Government has some room to, as English put it, "spread some of the benefits of economic growth". But it is limited. Government debt is still very high and rising. Much beyond the $1 billion in extra spending that Prime Minister John Key has already spoken of would be unwise.
Households, too, have got debt back up to near the lofty heights of the days immediately before the global financial crisis. The recovery may be well under way but, for the Government and households alike, the temptation to spend up in the year ahead must be resisted. Prudence continues to be the financial watchword.