Margaret Lives – This Government is Not for Turning

People expecting a radical change of economic direction from the Government are to be severely disappointed as a consequence of recent comments made by Bill English and John Key. To use a refrain that was popular during the Thatcher era in Britain, to describe its economic direction, ‘the Government is not for turning.’ Indeed, the Government has appeared to have used the Canterbury Earthquake as an excuse to announce further cuts in existing government spending.

People are being told that the Government needs to find appropriately $800 million as a consequence of the earthquakes and that we can expect nothing in the Budget. However, Key and National’s line would have been more convincing, if they had not been saying it prior to the February earthquake. It was at that point that Key signalled that government cuts and partial asset sales were on the Government agenda. He then used some exceedingly dodgy explanations to justify them, such as comparing New Zealand’s debt to that of Spain and Greece.

Now, the Government and its economist allies in the banks and finance houses are using the earthquake and an IMF report to the Government as ammunition. Apparently the IMF has called for cuts and balanced budgets. Of course, as CTU economist, Bill Rosenberg noted this morning on Morning Report, the IMF would recommend this solution regardless of the circumstances. The IMF’s refrain is comparable to, not as much as a needle stuck in a groove of a record, but a record that simply has one track and one verse.

But, what I found to be the really interesting thing about the discussion this morning between Rosenberg and Westpac’s ‘pet’ resident economist, Dominic Stephens was the belief that Stephens still had in the free market and spending cuts actually delivering the economic and social goods not only for Christchurch, but in the longer term for New Zealand as a whole. The recession and the resulting failure of market economics as a practical solution (not that it ever was) appears to have simply passed him and his colleagues by. Cutting spending and lower personal taxes, Stephens croaked was the only solution. GST had to increase he said. He made some references to the damage that having a ‘high’ 39 cent marginal tax rate had caused.

Further, Stephens was worried about capital gains as this was causing people not to invest in productive areas of the economy but, to speculate in unproductive areas such as land. Yes, quite. I am not disagreeing with him in this respect, but I would observe that this is an issue, mainly because New Zealand is one of the few countries not to have a capital gains tax. This is partially thanks to the efforts of people such as bank economists who have actively campaigned against it.

Labour and the Greens have gone on record as pointing out how damaging such cuts could be at this point. They are correct. As Rosenberg pointed out this morning, cuts at this point, especially since the recession is not over could have the undesired effect of prolonging it. It brings to mind Maynard Keynes’s famous observation during the Great Depression of the 1930s that the Budget could be balanced while lying on your back.

However, despite their comments, both Labour and the Greens are very light on detail. In my opinion, what is needed is an active government policy of investment and actually more government spending, this will mean higher taxes (read more tax bands)on those on higher incomes and, importantly, the imposition of taxes on areas that are not currently taxed, such as capital gains and bank transactions. Bank transactions have become a hot issue in Europe due to the amount of money involved. Taxing transactions especially those on large corporations would raise more money that GST would ever hope to. And, it would be progressive, something that GST is not. The other area in which New Zealand is being short changed is the area of free trade. New Zealand is in the process of negotiating yet another free trade deal, in this case the TPP (Transpacific Partnership). This deal involves a number of nations, including the US and the outcome of such a deal could be very detrimental to New Zealand’s economic, financial and social sovereignty. Every time such a deal passes, it weakens the productive base of the economy and the ability of people and the government to determine their own economic and social outcomes.

New Zealand stands at a cross roads. We can either build an egalitarian social democratic economy and society or continue on with the half baked failed free market economic theories that are the real cause of our present distress and have caused practically every major economic recession and depression since the 1870s. The choice is ours.

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