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Tim Watkin: Reluctant Keynesians shaken into spending - again

opinion

By Tim Watkin

Published: 2:50PM Friday March 04, 2011 Source: ONE News

  • PM John Key, wife Bronagh and mayor Bob Parker mark the two minutes' silence in Christchurch. (Source: Getty Images)
    PM John Key, wife Bronagh and mayor Bob Parker mark the two minutes' silence in Christchurch. - Source: Getty Images

From: pundit.co.nz

The earthquake will ask some tough questions of all politicians this year - What will they cut? How much can they borrow? Either way, the government's austerity plans are on hold.

Even as the funerals begin, the release of names continues to give flesh and blood to the tragedy and grief keeps clutching at us, the political and economic reality of this earthquake is starting to come to the fore. Like liquefaction.

Prime Minister John Key has just announced $120 million to carry Christchurch through the next six weeks, with workers who can't work getting $400 a week, via their employers, until early April. That's ten times the amount allocated for similar purposes after the first quake. And good on 'em.

The compensation comes after Key said this morning that the cost of the re-build, from "back of the envelope" calculations, would be around $20 billion. Even if you say it quickly, the $5 billion that the government reckons it will need to contribute towards that, on top of the EQC funds, the re-insurers and locals' private insurance, is a huge amount of money. And as these things go, it's probably an under-estimate.

All of which has massive implications. The Prime Minister also said the earthquake would have a "substantial impact" on this year's Budget, in May. For example, can the government stick to its goal of reducing new spending to close to $800 million. Bill English, in his state of the economy speech less than two weeks ago, said:

We plan to reduce that new spending allowance in Budget 2011 to around $800 million to $900 million. I would like to think this is just a start and that at least some of this restraint could continue into future budgets.

Such thinking has been upended by that mighty shake.

You know, it's become a pattern for this government. Every time they try to tilt right and play the austerity card, they get stopped in their tracks. These reluctant Keynesians keep being forced to get the cheque book out.

National MPs were compelled politically to promise spending (and limit cuts, to say student loans, KiwiRail and the like) to win the 2008 election, then introduce a stimulus package to weather the recession (although most of the stimulus came in the form of tax cuts, which aren't the most targeted or reversible instruments, and which they ideologically were desperate to do anyway). Just as the razor blade was starting to be sharpened, the first earthquake forced the promise of more government spending, from wage subsidies to infrastructure builds.

And now this.

When it comes to vast sums like this, political economics becomes very simple. You need more money and it has to come from somewhere - you either have to cut or borrow.

Naturally, a right-wing government will favour the former, because it wants to do that anyway. And this will become one of the big questions in the next few months. What's going to have to be sacrificed to pay for Christchurch?

It's the perfect cover for those who prefer small government anyway, except that sacking more public servants and cutting more night classes aren't going to come close to picking up the tab. So you look to the big ticket items?

Will National choose to go farther than intended on welfare cuts? Will defence upgrades be postponed? Will some of the highways of national significance be seen as less significant? Maybe we could skip a prison or two? What about the budgets for the Rugby World Cup? Whanau Ora? Broadcasting? Youth Affairs? The Families Commission? And on and on...

Those who prefer bigger government will be fearful of opportunism by the government in coming months, but on the other hand will be pleased that the stimulus continues, contrary to the government's political instincts.

Not too pleased though, because the political impact extends to them. Labour, for example, might have to re-think its tax-free zone on the back of this disaster.
But what about the other side of the equation? The borrowing?

Remember this  ?

"What is clear is that the rapid rise in net foreign liabilities is unsustainable.. Simply servicing the existing debt of almost $170 billion is a strain on the economy. These concerns are front of mind for credit rating agencies..."

Or this? "We will need to work fairly hard to reduce [our debt levels]... The government's budget is going to tighten up compared to last year."

That was Finance Minister Bill English on February 17 and February 1 respectively. His was a government "committed to reducing foreign borrowing". Now we're going to borrow many millions more.

Just a matter of days ago, such borrowing more was inconceivable and the indication from the ratings agencies - Standard & Poor's put us on a 'negative credit watch' late last year, you'll recall - was that any more borrowing was not only irresponsible, but impossible. We were up to our eyeballs. I remember National making comparisons to Portugal, Ireland and Spain.

(I'd note that for all the spin around that issue, S&P told the Herald this month that, "Generally, we look at the Government in New Zealand as being relatively small and compared to its peers it's quite efficient", and that it doubted that government cuts could achieve any meaningful savings).

Now, more borrowing is essential, and suddenly it's also no big deal. Moody's sees no reason to alter our credit rating, despite anticipating extra offshore borrowing as a result of this second quake. Our debt ratios would remain in line with our Aaa-rated peers, it says.

The government, if not sanguine, now accepts that borrowing more is possible.

Which prompts the question, how come borrowing that would have utterly buggered our economy a week ago, is now perfectly acceptable? How can both be true and responsible?

Either way, the government books have been turned on their heads, and managing them through this disaster now lies at the heart of this election year.

Read more of Tim Watkin's blogs over at Pundit.

Comment on Tim Watkin's blog below.

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