A Christmas Package of Substance

Gareth MorganPolitics

Gareth Morgan, Director of Gareth Morgan Investments

The economic package will be pivotal in determining whether recent political ‘change has been picayune. To prove it isn’t the government must deliver significant structural reform in public sector outlays and avoid the fiscal trap that terminated Labour as effective government. That trap of course was the failure to actually deliver meaningful fiscal control and instead rely on promises of gigantic “medium term fiscal savings” flowing from questionable “fundamental changes”. The days are long gone when government can expect markets to drop the price of capital as a result of mere promises of expenditure cuts. If this week’s package is to break with the doleful tradition of fiscal promiscuity, it will need to deliver immediate cuts of significant size.

In magnitude, the size of the cuts will have to be at least $3 billion if the reform is going to even start to be meaningful. Given the fiscal deficit is deteriorating anyway to the tune of $2 billion per annum, it is clear that $1 billion of cuts will simply stall that deterioration for six months, rather than start to reverse the burgeoning fiscal burden.

As well, there is the quality of the expenditure cuts made. Rather than focus solely on the “soft’ targets of Health and Education, government quality would be enhanced if Cabinet signalled clearly whether it actually wants to be in either of these businesses beyond the short term. Rationalisation of expenditure in these areas are grounds well trawled, and has now reached the point in health at least, where expenditure cuts simply result in withdrawal of services, rather than any improvement in efficiency of delivery. Similarly, with education the rationalisation is simply denying the populace places in the education system – dumb, given economic development will be slower coming from uneducated labour.

Of course the sacred cow where fiscal squander simply has to be stopped, is social welfare. Here, new Minister Shipley can’t see significant. savings in the short term. Well if that’s the case then the government’s fiscal package will ultimately be rewarded by a further drop in the credit rating of our sovereign debt iii 1991, and higher interest costs to the taxpayer to service that debt. Significant savings demand that welfare outlays be cut by 30%, particularly National Superannuation. Much of the welfare atrocity can be sourced to this Muldoon bribe which successive governments have been terrified to transgress given its proven political value. Without culling it though, government will fail to excite financial markets into a sustained loosening of the interest rate collar that’s stifling economic recovery.

The growth mandate this government has been elected on demands they slaughter fiscal munificence. National’s achilles heal since 1975 remains its failure to recognise that a Champagne social benefit system cannot be sustained on a beer bucket economy. Its curbing will open the way for lower real interest and exchange rates.

A Christmas Package of Substance was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.