Gareth Morgan, Director of Gareth Morgan Investments
The confidence with which Ruth Richardson admonished Bill Clinton’s embrace of lax increases to address his country’s structural budget deficit, is reminiscent of the cockiness of one of her predecessors just before his political droop. In early 1987 Roger Douglas wouldn’t hear of any doubts commentators had about the sustainability of the boom economy his policies had spawned. When told his recovery was an orthodox speculative bubble rather than the sustained recovery that he argued financial market deregulation was delivering, he labelled such prognostications as the jaundiced views of “doomsayers”. Not for that Minister of Finance were thoughts that the Fquiticorps, Rada’s and Judge Corps were ephemeral phenomena. Then the crash and soon after Douglas’ demise.
The spectacle of Richardson labelling the US higher tax strategy as “unintelligent” has the hallmarks of a Finance Minister drunk with the political joy of economic recovery but oblivious to tho evolving economics that will undermine her stupor. Still harping on about the sustainable nature of the recovery in the face of data that increasingly indicates a recovery that is at risk from overheating of domestic spending, the Minister’s nascence is akin to that which felled her erstwhile mentor.
The Clinton administration has clearly made the decision that reducing the budget deficit is more important at this stage of their economic recovery, than holding out hope of getting sufficient spending cuts to produce that result. The last two Republican administrations have promised spending cuts of sufficient magnitude and demonstrably failed to deliver. The result has been that the US budget deficit has continued to climb, At 5% of GD? it is clearly at a level which exacerbates debt levels, Continuing to ignore its impact as the Republicans did1 simply condemns America to a level of real interest rates that confines economic growth and prolongs unemployment.
In NZ, Richardson started off promising budget balance; abandoned that target in the face of peer group pressures; and has maintained an alternative approach of reducing government spending relative to GD?. But she is failing to he sufficiently successful on that front to rein back the deficit. Quite the contrary – it is out to 4% of GDP a level that will exacerbate the government’s debt ratios, Continuing this way guarantees the debt ratio will reach a point where the credit rating of NZ government paper again is dropped. A downgrade would raise capital costs to all NZ based firms, confine growth, and prolong unemployment an outcome the US has decided it is now prepared to avoid.
The US alternative of raising taxes on households~ but facilitating lower interest rates (capital costs) is one which will favour investment and cramp household consumption – not such an “unintelligent” alternative for a small economy courting a balance of payments blowout, and a financial market-enforced rise in interest rates. A government that cannot control its deficit and a household sector allergic to saving is hardly a position from which to claim superiority.