Gareth Morgan, Director of Gareth Morgan Investments
That the government’s fiscal policy is off track, no matter what the latest assurances are from the Minister of Finance, could be a source of financial market consternation and lead to an upward correction to interest rates. But the bond rate is now back down to the rate which prevailed prior to the announcement of the Wimps Super package on November 8. One explanation for this is that the financial market had fully discounted into rates the fact that there would be a repeal of the budget night superannuation initiative. Certainly an adjustment was predictable then even though the Minister of Finance pronounced that the government would not be budged from its budget night decision. Such an untenable position would hardly have fooled financial markets.
But where the government’s fiscal plans are now in trouble is in the $400 million plus which the latest scheme sacrifices. Here the Minister’s ordering of priorities becomes apparent. Confessing that she is well satisfied with the government’s latest adjustment to the superannuation scheme, Miss Richardson in a recent speech has reaffirmed her commitment to balancing the budget by 1993/94. This time though, an ambivalence shrouds her pronouncement, incertitude that was absent from her December 1990 deliberations on fiscal priorities.
In December 1990 eradicating the budget deficit was seen as necessary to assist strengthen the chances of economic recovery, but now the lack of an economic recovery is seen as a barrier to eradicating the deficit ! Set against a series of fiscal backdowns, with nothing but trite promises of surmounting this slippage, the reality is now a deficit trend that is in the opposite direction to that which the Minister sold offshore creditors during her post budget tour.
But still the long rates don’t react. If this slippage had been obvious in December last year when we were swamped with papers indicating how the budget was to be brought under control, then we could have bet on an adverse financial market reaction, rather than the ratification of the pre-announcement interest rate falls. So what’s changed ? The market’s expectations of economic recovery, that’s what.
In line with the dimming expectations of imminent recovery in the world economy, financial market’s for now can perceive strong pressures on interest rates to drop. The slowing of the economies suggests that real interest rates can retreat, while the downward trend in inflation will lead to further reductions in the inflation premium incorporated in interest rates. So even if governments engage in some fiscal expansion, and the badly indebted ones forget for now about financial surpluses, will the financial markets really care ?
Sounds like a window of opportunity for politically beleaguered governments needing to demonstrate to electorates that politicians can spend our way rich. As householders we might be frightened into saving but the government won’t have that problem if their lenders turn Keynesian, and concur that increased government borrowing reduces the credit risk on the paper they issue. Times change.