Who's Really To Blame For Our Economic Troubles?

Scoop

3 days ago

New Zealand's economic downturn is proving hard to shake - but economists say when it comes to identifying the cause, it's not as simple as pointing the finger at government spending cutbacks or the Reserve Bank's interest rate hikes.
Although conditions are expected to improve as the year progresses, the economy remains sluggish. The primary sector is providing one of the few bright spots.
Last weekend, when issuing an annual update, Kiwibank chief economist Jarrod Kerr blamed the Reserve Bank's decision to thrust the economy into recession to tamp down problem inflation.
Some readers contacted RNZ saying that was too simplistic and letting the government off the hook for the impact its spending cutbacks and public sector job cuts were having.
"My wife's MPI office in Christchurch reduced headcount by about 10 percent," one wrote. "For each public service worker cut, two to three private sector jobs went with it. The cancellation or freezing of so many infrastructure projects saw my industry (engineering) lay off a quarter to a third of the workforce."
So who's to blame?
"The overstimulus of the economy from both the government and the Reserve Bank in 2020 and 2021 meant the economy was unsustainably overheated," said chief forecaster at Infometrics Gareth Kiernan.
"The government and the Reserve Bank got us into the mess we were in, in the first place, and therefore had to get out again."
While normally monetary and fiscal policy would work to smooth the economic cycle, that was not the case this time, which made the upswing hotter and the downturn bleaker.
"Normally, if the economy is going hot, they tend to pull things back. And if the economy is slowing down and we're heading to recession, you typically get more government spending and lower interest rates and that sort of thing. That's not what we've had over the last five years because they pumped things up too much and had to cool the jets on the other side.
"Both the government and Reserve Bank needed to, they had no choice.
"Government spending decisions have exacerbated the recession but they had no choice because they also exacerbated the boom before that."
Too much spending
He said, in December 2022, government consumption spending was 13.5 percent higher than had been forecast before the pandemic hit.
"It's still 7.5 percent larger than we were forecasting now… so they've pulled it back in line but it's still larger than it would otherwise have been expected.
"Government investments - infrastructure, schools, hospitals, whatever else - by mid-2024, that's 18 percent larger than we were forecasting."
Spending was still 13 percent higher, he said.
"That puts some context around the fact that yeah, government has been tight but we still haven't undone or unwound all of the massive government-related Covid boom.
"That's also reflective of the fact that fiscal numbers over for the next five years are only just getting back into surplus if you're lucky."
Kiernan looked at GDP broken down into household spending, government spending, business investment and exports and imports.
He compared the current situation and the experience of the past two years to what normal growth might have been if it had kept going from the 2022 base at a 10-year average rate.
"Government investment grew through 2023 and early 2024. It's done its fair share of contribution to how the economy has gone in a positive sense.
"If I attribute all of the private sector investment and household spending and the slow growth there to interest rates and in Reserve Bank policy… then you put around about two-thirds of the underperformance of the economy over the last two years down to interest rates, 20 to 25 percent on to the government side of things when you take consumption and investment together and the other 10 percent or so is exports underperforming."
Senior economist at ANZ Miles Workman said it was a question of how the Reserve Bank responded to the government's fiscal policies.
"The faster the government gets the books back into the black, by restraining spending or increasing taxes, the more likely the RBNZ will need to lower the OCR, which would offset lower demand from fiscal policy settings by shoring up demand from households and businesses.
"In other words, it's not as simple as saying government policy has caused X percent of the slowdown and the RBNZ has caused Y percent. The RBNZ's policy stance is a function of fiscal policy settings."
'A con job'
Economics professor at the University of Auckland Robert MacCulloch said there had been mishandling of the economy by governments on both sides in recent years.
"The narrative the parties are using, that the other party is to blame for our problems… I'm past it now, that all the problems we've got are because of [Jacinda] Ardern and [Grant] Robertson and Labour messed it up, then Labour say the same about National. I think it's a con job on the people of the country. The country hasn't been doing great now for quite a long time under both major political parties."
He said the wage subsidy had been a significant source of debt, but while it was introduced by the Labour government, National had put pressure on to extend it for bigger firms, which increased the cost.
"Luxon's getting angry saying we inherited a shambles. I mean, what's he talking about? His party voted in favour of the all the fiscal and monetary policy. They were wildly enthusiastic about the wage subsidy scheme."
He said the cuts the government were enacting were immaterial in the scheme of the fiscal pressures looming from the ageing population.
"The cuts in bureaucracy they've done are just a couple of percent of those increased pressures on health and pensions. They're going to have to grapple with how you deal with those huge outflows with the ageing population… the Nats don't have a plan to rein in the cost of those major programmes."
Tough job for Reserve Bank
The chief economist at the NZ Initiative, Eric Crampton, said the labour market was "certainly in worse shape" than it had been from mid-2021 to mid-2023.
"But employment rates during that period were the result of substantial overheating from debt-fuelled spending and substantial monetary stimulus. They could not be sustained without severe inflationary consequence. It is wrong to blame anyone for labour markets not looking now like they did in 2022."
He said monetary policy would always be expected to move last.
"That doesn't mean monetary policy is slow. It means that whatever the bank does in monetary policy takes into account what everyone else has done and is expected to do. So if the fiscal authority announces a track - a Budget, Budget policy statement - monetary policy adjusts to take that into account. The Reserve Bank moves last - it makes its move after seeing what everyone else is doing.
"Governments can be more and less helpful with all of that. But a bank following an inflation target ought to be taking account of what Parliament is doing. "
He said the Reserve Bank had a tough job at present.
"While the employment statistics are comparable to where they were around 2016-2017, government estimates still suggest that there is a remaining output gap - that the economy is running a bit below potential. However, there are inflationary pressures both in the non-traded sector and in tradeables. The bank's failure to keep inflation within bounds over the Covid period should have it sensitive to the risks of going above-target again. So I wouldn't want to blame them too much for current unemployment except to the extent that the bank's errors during the Covid period makes things a bit harder now. "
He said keeping inflation within its target was the best thing the Reserve Bank could do to ensure long-term stable employment.
"Given inflation risks, the bank would likely need to act to offset fiscal stimulus, if Parliament decided to provide further fiscal stimulus - we are still running a substantial deficit as well."