Economic Wisdom From Sir Roger

ACT MP and former Labour Finance Minister Sir Roger Douglas, is one of the few MP’s who understand why we’re in the economic mess we’re in and what we must do to get out of it.

Here’s Sir Roger-telling it like it is.

Time To Get Real About Deficit

Thursday, March 26 2009

New Zealand finds itself pushed further towards the brink of economic collapse. We have been in a recession for over a year, and the figures that are coming out from Treasury and Statistics NZ suggest that things are still getting worse.

Today, it has been revealed that our current account deficit for the year ending December 31 2008 was over $16 billion – the largest it has ever been.

During 2008, we racked up a deficit of $4,000 for every man, woman and child in New Zealand.

However you run the numbers, they are astonishing. We’ve had over 15 quarters where the current account deficit has been over $3 billion. The position has become so dire that the Reserve Bank has been selling assets to keep our dollar strong and finance the deficit. In the last six months of 2008, the Reserve Bank sold over $11 billion worth of assets.

The bad figures do not end there. Most worryingly of all the figures is the fact that we have $90 billion of debt that could be called in by foreign creditors in the next 90 days – and there is no way we could afford it.

That external liability could be okay. In the minds of our investors, our situation will not deteriorate further if they have confidence in New Zealand’s economic prospects. That means we must get our policies right to ensure that overseas investors have that confidence.

Finance Minister Bill English has demonstrated that he understands the problem. He talks of the pressure on our economy from such a large current account deficit. But, in the next sentence, he announces plans for the Government to borrow over $40 billion in the coming years to finance a bloated and unsustainable Government sector.

National is not to blame for this crisis. The Labour-led Government increased Government spending massively over the past nine years. It forced compliance costs on private businesses, making them less competitive. That loss of efficiency made us struggle to compete internationally, and has exacerbated our current account deficit. Households used debt to finance their desire for consumer goods, and household debt surged. This has led us to the brink of financial disaster.

But National is now the Government. There’s no point whining about Labour’s terrible economic management – National has a duty to do something about it. They need to stop complaining about Labour’s spending binge and start cutting some of those unsustainable programs.

Having managed New Zealand through difficult times, I understand how important confidence is. Consistency of policy is the only thing that leads to credibility in the Government. In turn, this creates the kind of confidence that New Zealanders need to get through this pain.

Governments must be consistent to ensure that the market can predict what the Government will do. All this talk of bailouts and the like undermine certainty. It suggests to business that the Government may begin to actively pick winners and losers.

But such an approach is a recipe for disaster. The US has embarked on a shambolic and inconsistent bailout policy. Ideas have been ad hoc – the market has suffered – with thousands of dollars lost by ordinary families.

National’s rolling maul has the potential to do the same thing. Ad hoc policies, developed in response to the news of the day, will ensure that investment slows even faster. Stability is what is needed.

Once we have consistency people will start to see the Government as credible. Certainty that the Government knows what it is doing and is managing the recession is very important. Without it, we will suffer as political responses swing even more wildly trying to impress the latest focus group.

With consistency and credibility comes the confidence needed to encourage and retain investment, and prevent the collapse of our dollar that would be caused by a flight of wealth from this country.

We need to deal with our deep-seated problems, which are putting New Zealand at risk more than anything else.

National will say that it is doing the best it can – that it is cutting the size of Government. But people who believe that are struggling to see beyond the smoke and mirrors. The reality is that around 70 percent of State spending is in the areas of health, welfare, and education – the Government is not tackling these areas.

In fact, the Government is stuck in the past; wedded to the idea that Governments can actually deliver these services through the monopolies they have set up. To put us back on the path to growth, we need to make several quick changes in policy.

1) We need to immediately abolish those departments that deliver no social benefits. Who has ever heard of an earth-shattering report from the Families Commission? What does the Charities Commission even do? Why do we need a Ministry of Economic Development when we did alright without one until the fifth Labour Government – and that’s without even looking at the political correctness that has led to the Ministry of Youth Development or the Ministry of Women’s Affairs.

2) We need to focus on the dollars, not the cents. It’s not about cutting five percent from some budgets here and there. It’s actually about reducing the amount of spending undertaken by the State until we balance the books. An economic crisis is not caused by the small stuff; it’s caused by unsustainable and costly Government policy.

3) We need to change the way we deliver social services. At the moment, only the wealthy have access to healthcare when they actually need it. Only the lucky have access to the successful schools. Only the politically-connected have job security and inflation-indexed wages. We’ve set up a system to help the poor and ended up delivering benefits to the privileged few.

It is not about whether we have a duty to the poor – ACT agrees that we do. It’s about how we make good on that duty. Labour thought that throwing money at it would work. But the extra money it threw at health led to a drop in hospital productivity of around 15 percent. The cost of that loss of productivity was thousands of operations. The cost was people dying on the waiting list. Big Government does not work. Any major failure shares a common denominator: Government command and control.

Only by restoring choice to the individual will they be able to access the social services they need. That means handing over the money we currently spend on health and welfare, and asking individuals to purchase their own insurance and meet their own obligations. If we structure the welfare system right, we can make sure every one has access.

The Government needs to have more faith in the people of New Zealand. People understand there is a trade off between the short and medium term. People realise they must work hard now for a promotion in the future. Politicians need to understand that the public is willing to accept the potential for short-term pain so long as their prospects in the medium term are good.

Mr English is very good at telling people what the problems are. He’s good at telling the public how it is affecting them. But he has been very poor at setting out a comprehensive way to solve our problems. That failure is causing a lack of confidence that will harm us even more. By looking for the short-term fix – the cycleway, or the nine-day fortnight – we are ignoring the bigger picture and the real problems that need to be addressed.

Let’s get real. Tinkering with policy will not reverse the causes of slow productivity growth and a stagnant economy. Let’s be bold and make ourselves prosperous again.

Couldn’t dispute a word of it.

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3 thoughts on “Economic Wisdom From Sir Roger

  1. Amen to that Reid.

    The Global warming fraudsters are desperately trying to implement their destructive policies before the global recession destroys what little public sympathy they have left.

  2. One thing all nations can do to improve their economies is reject carbon controls. I have noticed that NZ is way too caught up in carbon penance neo-pagan religious activities. How many more years of global cooling do we have to have before the people realize that carbon control is a fraud?

    Global warming is a phantom menace akin to the witch hunts of the 17th century. I say burn carbon and feed the plants. The believers in global warming will go down in history as great fools.

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