It is surely beginning to dawn
on us, nearly three years after our recession began, that anything approaching a full recovery is still a long way off.
It is now clear that
unemployment remains stubbornly high, that the housing market is depressed, and that property values have fallen sharply so
that most people no longer feel as wealthy as they did. Lower housing values and employment uncertainties
explain why domestic demand is sluggish so that – barring an unlikely pre-Christmas boom – we can expect to see
increasing numbers of empty retail premises in our high streets in the New Year. Little wonder that confidence
in the economy is ebbing and that employment and investment intentions are at low levels.
As a consequence, the exodus across the Tasman has resumed.
Australian living standards continue to rise faster than our own, as both demonstrated and assisted by the growing
strength of their dollar against ours.
a great deal is going right for our economy. Our major export markets in Australia and China are performing
strongly and demand for our goods is buoyant. Commodity prices generally and dairy prices in particular
are at historically high levels. Our trade figures mean that a trade imbalance is not so much a constraint
on expansion as it has been over such a long period.
Inflation is not an immediate problem and the Reserve Bank governor has signalled his intention to keep interest
rates at low levels. Our banks are in good shape (though, sadly, the same cannot be said of our finance
companies). The warnings of the “bond vigilantes” that increased government borrowing to fund
their deficits will mean rapidly rising long-term interest rates around the world have not materialised. Our
own government’s finances are stronger than forecast and are in any case among the healthiest of any advanced country;
most European governments can only dream about our relatively and historically low levels of government indebtedness
In these unusually favourable circumstances,
there is something wrong with us if we cannot make a good fist of coming out of recession in good order. So,
what is going wrong?
What we are
seeing, I believe, is a simple failure of analysis. An economy in recession is by definition an economy
in which there is a deficiency of demand. If we want to recover from recession, we have to see somewhere
a lift in demand. The question is, therefore, where is it to come from?
For once, a partial answer is provided by the export sector.
The improvement in export prices is helping to re-balance the economy towards exports and away from domestic consumption
–something the government is keen to see and a process that could be made even more beneficial by a more competitive
But is the relatively
strong performance of the export sector enough to counter the impact of lower levels of activity in the other two sectors
– the private sector and the government? If the answer to that question is no, then we have our answer
as to why our recovery is so sluggish.
is of course only too evident that activity and confidence in the private sector have suffered during the recession.
Consumers are keeping their wallets closed, and businesses are cutting costs rather than taking on employees and investing
in new capacity.
So, if we are to
lift ourselves out of recession, we need the government sector to be playing its part in stimulating the level of demand,
so as to offset and eventually reverse the current depressed state of the private sector. Yet, when we
look to what the government is doing, we see priority given to the government’s finances rather than the health of the
wider economy – to getting the government’s deficit down, rather than on using fiscal policy to stimulate the
economy as a whole. The effect is that depressed demand in the private sector is reinforced rather than
offset. The government is not, in other words, helping towards a solution but contributing to the problem.
The government says of course that it must cut
back because it has to borrow just to maintain current spending, let alone spending at a higher level. But
that is simply to re-state the problem rather than resolve it. The government has a deficit because a depressed
economy means that its revenues are down. If the government is not helping but hindering recovery, then
it will take longer to reduce the deficit and the recession will drag on for longer. And the longer it
takes, the greater the risk that less than optimal levels of employment, investment and output will become permanent features
of our economy.
The government is
quite right to insist that it must, like the rest of us, get value for every dollar it spends. But isn’t
it time that ministers took a wider and longer view of the role they must play if we are to shake off the shackles of recession?
2 October 2010
This article was published in the NZ Herald on 12 October.