Why everyone is talking about John Key, GDP, recession, working for families, and debt
One of the changes uppermost in our minds right now is the election, and the possibility of a new Government.
Right now we are in a mild recession.
A recession is when there is a drop in GDP for two consecutive quarters.
GDP (Gross Domestic Product) is the value of consumption (e.g. purchases), plus the value of investments (e.g. savings) plus the cost of Government spending (e.g. social services, health, education) plus the value of exports minus imports. Believe it or not, GDP has doubled in this country since the 1980s. That means in economic terms we should be twice as well off as a nation as we were then…but is that the case?
A drop in GDP is hardly surprising, given we’ve just come out of the longest period of sustained growth in our economy since the 1960s. When you look at the data, recession has been a frequent visitor to these shores up until 1998. History tells us one thing – that is you can’t have growth forever.
Whoever assumes office will inherit a recession. The important question will be what will they do to try and help this nation out of the recession, and what will it do to us?
In any economy there is only a certain amount of money going around at any one time (unless you put more in – but we’ll get to that in a second).
One of the main differences between the parties, albeit smaller than it used to be, is Labour will generally use government spending to provide ‘core services’ for the good of the population, whereas National will prefer to cut back on government spending on ‘core services’ and transfer the money to the people with a view that they will spend this money for their own betterment.
Labour’s approach generally results in taxation fueling provision of these services, and National’s tends to result in a principle of lower taxation and people providing for themselves.
Now tax cuts are a percentage of income, and therefore those earning more receive more.
Generally, the wealthier you are the more you get and the less you need – tax cuts received by the wealthy will often get invested by them, and the interest earned both increases their wealth and contributes to the development of GDP. Whereas, tax cuts received by the poor are generally spent upon the necessities and utilities of life.
Therefore, in a scenario in which tax cuts are used the gap between the wealthy and the poor generally increases. If this were not so, and if trickle down really existed in anything more than the imagination, a packing like Working for Families, and the high rates of poverty in this country, would no longer exist.
Now, if National were to lower taxes by reorganizing government spending, this would transfer the possibility for social spending from the state to the individual.
To achieve this they would most probably need to cut significantly into current government social spending – social reporting, domestic violence prevention initiatives, perhaps as in the past they would also cut into health, education, housing etc.
One of the most significant social expenditures of recent years is Working For Families. Up until recently John Key has denounced this as middle class welfare.
There’s a certain truth in his denouncement. The government were very focussed in their initial roll out to the middle and nearly middle classes. Research shows tax relief packages like WFF are best accompanied by initiatives which lift universal well being – like a universal child benefit.
However, recently he’s changed his mind. Now, it seems, National would keep WFF.
That places National in something of a predicament, upon which the government are seizing. If they aren’t going to cut WFF in order to afford delivering tax cuts, they will either need to cut other services, or borrow money.
Therefore, the government is hammering National about WFF and borrowing because it wants to alert the public to how unsustainable or volatile National’s economic plans are. They have a point.
If National borrow money it runs the real risk of increasing inflation at a time when the economy is in recession. The results of excessive borrowing to fund tax cuts would have the effect of introducing an excess amount of money into the economy (too much money chasing too few goods) – and this would increase inflation.
I guess in every day language and experience, prices would rise and we could buy less for our money, because people selling them would ‘feel’ they could charge more for things because there was ‘so much’ money in the system. But if income remained relatively static (and for those on wages versus investment it doubtless would), then things would feel more expensive.
Studies show inflation hits the poor worse than the wealthy, because the poor are less able to insulate themselves against the effects of inflation – they are more dependent upon income from work than investment oversees, for instance.
The alternative to borrowing excessively is to either just cut government spending, or borrow less and cut government spending a bit.
Whilst there is no doubt in my mind there is some ‘fat’ in the government system, reasonable culling of that fat (ie. making people redundant) will not release anything close to the sums required. Moreover, making people redundant creates unemployment. That has isn’t a good thing – for the economy nor for the families concerned.
Ultimately, some serious borrowing will be required: this at a time when the present government has worked very hard to reduce the debt of the government and place us on a better economic footing for future years – that’s important because the future is far from certain, and reducing the burden of debt repayments (because even loans from governments need repaying) helps release cash for expenditure elsewhere, personally or publicly. We are entering a time of transition and change the magnitude of which none of us have really seen in our lifetimes. The changing times will re-write substantial parts of the political and economic ‘rule books’, and creating debt in order to buy tax cuts (what often get called bribes at election time) is unwise to the point of reckless.
If significant borrowing was undertaken to fuel tax cuts, the results would likely not be good for the economy. It would most probably lead to deeper recession and/or high inflation.
The results of this would initially be higher interest rates, because interest rates are a mechanism for controlling our spending/investing (it’s believed high interest = we want to save / low interest = we want to save). They might be lowered to try and curb inflation.
But higher interest rates also encourage offshore investment, and this pushes the value of the dollar up. One result of a high dollar is that it becomes harder to export, but imported goods become cheaper. On the other hand, lower interest rates are believed to induce spending, discourage offshore investment (which, given that all profit is taken offshore, is a good thing I believe), make exporting easier, but raise the cost of imports.
Either way, in there are no short cuts.
Although it feels like we might be financially better off under National because they would give us a tax cut, that’s only half the story. Economically, National would be deferring government spending to the individual, but we may choose to spend it on anything we like. The result might be an overall decline in the social well being of the nation. Furthermore, a tax cut will cost us something, somewhere. There are no free lunches. And if National have to borrow excessively to fund tax cuts and WFF then we might be in for a very rough time, indeed.
Finally, in one three year term National can systematically cull a social development system which, while far from perfect and doubtless containing some bureaucratic bloat, is something we can also be pretty proud of. That’s a real concern.
My hunch is National are probably looking to follow other right wing governments in waiting, and pursue a centre-right agenda rather than a more extremist one. Their fear and hesitancy, I suspect, is in upsetting their heartland whilst attracting the centre and centre-slightly-left. Perhaps that’s what makes choosing between National and Labour such a difficult and perhaps even pointless task. But the choice isn’t red or blue.
In the UK the media report that ‘the people’ think it’s time for a change, and that means a Conservative (National) government. That’s because the UK has a “first past the post” system.
But in New Zealand we don’t. We have MMP.
Therefore, a change of government categorically doesn’t mean changing Labour for National. We have been given a freedom, but we don’t seem to realise it – we’re either too stupid or too bloody minded, perhaps.
A change in this country, and particularly a change which helped us be a more just nation which reflected our radically changing times, might better mean changing a strongly led Labour government for a government led by Labour in which the voice of Green and Maori were significantly stronger (say, each having 15% of the electorate).
In other words, voting with your conscience and for what you care deeply about (and always presuming that’s not just yourself and your own self interest, but something more like the teachings of Jesus) and using the real freedom you have makes a very real difference to the future of this country.
Getting suckered into thinking it’s a two horse race is real foolishness. Getting suckered into believing and listening to the political game being played by National and Labour right now is probably equally a kind of foolishness.
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