• Which Deficit?

    So, the much-touted and long-awaited government surplus looks unlikely to arrive this year. Is that a surprise? No. Does it matter? Not much.

    The only reason for sparing much time on the failure to eliminate the government deficit is that it relates to a target that the government itself identified as the crucial test of its ability to manage the economy. In doing so, it exploited the confusion in most people’s minds – and that includes the minds of many media commentators – as to what deficit we are really talking about.

    Just a few days ago, in reporting the probability that the government would remain in deficit, Radio NZ news described it as “the country’s deficit” as though the two deficits were the same thing. Sadly, the government deficit, about which so much fuss is made, is only a minor factor in an economy which continues to remain in substantial deficit in its total operations.

    Far from running the economy in a prudent fashion, the government presides over a New Zealand economy that continues to chalk up foreign payments deficits, year after year. We continue, in other words, to go on spending well beyond our means. We fill the gap by selling assets to foreigners and by borrowing at high interest rates to overseas lenders – a classic instance of a rake’s progress that makes a day of reckoning eventually inevitable.

    That foreign payments deficit is about to get a lot worse, as the overvalued dollar (about which so much jingoistic celebration was enjoyed) makes it more and more difficult for us to pay our way. Those cheaper Aussie holidays today are bought at the cost of Kiwi jobs and living standards tomorrow.

    So, let us be clear about the deficit we are talking about – the country’s deficit, the one that matters, the one that is getting worse all the time, or the government’s deficit, that simply defines how much the government takes in tax revenue from the rest of the economy by comparison with how much it spends.

    Is there are any link between the two? Yes – the priority given by the government to its own deficit has almost certainly made the country’s deficit worse. This is because, in a recession, which by definition arises when people (that is, households and corporations) are earning and spending and investing less, the slow-down can only deepen if the other major sector – the government – also cuts its spending.

    Our recession was longer and deeper than it should have been, in other words, because the government gave priority to balancing its own books, and ignored what was happening to the whole economy. An economy that went backwards for several years was even less able than usual to pay its way in the world when the world economy began to improve.

    But surely, many will say, it must be a good thing for the government to tighten its belt when the economy slows down? That would be true if the government were a business, but running an economy is not the same as running a private business. The paradox is that the government’s preoccupation with its own finances has meant a more sluggish economy and reduced tax revenue so that it becomes more and more difficult for the government to balance its books.

    This is the lesson taught by both history and recent experience. It is a lesson that has now been painfully learnt all over again by the world’s central banks, some of which – the European Central Bank, in particular – wasted six or seven year insisting on austerity as the proper response to recession. The people who paid the price for that mistake were Europe’s poor and unemployed; we were saved from worse only because our Australian-owned banks remained relatively stable and because our main export markets in Australia and China remained until recently reasonably buoyant.

    If the government’s finances are only a small part of the picture, why have they attracted so much attention? It is worth noting in passing that, while the Labour government of 1999-2008 recorded a surplus in eight of its nine years, the current government has now chalked up six successive deficits. So why focus on this particular factor?

    The answer is that focusing on the government deficit has been driven by political rather economic considerations. It has served the government very well as the justification for policies that come straight from the neo-liberal handbook. We can be sure that the next round of cuts in the level of public services will be misleadingly explained as “necessary to eliminate the deficit”.

    In the end, in any case, facts cannot be denied. As any accountant will tell you, borrowings and lendings must, as a matter of accounting identities, match each other. Our perennial foreign payments deficit – what we need the rest of the world to lend to us – must be matched by the borrowings our economy makes in total. If the focus is entirely on achieving a government surplus, that makes it inevitable that the private sector (households and corporations) must borrow even more.

    The truth is that, by looking only at the government deficit and ignoring the country’s deficit, we create an unbalanced and broken-backed economy that will survive only as long as overseas peddlers of “hot money” are willing to go on lending to us.

    Bryan Gould

    12 April 2015

     

     

     

2 Comments

  1. Steve says: April 12, 2015 at 4:30 amReply

    Hi Bryan
    Thanks another excellent article.
    I point you to a post on made this week on FB. One of the developing problems arising from cheaper energy is the demand for corporate welfare from producers lines and retail companies. One emergence of this was discussed on Nine to Noon.
    Could savings in energy efficient lighting be clawed back?
    http://www.radionz.co.nz/national/programmes/ninetonoon/audio/20173753/could-savings-in-energy-efficient-lighting-be-clawed-back
    If you missed it your might be interested.
    Some of my comments:
    I recommend a careful listen

    Some comments from me:
    – the idea that money savings and climate saving technologies can be blocked (effectively) by the Commerce Commission is nothing short of a scandal
    – not one mention of climate change
    – this is market failure and
    – corporate welfare
    – the idea that either generators or lines companies need to “make a return on their assets” – illustrates the fact that these assets should be owned by the public for the public good (which of course they used to be)
    – neoliberal fail
    – this is our version of corporate behaviour around the world where existing power companies suppress new technologies because they threaten their business model
    – like Germany we should take back the lines companies and generating companies into public ownership to stop this nonsense

    Thanks – appreciate you great posts.
    Steve

  2. Brian says: April 19, 2015 at 4:07 pmReply

    The govt. deficit equals to the last dollar net financial assets in the non-govt.sector. Commentators have being going on about our current deficit for as long as I can remember.The sky hasn’t fallen in.Imports are a benefit as they raise our standard of living.Exports are a real cost to us,since it mainly farm products being exported,to the detriment of our environment.The sad thing is people are not taught the basics of economics pertaining to a sovereign govt. issuing its own currency.Our govt. issues the currency,companies and households have obtain it.The govt. spends first then taxes.The surplus that the last govt. obtained was at the expense of the non-govt. sector.This destroyed wealth for individuals and companies which have gone into debt which is not sustainable.When the crash comes as it will like the grim reaper people will be unable to comprehend that over the forty they been in a financial war and that they been the targeted by both labour and national to have there wealth stolen to the benefit of the 1%.