Of Budgets and Borrowing: A Reply to Chris Trotter
In the wake of an otherwise unremarkable New Zealand Budget, I was not expecting to supply much in the way of political commentary. Why would I? The most notable aspect was Grant Robertson throwing a one-off $350 at anyone who earns less than $70,000 a year and who doesn’t already receive the Winter Fuel Allowance. I myself get the Winter Fuel Allowance, so that $350 is, alas, not for me. I also would have liked the Government to be a tad more proactive, but that would be to give the current New Zealand Labour Party far, far too much credit. We live in an era of low expectations.
But then I stumbled across Chris Trotter’s somewhat confused commentary (http://bowalleyroad.blogspot.com/2022/05/an-exercise-in-basic-accountancy.html), and found myself needing to set the record straight. On multiple fronts. It’s the economics geek in me perhaps.
Trotter’s major sin, to my mind, is his misunderstanding of the nature of Government borrowing. Specifically:
In a rational society, any shortfall in state revenue would be made up by a corresponding increase in taxation. Unfortunately, democratic states are seldom governed rationally. Governments elected by the people are reluctant to court the wrath of their electors by increasing their taxes, preferring instead to allow the nation’s cultural and physical infrastructure to decay. Or, if the deferral of crucial maintenance fails to produce the savings necessary to keep the “Musts” operational, borrowing to make good the shortfall.
How very neoliberal of you, Mr Trotter. More or less, this is the old fallacy that Government ought to organise its income and expenditure plans after the manner of a household. A balanced budget, and all that, as opposed to that evil borrowing.
Now, there are two major errors here – one Keynesian and the other not. The Keynesian objection is that state revenue and expenditure can be used to boost short-term output (via a budget deficit) or else act as a handbrake to an overheating economy (via a budget surplus). Trotter’s “rational” society would find itself running austerity measures in the middle of a recession, and we know how well that works out.
The other objection to Trotter’s rational society is that Governments – unlike you and I – live indefinitely. A budget deficit is really a case of bringing consumption forward in time. Well and good… but doesn’t this merely mean that we have to raise taxes further down the line – or what Trotter calls a fiscal day of reckoning?
Bizarrely, no. You see that small point about Governments living forever produces a deliciously counter-intuitive result. Namely that so long as each future generation is willing to put up with deferred consumption, no future generation actually needs to suffer an overall loss during the course of their full lifetime. Each succeeding generation borrows from the next, and so on. The can really can be kicked indefinitely, leaving no-one worse off. It is why Great Britain still has debt from the Napoleanic Wars floating around – it turns into a multi-generational pass-the-parcel.
Are there caveats? Sure. If interest payments on the debt wind up exceeding economic growth, you’re in trouble. But if economic growth exceeds interest payments? Deficits can be run indefinitely.
The problem with days of reckoning is that they always come. It was Rob Muldoon who found himself without a chair to sit on when the music stopped playing in 1984. When the game resumed, David Lange, and his Finance Minister, Roger Douglas, found themselves without fiscal options. Something dramatic had to happen to the way New Zealand was run, or the lights would indeed go out and the ATMs stop working. (In 1984 they very nearly did!)
Naughty, Mr Trotter. Very naughty. He is conflating the Balance of Payments crisis of 1984 with a Debt crisis. Which it wasn’t – and honestly, this is the sort of neoliberal rewriting of history that Trotter spends most of his time pushing back against.
In the aftermath of the 1984 election, there was a run on the New Zealand dollar. In that era, the dollar was fixed, and it was well-known the incoming Government would devalue. People were selling down the dollar in anticipation of the drop, with the intent of buying back after the devaluation. So the Reserve Bank’s foreign currency reserves were decimated.
Today we have (more or less – it’s a bit messier on closer inspection) floating currency. Which has issues of its own, but which means a run on the foreign currency reserves can’t happen.
Prior to Rogernomics, Budgets had been newsworthy largely because they were the occasion for rises in government taxes on petrol, tobacco and alcohol. Less frequently they made news on account of minor adjustments to Income Tax. Roger Douglas put paid to all of that.
The newsworthy nature of Budgets in a fundamentally Keynesian economy was the impact surpluses or deficits would have on the economy further down the line. Muldoon was quite notorious for his election-year spending sprees – which boosted short-term economic growth — only to feed through into higher inflation the year after.
Meanwhile those increases in taxes on petrol, tobacco, and alcohol had a non-trivial impact in an era where the currency was fixed. Balance of Payments considerations and all that, and Trotter is fully aware of the 1958 Black Budget, and what it was trying to address.
After 1984, Budgets became part of the grand theatre of economic reform. Not even the “Musts” escaped the attention of the reformers. The National Party Finance Minister, Ruth Richardson, confronted with another day of fiscal reckoning in 1991, produced what she called “The Mother of All Budgets”. (A reference to Iraq dictator Saddam Hussein’s promised “Mother of All Battles” during the First Gulf War, which should have warned New Zealanders what Richardson had in store!) It was TMOAB that slashed the incomes of beneficiaries by 25 percent – impoverishing thousands. For some Kiwis, Budgets were now events to be feared.
Except that 1991 was intended as the Last Word on the economic reforms, not as a sign of things to come. I am old enough to remember media commentators talking about whereas 1991 was the Mother of All Budgets, 1992 was a “distant aunty.” In short, rather than the Budgets of the neoliberal era being part of grand theatre, their precise lack of theatre from 1992 onwards has become an implicit part of the political culture.
Under neoliberalism, Governments don’t matter – so neither do their Budgets. One thing Trotter really does neglect is that New Zealand Budgets of yesteryear were announced at night. People would sit around the television, having stocked up on the beer, petrol, and cigarettes, and watch them unfold in real time. Modern Budgets don’t have that sort of drama. They’re announced during the afternoon, and people see a summary on the evening news, or they read about it the following day. I honestly would have expected Trotter to at least note the ideological implications at work here.
It will not be an ordinary day. Crowded into its 24 hours will be climate change, global financial fragility, the weakening and breaking of supply chains, rising geopolitical tensions, rampant inflation, and the ongoing effects of a global pandemic. To keep the lights on and the ATMs working in the face of these challenges, governments all around the world have been forced to borrow and spend like there was no tomorrow. (Which, with the hooves of the Four Horsemen of the Apocalypse thundering across the planet, may not be an unreasonable prediction!)
Indeed. But here’s the funny thing: a Government with rather more imagination than the current one might be inclined to use such a crisis as an opportunity to revamp the New Zealand economy in a different direction. The neoliberals of the 1970s, 1980s, and 1990s put crises to good political use, as they danced upon the corpse of Keynesianism, and urged a clean break with the post-war years. Days of Reckoning, as Trotter calls them, can very useful for politicians who still actually believe in something.
Less so for politicians who want to be managers, rather than reformers. In 2022, amid crisis and turmoil, we have a Labour Government that isn’t interested in economic ideology, except being less bad than the Opposition. It indeed seeks to hold the line… on behalf of the very system those neoliberals built forty years ago. It would be almost morbidly funny if it weren’t quite so sad.