National MP Craig Foss’s patsy question on Tuesday provided Finance Minister Bill English with a pretext to rubbish the Clark Govt’s fiscal policy management. It invited him to tell what reports he had received of recent Budget measures taken internationally and to explain the implications for NZ. English replied Govts around the world are trying to deal with ballooning debt and deficits and had to make difficult choices. An example: the British Govt is dealing with a deficit of 11% of GDP. An emergency Budget included a 25% reduction in all Departmental spending other than health and overseas aid, a freezing of state-sector wages and an increase in GST with no offsetting tax changes. This was the sort of mess a country could get into if it mismanaged its Budget.

Spending Curbed. The incoming British Govt was dealing with an economic imbalance caused by a decade of rampant public spending “and growth in all the wrong places.” It was emphasising the need for saving, investment and enterprise instead of debt. The Key Govt similarly has curbed increases in Govt spending and reprioritised almost $4bn of public spending. But English said he is wary about cutting too much too quickly; a measured approach is being taken to fiscal constraint and a horizon of three to five years has been set for Govt Departments to manage within the money they have.

Private Debt The NZ Problem. None of this addressed the implications for NZ of Europe’s debt repayment and fiscal tightening, much of it indirect. It is creating uncertainty and has the potential to foment fresh dislocation in global financial markets, making credit less available and more expensive. A more direct effect from Europe’s budget-balancing would be to slow NZ exports as their economic growth slows. Hopefully, they learned from NZ’s experience two decades ago when a policy preoccupation with restoring the Govt’s accounts pushed us into a recession. The prospect of the Europeans turning slowdown into recession is bothersome.

Surplus Beneficial. More to the point, our own overseas liabilities (as English knows) are our greatest economic vulnerability, although most of our debt is private-sector stuff while Europe’s problems centre on sovereign (or public) debt. NZ’s public debt has been driven back up again by the effects of our recession. But it may well be much worse if Labour’s Michael Cullen hadn’t been so fixated for so long with building surpluses and spurning cries for tax cuts.

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