Giving business people insights into factors to be considered as the Govt prepared its 2009 Budget, Treasury Secretary John Whitehead said economic downturns don’t last forever. But global economic and financial stresses have become so severe in recent months “we face a tough few years.” He spotlighted two major categories of risk: external (the world could take longer to stabilise and grow; and/or the impact on NZ is more pronounced) and domestic, including the prospect of our fiscal position and external debt making it harder for us to access money and pay for it. There are regulatory risks, too.

Debt The Problem. Policy priorities must be lifting growth and halting the rise in debt, although this heightens tension between the need to deal with short-term issues arising from economic shock and longer-term issues around fiscal consolidation. The challenge is when to stimulate, then when, how and how quickly to consolidate to recover the stimulus. The fly in the fiscal ointment is the rising public debt. A credit downgrade (based on Irish experience) would result in a 1.5% rise in interest rates, calling for another $600m in interest on Govt debt each year - the same as two new Wellington hospitals. The country’s credit rating also determines how much many of our businesses and households have to pay. 1.5% is another $3,000 interest on a $200,000 mortgage.

Value For Money. The debt threat explains why the Govt must focus on the level and quality of its spending. Getting value for this spending “has assumed particular importance.” Public sector spending has grown sharply in recent years in dollar terms, from $37.5bn in 2002 to $57bn in 2008. The Govt (and Whitehead) says this rate of spending growth must be slowed and savings and efficiencies found. But in its latest Monthly Monitor, BERL presents a chart derived from the OECD database. In 2007 our Govt consumption spending (the Govt’s claim on the productive resources of the country) was 18.8% of total GDP, compared with Aust’s 17.7%, Canada’s 19.3%, the US’s 16.1%, the Euro area’s 20% and the UK’s 21.2%. The average for the 30 years to 2007 was 18.5%. It’s not an argument against looking for savings and increasing efficiencies. But it does make nonsense of the persistent National/ACT (and business-sector) belief a mushrooming bureaucracy in Wellington has resulted in a disproportionate growth in the size of our Govt.

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