Govt should ignore calls to panic spend

Calls for the Government to launch an emergency spend-up to boost the economy are unrealistic. Doing that now would be to acknowledge that the economy is tanking, which would:

A) be a terrible look for the Government and B) might actually do more damage to confidence by looking panicked.

Also, the economy isn’t actually tanking.

GDP growth has slowed with tedious monotony since December 2016.

But it’s been a funny sort of downturn, with low unemployment, a construction boom, a growing population and strong commodity prices.

All those grim business confidence surveys still contain complaints about capacity issues, like staffing shortages, usually associated with boom times.

It’s also true they reveal plenty of concern about the outlook, and GDP growth is sliding into territory which makes us vulnerable to the global downturn.

So yes, both monetary policy and fiscal policy responses are warranted to ensure we don’t stall at the bottom of the economic cycle.

There is good logic for increasing government spending and you can bet, as we head into election year, that will happen.

But let’s not panic. Spending needs to be done in a planned and orderly manner.

It has to be underpinned by a sense of purpose to deal with specific social and economic issues that will pay dividends in the long run.

Spending simply to stimulate an economy runs the risk of being wasteful and inefficient, with no guarantee of success.

Getting the timing right, to match with the economic cycle, is difficult.

As evidenced by the spending increases the Government has already made, it takes time for policy to flow through to the real economy.

Quicker fixes like one-off tax breaks — so called “helicopter money” — just aren’t warranted yet.

We should hope they never are. Tax cuts might be a good idea — depending on your political views — but again, they should be made with a long-term view.

At the height of the Global Financial Crisis in 2008/09 Australian Prime Minister Kevin Rudd blew his nation’s enormous surplus with two stimulation packages.

He handed A$10 billion in helicopter money back to consumers and spent A$42b on a range of makework initiatives — from infrastructure projects to home-insulation upgrades for all.

Unfortunately for Australia, the downturn outlasted the stimulus effect.

The economy did not thrive and the government is only now starting to balance the books after a decade of Budget deficits.

Finance Minister Grant Robertson needs to hold his nerve.

If the polls are to be believed, this government has seen its popularity slip this year.

The good news for Robertson is that he gets two opportunities to unleash his fiscal firepower next year.

The Government has surplus headroom to deliver another spending boost in the May Budget.

Then there will be an election campaign where Robertson has the fiscal flexibility to up the ante again with more visionary policies.

Meanwhile, unless we cop a bad drought or global markets collapse, we will likely see the economy stabilise.

Economists are now picking the Fonterra milk payout to head north of $7 per kg of milk solids — a level we once called dairy-boom territory.

Beef and lamb prices are near record highs.

The low dollar is making tourism more competitive — we’re already seeing a lift in visitors from Australia and the US.

Immigration is holding firm above a net population gain of 50,000 people a year.

The local NZX50 share index is up 25 per cent this year, bolstering KiwiSaver accounts, and corporate profits have been solid.

Consumer spending remains buoyed by low unemployment and even the housing market appears to be near the end of a long slide.

We should hardly be cheering about a housing-led recovery, as it would leave many long-term structural issues unsolved.

But regardless we may get one. Westpac’s chief economist Dominick Stephens has been an outlier with his upbeat forecasts for the housing a market — but the latest Reinz stats suggest he may be on the right track.

The Westpac forecasts see annual house price inflation hitting 7 per cent next year and point to a turnaround in the sluggish Christchurch and Auckland markets.

Mortgage rates are continuing to fall and, while credit conditions are tougher now than in the boom years, the Reserve Bank has an option on lifting or loosening its Loan to Value Ratio (LVR) restrictions, which would provide a further boost.

When you look at what has really changed about the economy since the so-called “rock star” days under John Key, the housing market sticks out.

Countless columns have been written about all that was wrong about that — but the wealth effect of rising house prices is clearly a driver of economic sentiment in a way that making sensible long-term structural reforms is not.

Humans huh? We’ve been letting sentiment getting in the way of our own progress for millennia.

It seems unlikely we’ll stop now.

Which brings us back to the need for finance ministers to be the sensible and dispassionate ones.

New Zealand is heading into an era which will see greater government spending on housing and infrastructure — regardless of who’s in charge.

It’s overdue. But let’s see it done wisely and with longer horizons than the immediate business cycle.