Archive for the ‘Economy’ category

The economy

June 6, 2008

One of the biggest election issues this year is likely to be the economy. Over the last nine years the economy has grown strongly. In part due to good luck, with high prices for our exports, partly due to the reforms of the 1980s (the growth we saw under Labour was a continuation of a trend which started in 1991), and in part, because Labour kept the main elements of the reforms of the 1980s in place, and was very cautious dealing with the economy.

However, thanks to the global credit crunch, this has changed. Unemployment has started to rise again. We also face problems with high inflation, a official cash rate as high as 8.25%, inflation set to reach 4.7% (well above the 1-3% target range) and a slowing of economic growth to under 1% in 2009 forecast. Other bad features forecast include a doubling of unemployment to 6%, a 13% drop in house prices with the lowest level of house sales in 18 years, and a fall in the value of the New Zealand dollar. Many households in New Zealand are strugling with high food and petrol prices, the high interest rates putting pressure on their mortages, and with these projections things don’t look like they are going to be much better.

None of the above is Labours fault. Sure, Labour could have cut taxes earlier, not bought in redistributive schemes like Working for Families, and so forth. But the reality is that we live in a very globalised world, and do a lot of trade with other countries. This means that circumstances beyond our control have a big impact on our economy. There was nothing that Helen Clark could have done to stop the global credit crunch from occuring, and she is just as much the victim of bad luck now, as she benefited from good luck in the strong growth over the last nine years.

However, economic growth does not come from itself. While government policies have limited effects on growth in the short run, they can set the foundation for better conditions in the long run. But there are limits to what can be achieved. Creating a good business enviroment (low taxes, low levels of regulations, little corruption and stable macroeconomic conditions) as well as investing in infrastructure needed and resources (the most important economic resource is of course people, who need good educations to preform well in a high skill based economy), are the main things. Obviously economic growth needs to be balanced against other concerns like looking after the poor and the enviroment. However, economic growth will make these tasks a lot easier (and basically any other task in government). The reality is that you can not afford to spend much money on social welfare, on health, or education, or fighting climate change, with a failed economy. That is why improving the economy should be central to every Parties plan for New Zealand’s future.

I am not an economic expert (I only took 2 first year papers and one second year paper at university on economics) but I do know the basics. A good plan to improve the New Zealand economy (long term) will consist of:
*Creating a low and flatter tax system, with the abolition of redistributive tax rebates (such as working for families).
*Investing heavily in education, transport and communication networks.
*Reviewing, with the aim of reducing red tape, the Resource Management Act, and all other bureacratic regulations.
*Mantaining the independence of the reserve bank.
*Create competitive markets where state monopolies exist, such as ACC.
*Aim to sign free trade agreements with more countries like the United States.
*Aim to keep markets as flexible as possible, so they can easily adjust to changing market conditions.

In the short run, make progress on all the above. But mantain medium governemnt surpluses (funding tax cuts through cuts in spending) to give the government flexibility, and avoid putting more pressure on inflation and/or overheating the economy, and try not to let interest rates fall too soon or fast (high interest rates are good for punishing people who live beyond their means. On the other hand, in keeping our dollar high, they hurt our exporters).

Enough on my ideas. Back to the real world. The great worry facing the economy is that we could be looking at stagflation in the worst case scenario. In any case, with high inflation and a high OCR, Keynesian style fiscal stimulation is not what the economy needs now, and as Bernard Hickey blogs, the 2008 budget could do more harm than good. Sadly, with this election likely to be a bribe war between Labour and National (like the last), things aren’t going to improve anytime soon.

Onto the political implications. No doubt the tax cuts in the budget were one massive election bribe. The New Zealand public is demanding them to help them in their financial distress. Sadly, although they could help long term, they are not the answer. The risk is that if New Zealanders go and spend all their extra tax cut money, it will push inflation up, the OCR up, the dollar up (huting exporters) and eventually cause a recession. Even if this doesn’t happen, the improvement to peoples financial circumstances from tax cuts will not be overwhelming, and quickly eaten up by rising petrol and other (perhaps more food) price increases. The key to improving peoples wellbeing in the long term is not a one-off tax cut, but long term wage increases driven by growth in productivity.

I don’t see much of this message from National. Instead, don’t be the least bit surprised if they use tax cuts as a massive election bribe to buy their way into office, like they tried to do last election. The political risk for National is that they will get voted into office now with people thiniking about how they will spend all their new cash, with inflation eating it up almost as soon as they get it. At the same time, all the predicted forecasts (higher unemployment, inflation, low growth e.t.c come to pass). People quickly forget about the tax cuts, blame National for the economic downturn, and return Labour in 2011. There is no doubt that Bill English will have his work cut out for him, with the bad shape the economy is in.

I strongly believe that reruning the 2005 campaign of using tax cuts as an election bribe, while it may work this election (a big if), will hurt National in the long term. Instead National should talk down its tax cuts, promising they will be modest, and not to expect too much from them. When they do come out, they should be identical to Labours, with a few minor alterations to the top tax brackets, like removing the 39% rate, cutting the company tax rate and only minor adjustments above Labours promises to the lower thresholds. They should not be sold as a bribe, but as part of a wider package at lifting New Zealand’s economic growth. A emphasis should be made that we are facing tougher times, and the higher petrol and food prices are here to stay. Nationals first budget should keep with this scheme, think long term, and be a real chance for National to stamp its mark upon the economy. And should include spending cuts, and the clear message that we must be prudent with our finances to help us through the tough times. Above all, national should avoid blaming Labour for the bad economic conditions (as things will not miraclously improve once National takes office). Sadly, I will be most surprised if my approach is taken.

Ultimately, time will tell what happens to the economy, and what National does. I really hope for the best, especially for those low income families struggling under the conditions, but fear the worst.

The world in the future

April 16, 2008

Predicting the future is very difficult, largely because almost anything can happen, and events will always surprise us. However, it is very likely that the world in the future will be very different to the one we live in now. And within my lifetime, one can be reasonably confident the US will decline from being the sole superpower, to a multipolar world, with China and India as world powers almost as powerfull as the US.

The Economist has a good graph here, showing projected economic growth rates over the next two years, showing the % by which their economies will grow this year and next year. The results are:
China: 19% (and this is already a big economy- watch out)
India: 17% (another 2 years of spectucular growth on the way)
Russia: 12%
Brazil: 9%
South Africa 8%
Mexico: 4%
Britain: 3%
Eurozone: 2.5%
Japan: 2.4%
US 2% (no doubt reduced by the current economic problems)
The trend is clear. The developing countries are growing rapidly, while the rich countries are growing slowly.

If these trends continue (and they are likely to do so), the rapidly developing countries will make up a much larger share of the World economy.
In 2003, Jim O’Neil, a Goldman Sachs economist, invented the new term “BRIC” (an acronym for Brazil, Russia, India, and China) to identify countries he thought would become major players in the world economy in 2050. This arguement was outlined in the Goldman Sachs paper “Dreaming with BRICs: The path to 2050” (avaliable here), in which Goldman Sachs created a model to forecast future economic growth, and entered data into it for the BRIC countries, and also the G6 (US, UK, France, Germany, Italy and Japan). To test the acuraccy of the model, the same test was applied for the period 1960-2000, for the G6 countries, and South Korea, Hong Kong, India, Brazil and Argentina, and turned out to be remarkably accurate, with the exception of Brazil, Argentina and especially India, where growth was much lower than the model predicted, and the model slightly underestimated growth in South Korea, Japan and Hong Kong. In a 2005 follow up paper here they looked at 11 other emerging countries (including Indonesia, South Korea, Mexico, Nigeria, and Turkey), all of which (except Turkey) will also grow strongly and play a larger role in the world economy.

Lets compare the world in 2005 to their projected 2050 world (the figures not in brackets are GDP in billion $US 2005, GDP per capita is in brackets, with countries listed by size of their GDP, the 2005 follow-up paper is used for the 2050 projections). The change to the top 12 is particularly interesting:

2005:                                            2050:
United States 12 454 ($42 114)     China 48 571 ($35 105)
Japan 5 293 ($41 538)               United States 37 666 ($89 663)
Germany 3 062 ($37 146)              India 27 235 ($17 011)
France 2 314 ($38 151)                 Japan 8 040 ($80 492)
United Kingdom 2 261 ($37 411) Brazil 8 028 ($35 143)
China 1 918 ($1 468)                    Mexico 7 838 ($52 990)
Italy 1 185 ($32 446)                     Russia 6 162 ($55 630)
Canada 1 156 ($35 226)                Germany 5 440 ($73 904)
South Korea 814 ($16 741)            United K. 5 067 ($79 203)
Russia 754 ($5 257)                      France 4 483 ($79 807)
Mexico 753 ($7 092)                     Indonesia 3 923 ($11 668)
Brazil 747 ($4 013)                       Nigeria 3 708 ($10 402)
India 746 ($691)                          South Korea 3 684 ($81 462)
Turkey 349 ($5 013)                   Italy 3 128 ($62 083)
Indonesia 272 ($1 122)                 Canada 2 983 ($71 993)
Nigeria 94 ($733)                         Turkey 2 757 ($31 880)

Of course, a lot can happen in 50 years, and the actual 2050 figures wil probably be quite different. But what is much more important than these figures is these trends.

The basic reason why the US is the worlds sole superpower today is because of the size of its economy, in 2005 matching those of the next 4 countries combined. A country can not afford to spend much on its military with a failed economy.

In the future this will no longer be the case. China and India will be world powers a longside the US, and there wil be a new range of not insignificent regional powers like Brazil, whose influence can also be felt. Some of the large third world countries will have economies the same size or bigger than large european countries. In short the days of the West dominating the world are over, and a whole new age of Asian and other non-Western countries dominating the world stage is about to begin.

The deficit

March 18, 2008

It turns out the $400 000 000 deficit is actually a $600 000 000 surplus. So there is (some) money for tax cuts after all. Actually, I didn’t look that much into the deficit anyway, regarding it, like the low surplus now, as a temporary thing due to the recent US economic problems. None the less, the fact the surplus is now only $200 000 000 instead of the billions means any tax cuts will be very small.

It also raises the question of where the surplus has gone. No doubt much of it has gone into Labours irresponsible working for families and interest free student loan bribes, along with runaway spending elsewhere. One interesting thing to note from the 2007 budget was its inclusion of $10.3 billion in contingencies for new expenditure. No doubt we will find out more detail of where this unallocated sending will go now that it is election year (hint: election bribes).

For those interested in tax cuts, don’t get despondant about the surplus at only $200 000 000. The real surplus (OBEGAL), not the cash surplus (OBEGAL doesn’t count investment in assets as expenditure, which would be counted as expenditure in the cash surplus) was 3.1 billion, but with this error corrected is now 3.8 billion. Actually slightly ahead of forcast. So there is still money avaliable. And that $10.3 billion in contingencies can be forgotten about. If your brave enough to cut spending you might be able to afford something decent.

However, not everything is good. The economy is projected to grow at only 2% per year over the next three years, and with our population growing at 1.5% average per year between the 2001 census and the 2006 one, our per capita growth will probably be around 0.5%. This is bad, as when the economy grows, the government gets more tax revenue (e.g. more people spending more money, more GST, as well as more jobs (more income tax) and less people on benefits) creating room for tax cuts (which can lead to more growth causing an upward spiral) and better public services. And 2% growth could be good news. There is talk of a possible recession.

Translation: There may be money for tax cuts now, but may not be in future.

Auckland Airport update

March 11, 2008

The Canadians have revised their plans for Auckland Airport, with their newest proposals involving them owning 40% of the shares, but having less than a quarter of the votes on the airports board. One quarter is definitely not a controlling stake. This leaves Labour with an interesting decision to make. Should it make it more obvious that its decisions with Auckland Airport are a desperate poll driven attempt to gather the xenophobic vote, damaging our economy in the process, or back down and continue its support for foreign investment in a free enterprise based economy, and also avoid a politically damaging court case. My bet is with the former option, but I really hope the later is the one Labour chooses.

David Farrar also makes a valid point about Labour having the NZ super fund invest in strategic assets in many countries around the world.

On No Right Turn, Idiot Savant continues with his left wing hysteria talking about how foreign ownership leaves “those assets to be run down and asset stripped to satisfy their new owners rapacious desire for profit”. One would expect a pension fund to take a nice long term view when making decisions.

Auckland Airport

March 6, 2008

Given that the Government was willing to break the law in 2005, and steal  $800 000 taxpayers money to win (or steal) an election in 2005, and then greatly restrict our right to free speech with the Electoral Finance Act, it should come as no surprise that the Government is willing to resort to xenophobia and damage the economy in a desperate bid to retain power this November. (more…)

Dollar in a dive

August 17, 2007

This is the healine of today’s Dominion Post. More recent news shows it has fallen to just over 67 US cents. This is a very steep fall. It was only weeks ago that I was writing about it getting to 81 cents (which turned out to be the highest it would reach). One important thing to note about the dollar is the way it has mirrored the actions of the NZX50 (sharemarket), especially over the last two months. This confirms my view that it is the strength of our economy that plays an important role in keeping our currency strong.

Another interesting observation is that the dolar has fallen despite the hike in the official cash rate (OCR) to 8.25%, its highest in a long time. Usually increases in the OCR push the New Zealand Dollar up. The drop in the New Zealand dollar is probably good for the economy overall, and will be icing on the cake for sheep, beef and especially dairy farmers enjoying high prices for their products. But it will hurt more than benefit many urban new Zealanders, who wil face hikes in petrol prices and other imported goods. However it still remains volatile and could bounce back up. The recent drop in the dollar and sharemarket coincides with a downturn in world markets. Despite this I remain convinced that our economy is very strong, with high export prices for our agricultural exports and a bigger than expected government surplus which gives more room for tax cuts (as well as Labour election bribes, something there will be lots of next year), and even if our economy does go sour, the high OCR can be reduced and more Government spending (or tax cuts) can take place to inject demand into the economy to make it grow again.

Best times still ahead of us

July 27, 2007

In a interview with Bill Ralston, published in the Listener July 21-27, John Key says he believes New Zealand’s best times are ahead of it. He said “I personally think the best 20 to 30 years are in front of New Zealand”. He claims this is partly because of growing demand for our products from China, and good dairy prices. Key has gotten rich as a foreign currency trader, so must know a fair bit about economics. Lets hope he is right.