Listener: April 2, 2011

Keywords: Macroeconomics & Money;

As the nation comes together in its response to the Christ church earthquake, the activities of opportunists are particularly detestable. Most obvious were the few looters taking advantage of people’s unprotected homes. But the worst case of opportunism may be in economic policy, when it is claimed that certain programmes would have to be reduced because of the devastation.

It was known before the earthquake that features of Working for Families and the zero interest on student loans packages were problematic. (For example, Inland Revenue has declared one woman “not-married” so she does not have a Working for Families entitlement, although Work and Income has said the same woman is “married” and ineligible for the benefit.)

It was also being argued, well before the earthquake, that remedying these defects presented an opportunity to cut back on public spending, but that is not necessary. For instance, I would reintroduce market interest rates on student loans, but use the fiscal savings to increase student grants.

This opportunism arises because there is a desperate need to reduce Government spending, given the size of the internal deficit and the concerns that overseas lenders think we are too heavily in debt and borrowing too much. What the cut- backs are about is how we share out the burden of adjustment. It is not obvious that families and students should bear more than most.

It is further opportunism to say that the cut-backs are needed because of the Christchurch earthquake. They aren’t. They were necessary before February 22 and they were necessary before last September. To pretend the economy was in a good state before the earthquakes is just dishonest. I doubt it helps to mislead the public, except in the short term, for it makes medium-term economic management much more difficult.

It is true the earthquakes have compounded the difficulties of fiscal management. The Government has, rightly, responded generously to the financial and resources needs of the public in their immediate distress.

Such emergencies are one of the reasons the Government needs reserves (and why the recent increasing of public debt has been a bit of a worry). These demands won’t go away quickly. There is an awful lot of public infrastructure to be replaced, and the private sector will need support, too.

A further complication is that some of the resources for reconstruction for both sectors will have to come from other parts of New Zealand. Len Brown, the mayor of Auckland, was right to acknowledge there will be less for extending Auckland’s infrastructure and so there is a need to look for alternative sources of funding.

This year’s Budget is going to be as fiscally difficult as it gets. It’s election year, so the Government would prefer to sit on its hands (or indulge in handouts). But as Finance Minister Bill English has insisted, fiscal consolidation – reducing the medium-term deficit – is urgent. Dealing with the earthquake adds to public expenditure. My impression, though, is that despite their reputation, foreign lenders are not unmindful of the devastation from the earthquake. If they are convinced we have a programme of sound fiscal consolidation, they may well lend more for earthquake reconstruction purposes.

What is needed, then, is a 2011 Budget that determinedly returns the Government finances to surplus in the near-to-medium-term. But the rebuilding of Christchurch cannot be left solely to the market. Its “me first” is not going to work in this case, and neither will it efficiently co-ordinate the resources required, let alone prioritise the reconstruction and share the burden in the way we want.

What we need is a Government White Paper about earthquake reconstruction. Did I write “Government”? Would it not be just wonderful if the national consensus – looters aside – that has arisen from the pain of the devastation from the earthquakes was continued in Parliament by a multi-party approach to the reconstruction? It will probably take at least a decade, so it requires a nationwide commonality of vision. That would not be opportunism but New Zealand collectively seizing an opportunity.