Election Economic Misconceptions (3) Back to Surplus

Politicians from most parties seem to be obsessed with getting the country’s books back into surplus. This might be necessary at times, if debt has become too large and there is a problem with paying the interest, but this is not the current situation in New Zealand. Compared to most similar countries, our government debt is not that large, and the interest is affordable.

If the debt level is too high, then recovering the situation by getting the government books back into surplus might be sensible. But the time to do it is when the economy is overheating, because contracting it will do no harm.

The current season, when our economy is limping and facing the headwinds of rising fuel prices, is the very worst time to attempt to get the government books into surplus. Cutting government spending will weaken the economy, which tends to increase the deficit, so the policy has an effect that is opposite to what was intended.

A big chunk of what the government spends goes on wages and salaries and benefits. So the main way that government can reduce spending is to reduce salaries, cut jobs. or reduce benefits. The problem with all these options is that cutting people’s incomes also cuts their ability to spend. So, a reduction in government spending makes life tough for businesses, as they lose sales. They have to cut back their spending to compensate for it, so cutting government spending tightens the entire economy.

The other thing that a government can do is to provide fewer services to society. But this makes people feel worse off, and they may have to pay for things themselves that the government used to provide. People who feel worse off tend to spend less, so the entire economy is negatively affected.

Another thing that the government can do to reduce its deficit is to increase taxes. But that also means that people will have less money to spend on things that businesses sell, which also dampens the economy.

To make matters worse, if the economy is struggling, the government will get less revenue from taxation, so policies that cut back economic activity can make its deficit worse.

Tightening the economy is sensible if it is overheated, but it is the very worst thing to do if the economy is already struggling. That is the situation now.

Setting a date for getting into surplus is foolish, without reference to the economic situation. Decisions about surpluses and deficits should be based on the economic conditions, not the calendar.

The politicians are arguing about how quickly they can get the books back into surplus, but that is the wrong policy for the current season. It could crush the economy at a time when it is already fragile, and the international situation is uncertain.