Friday, May 05, 2017

This is why we can't have nice things

Writing in the Herald, Brian Fallow examines National's new net debt target of 10 - 15% of GDP - and specifically, what it will cost us:

We are not talking about trivial amounts of money here. Right now, 1 per cent of GDP is about $2.6 billion.

Say you wanted to keep net debt at 20 per cent of GDP. That is, after all, an extremely low level by international standards.

And let's assume nominal GDP grows by 4.5 per cent a year, which is what it has averaged over the past 12 years. Nominal GDP growth is the combined effect of real growth and inflation and is a rough proxy for growth in the tax base.

In that case, as a matter of arithmetic, a Government would be able to run a (cash) deficit of 0.9 per cent of GDP and still keep the debt ratio at 20 per cent.

Instead, the Government's fiscal priority is to reduce net debt by between 1 and 2 per cent of GDP a year over the next eight years. That will drive the target for the operating balance and limit the scope for capital expenditure.

Now, 0.9 per cent doesn't sound like much. But it is about what the Government spends on defence, or twice the annual cost of the accommodation supplement. That calibrates the scale of the opportunity cost here.

Or, its a massive housebuilding program, paid parental leave, ending child poverty, and stacking money away in the Cullen Fund to ease against the inevitable retirement of the Boomers (and its all of those things because its 0.9% extra GDP every year). And National is sacrificing this in pursuit of a debt target which is entirely arbitrary and self-imposed. Its austerity for the sake of austerity! But when we have enormous social and physical deficits from National's past cost-cutting excesses, it is entirely the wrong policy response.

This is why we as a country can't have nice things: because one of our major parties is committed to a government which simply can not afford them. But its entirely a matter of choice. If we want a government which actually can provide the services we expect, we can vote for one in September.