Tuesday, November 09, 2010

English's death spiral

Yesterday, we learned that the economy is in a death spiral. People don't have enough money, and so aren't spending. As a result tax and GST revenue are down. In addition, the government's books have taken a massive hit due to EQC paying out $1.5 billion for the Canterbury earthquake. Which means the government is having to borrow more money. Their response to this? Cuts, of course:

The Government is signalling it will tighten its belt another notch, with new figures showing the deficit has blown out by $2.2 billion since the May Budget forecasts and recovery is still sluggish.


Finance Minister Bill English said the lower revenue was largely caused by lower consumer spending, as New Zealanders paid off debt and saved more. He said the Government was still committed to "ongoing spending restraint".

Which sounds good and thrifty and all, and its exactly what an individual would do if their income wasn't meeting their expenses. But the government isn't an individual - or rather, it has duties to manage the economy and protect us from its excesses as well. And those duties make cutting spending in this sort of recession exactly the wrong thing to do. More cuts will mean people have less money to spend. Which means less demand and less consumer spending, and that's exactly the problem we're in. Faced with a death spiral, the government is hellbent on making it worse.

If you're getting a sense of deja vu, its because this is exactly what Ruth Richardson did in the early 90's. And the result was a prolonged recession, mass unemployment, and the creation of a permanent underclass. English, who learned at Richardson's knee, is repeating her mistakes. And we will all suffer for his stupidity.