Election 2011: Risk factor of global crisis ignored

Photo / Kenny Rodger

Whether from fatalism or insularity, there has been scant focus this campaign on the risk of the economy getting sideswiped again by the wider world.

Yet the risk of another global crisis is rising, emanating this time from Europe.

Even if that risk is averted, the global economy is slowing. Export commodity prices, while still high, have been declining for months - unhelpful if you hope for an export-led recovery.

If there is another global recession, the impact on New Zealand could be more severe than the last one, because the starting point is worse. Unemployment is higher and there is much less scope to cut interest rates or for the Government to take the sharp edges off the recession - it has just posted an $18 billion deficit and had its credit rating downgraded.

A toxic build-up of debt has left both main parties committed to returning the Government's books to the black within three years.

For National this would largely be an exercise in austerity, shrinking state spending as a share of the total economy.

For Labour it is more of a stretch, especially given that it has made some expensive promises such as income tax cuts for all but the top 2 per cent.

Other big-ticket items on Labour's list are making KiwiSaver compulsory while maintaining its tax credits, and extending Working for Families tax credits to beneficiary families. But both of those are delayed for the sake of the short-term fiscal position.

On lifting household savings rates, National is relying on the effects of last year's tax switch, which it says will take years to be fully felt. The idea is that higher GST discourages consumption, while lower income tax gives people at least the option of saving more.

Labour prefers compulsion, by making KiwiSaver mandatory for employees and by immediately resuming contributions to the Cullen Fund.

But both approaches face the inescapable fact that you can't have your cake and eat it. More saving means less discretionary spending.

Technically the economy has been in a recovery phase since the June 2009 quarter but the recovery has barely kept pace with population growth.

The unemployment rate has wobbled around 6.5 per cent for 2 years, while per capita output is still nearly 4 per cent below its pre-crisis peak in December 2007.

The Treasury forecasts moderate economic growth of around 3.3 per cent a year over the next two years. But nearly half of that comes from construction - rebuilding Christchurch, leaky homes and a normal cyclical recovery in residential building. It is better than nothing but it just repairs damage already done.

And those forecasts are predicated on a resolution to Europe' sovereign debt issues and an assumption that growth among our trading partners will be stronger next year. Financial markets do not share that sanguine view.

Some economists argue that much of the economic weakness in the Western world is structural rather than cyclical. Globalisation, technology and demographics have combined to deliver a lower growth rate and higher-than-normal structural unemployment, with the debt-fuelled growth of the past decade masking that deterioration.

If they are right the economic policies we need to be hearing about are structural ones.