Brian Fallow: Consultations are over, now it's time for decisions

Economic recovery is under way, but how much credit can the Government take?The measures the Government undertook to 'take the sharp edges off the recession' have been useful but pretty marginal in the overall scheme of things. TO BE entrusted with the stewardship of the economy a year ago must have seemed a poisoned chalice for the new Government.

The country had been in recession for almost a year and the international financial crisis was at its peak. Gloom abounded.

A year later, recovery is under way, consumer and business confidence have soared and house prices are back within 5 per cent of their all-time highs two years ago.

Instead of the worst slump since the Great Depression, we have had one that is about average for post-war recessions, in terms of the peak-to-trough decline in output.

Unemployment has yet to peak but economists believe most of the increase in unemployment is behind us and the rate may top out below 7 per cent, well below the 11 per cent suffered in the early 1990s.

But how much credit can the Government claim for this? How much is good luck rather than good management?

New Zealand has had some things going for it in this downturn as John Key - often seen in the role of cheerleader-in-chief - was quick to acknowledge.

Even in a global recession people have to eat. New Zealand's trade has been hit less hard than countries which earn their living through manufacturing or financial services.

It helps that nearly half the country's trade is with Australia and East Asia, which have fared better in this crisis than the heartlands of the Western world.

The exchange rate has done its job as a buffer, falling last year as world prices for our export commodities plunged, though its strength this year has gobbled up the rebound in commodity prices.

The Reserve Bank slashed the official cash rate by nearly six percentage points.

And the National Government inherited a strong Crown balance sheet with, by international standards, very low levels of debt.

In fact, its principal response to the crisis has been deliberate but, in a sense, passive: to allow its balance sheet to take the strain as the private sector ground to a halt and then went backwards.

In the fiscal year to June 2009 Government spending jumped $7 billion or 12 per cent, largely under the impetus from Michael Cullen's last Budget but also boosted by rising numbers of unemployed. At the same time tax revenues shrank $2 billion as the economy contracted and Labour's tax cuts in October and National's in April took effect. Combined with a boost to infrastructure spending, the effect has been a timely fiscal stimulus of around 3 per cent of GDP in both the 2009 and 2010 financial years.

The flipside is the need for serious belt-tightening for years to come.

In this year's Budget, Finance Minister Bill English flagged a reduction to little more than $1 billion a year in the future allowance for increased operating spending.

The Treasury warned this week that that would mean a contraction in public services over the next decade if we were to avoid unsustainable runaway growth in Government debt and/or counter-productive increases in taxation.

Fiscal policy aside, the measures the Government undertook to "take the sharp edges off the recession" have been useful but pretty marginal in the overall scheme of things.

The ReStart package of assistance for people made redundant has benefited just over 5000 people since its inception in December. But there are 138,000 people officially unemployed and 60,000 drawing the unemployment benefit.

The Job Support scheme, supporting firms which shift to a nine-day fortnight, has just 39 businesses taking part. There have been tax changes to ease cashflow pressures on smaller businesses, though they do not reduce their final tax bills. The "rolling maul" and the Jobs Summit have not left deep footprints.

What then of progress towards addressing the economy's deep-seated structural weaknesses and achieving the "step change" in economic performance the Prime Minister likes to speak of?

The Government has avoided a bull-at-a-gate approach in favour of a brain-picking approach. It has set up advisory groups, taskforces, working groups and ministerial reviews across a wide range of issues.

Among them are the tax working group, the 2025 taskforce looking at how to close the income gap with Australia, the electricity advisory group and the ACC stocktake.

There are consultation processes on water, broadband and the Resource Management Act, and a rewrite of the emissions trading scheme is now before a select committee.

The aim seems to be to get private sector input early in the policy-making process, to improve buy-in and balance whatever advice officialdom delivers. It reflects the Government's belief that making the economic boat go faster comes down to attention to detail across a very broad front of what the state does and what it regulates.

The past year has been a year of consultation. The year ahead will be one of decision.