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New Zealand and the Financial Crisis

Reading Time: 4 mins
  • Gary Hawke

    New Zealand Institute of Economic Research

In Brief

Political timing has put an unusual emphasis on New Zealand’s fiscal situation in relation to international financial turbulence.

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In the 1980s, reforms included adoption of General Accepted Accounting Practices for the public sector, the most important aspect of which was that accrual accounting would provide better information for political decision-making. It did, but despite being based on a belief that transparency was desirable and influential, it did not stop concealment of the financial situation of the Bank of New Zealand in the 1990 election campaign. In the early 1990s, legislation required that an election campaign should be marked by a Pre-Election Economic and Fiscal Update in which not only would the Minister of Finance explain developments and intentions, but the Secretary of Treasury would attest as a matter of professional judgement to the accuracy of the information provided.

The current government has undermined much of what was achieved in the 1980s. It has given up the attempt to keep the tax system simple and transparent; the Working for Families initiative addressed the way that in a society characterized by multiple-income families children are likely to experience relative poverty but it did so in a way which makes it very difficult to track redistributive effects. Subsidies reappeared in the tax system for activities like Research & Development with little ability to monitor effectiveness. Most important, an initiative to facilitate realization of private savings intentions was turned into a heavily subsidized KiwiSaver programme whose effects on redistribution are likely to be large and random while the effect on savings behaviour will probably be small.

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For some time, fiscal discipline was maintained, essentially by the scrooge-like behaviour of Dr Cullen as minister of finance. But with the passage of time, and movement of the political pendulum, the loss of rigorous control through the mechanisms of the 1980s and 1990s began to show. There was even a fading of the principal lesson of the Muldoon years, that it is unwise to allow one person to concentrate the power of Prime Minister and Minister of Finance. That error has not been repeated directly, but Dr Cullen acquired a major spending portfolio, Minister of Treaty Settlements.

The requirement of a Pre-Election Economic & Fiscal Update was not removed. It showed a major deterioration in the government’s fiscal position and in prospects for the years ahead. The Secretary of the Treasury delivered on the requirement of “professional judgment” although some contingent liabilities could be traced only in obscure notes.

As more transparent government accounts were developed in the 1980s and early 1990s, debate centred on what an optimal balance sheet for New Zealand would look like. Economic theory and political assessment did not generate a precise answer, but it was not difficult to conclude that that New Zealand’s position in the international economy pointed towards a conservative stance which gave a lot of attention to capacity to withstand adverse external shocks. A succession of Scrooge and profligacy was not what was recommended.

Adverse external circumstances have arrived. They were too late to be part of the content of the Pre-Election Economic & Fiscal Update but even politicians and political commentators could see that the latter gave a good starting point for assessing prospects. Nevertheless, there has been more attention to somewhat hysterical discussion of the mindless reactions of both market participants and governments, and efforts to identify moral failings than sober analysis of New Zealand’s position.

The impact on New Zealand will include very orthodox trade effects. Some, like obvious effects on prices for dairy products, will be significant even if their precise size remains to be seen. In comparison with past events, there will be more importance to the impact of rising cost of capital on major international infrastructure projects which included participation by New Zealand suppliers (of services as well as goods) and rather less impact from consumer demand for exported commodities. But the channel is essentially conventional, and its extent will depend above all on what happens in Asian, American and European markets. Secondly, there is the possible impact on New Zealand exchange rates as changes occur in markets in which the New Zealand dollar is traded. Past efforts to reduce the extent to which the value of the New Zealand dollar is affected by trades unrelated to the real domestic economy will be appreciated, but unfortunately will remain of limited impact. Thirdly, New Zealand has drawn on overseas savings, and there are related deals to be financed and refinanced. Developments in American and European financial markets will probably reach New Zealand through the four main banks which are subsidiaries of Australian banks, but there are complicated questions of liabilities between the subsidiaries and their parents to be worked through. The knee-jerk reaction of government guarantees for bank liabilities merely adds to the complexity. The loans are primarily private, especially through banks, but announced and prospective government guarantees add greatly to the contingent liabilities disclosed in even the detail of the Pre-election Economic & Fiscal Update.

This is a long way from thinking in terms of traditional balance of payments problems although not all commentators have resisted the temptation to turn to the familiar. Growing international interdependence means that simple ratios like the balance of payments on current account as a percentage of GDP are less important than they were. We know less about assets owned by New Zealanders abroad than we know about international participation in New Zealand investment. Their management will be exercising their owners – or at least the agents of the owners in areas like managed funds – but they register less keenly with those managing the government accounts. Nevertheless, it is international interdependence of all kinds that is under scrutiny.

The election campaign makes marginal contact with the economic issues. Obama found himself in trouble in America through use of the phrase, “spread the wealth around”. He actually prefaced the comment with the observation that he did not want to penalize wealth holders but facilitate the acquisition of wealth by those coming behind. He would not have needed that context in New Zealand politics. Even the opposition talks more about wealth distribution than about acquisition. The coincidence of the Pre-Election Economic & Fiscal Update with the international crisis gives us an unusually good information base, but its impact has been small.

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