A policy experiment in the South Pacific

Apparently we ran an experiment in economic policy here in the South Pacific which is described here:

[New Zealand] Treasurer Bill English said last week that he would cut public spending as a share of gross domestic product by more than twice as much as the Abbott government has announced.

In fact, without a minerals boom to line government coffers and despite a huge repair bill from two devastating earthquakes, New Zealand’s budget will be back in surplus by $NZ400 million ($370m) next financial year, rising to $NZ3.5bn by 2018.

English, now in his sixth year as New Zealand’s Treasurer, commendably chose not to emulate the world’s greatest treasurer Wayne Swan and kept a tight leash on public spending before and after the global financial crisis, preferring to cut income taxes and lift consumption tax. The Key government, facing election again later this year, is now reaping the rewards.

It wasn’t just our Wayne who took this road to ruin. Virtually everywhere was the same, with the US leading the way into an economic darkness it is impossible to see ending any time soon. But try to tell someone that Y=C+I+G is an economic death trap. But if you doubt it, look at the comparison with Australia.

The culmination of almost two decades of mainly populist budgets, the Abbott government will spend $6200 a person on cash welfare next year, over 25 per cent more than New Zealand’s government will on each of its citizens (converting all amounts to Australian dollars).

Education spending, at $2900 a person, is 10 per cent more generous in Australia but health expenditure is torrential by comparison: Australian state and federal governments will lavish more than $4600 a person to keep Australians alive and healthy, almost 50 per cent more than is spent in New Zealand. No methodological quibble could bridge such stark differences.

The relative splurge extends to hiring, too. Australia’s population of 23.5 million is about 5.2 times New Zealand’s, but as of June last year we had 8.4 times as many public servants: 1.89 million across our state, federal and local governments compared with New Zealand’s 226,000. . . .

Apart from a bloated public sector and a wellspring of whingeing, what does Australia get for its vastly more indulgent public spending? Much higher taxes, for one thing. The marginal income rate most Australians will pay from July — 34.5 per cent — will be higher even than New Zealand’s top 33 per cent rate, which makes a mockery of our 49 per cent top rate, which will be higher than China’s and France’s.

Undisciplined government spending will pull an economy into the dust. Such spending is a disaster both economically and then politically as governments try to pull things right.

And then there is also the delusion that low interest rates will propel an economy upwards, yet another Keynesian bequest.

Even rising interest rates have been unable to dent record high confidence levels among New Zealand households and businesses.

There is no “even” about it. High interest rates, or at least high enough to shut non-productive borrowers out of the money market, are a major factor in keeping an economy on track and growing. Economic theory today is comparable to the theories Adam Smith was writing about criticising in 1776 if not actually worse.