Policies made on a calm day seem more robust
The debt crises in the US and Europe are a collision of political wishful thinking and economic reality. Jean-Pierre de Raad writes that New Zealand would do well to face its own fiscal demons now.
New Zealand seems like a safe haven. While the US and Europe struggle with seemingly impending doom, our currency has pushed ever higher, a sign of relative economic strength. But this is just a timing issue – our fiscal core is rotting just like in the US and Greece.
Our newfound illusion of fiscal restraint must not derail the necessary debate on how we tackle the unsustainable health and superannuation costs of an ageing population, and the need to improve economic performance. The US and Europe show that, when hard policy decisions are made at gun point, neither the process nor the outcomes are optimal. Policy options are better considered calmly and on our own terms.
The New Zealand dollar has soared to new post float highs, because our economy and our fiscal position is in better shape than the US or Europe. This is true, if you choose not to look too far ahead. The May budget signalled policies to improve the fiscal position over the next five years. But the real long term issues caused by an ageing population are unresolved.
So what does New Zealand have to do with the US or Europe in distress? Both the US and Europe are faced with their fiscal demons now. They show that when economics and politics collide, the result is a mess. Both have failed to show leadership to deal with their underlying issues and are instead fire-fighting to keep their fragile economies afloat.
The debate on managing Greece’s problems is about how it should default on its debt and who should pay: the Greeks or holders of Greek bonds in Germany and other parts of Europe? Even the latest rescue deal, including €35 billion of asset sales, barely stabilises Greece’s government debt at 150% of GDP. This is still unsustainable. Greeks are protesting in streets against widespread job losses, wage cuts and policy reform. But even more austerity or a better plan is needed to actually reduce Greece’s government debt to a sustainable level.
In the cases of Greece and US, the fiscal issues and economic concerns have been known for some time. But there was not enough urgency, until now, to make the hard decisions.
Now that the time has come, Greece finds it is too late. It has too much debt and there is no credible way to repay it all. Terms are being dictated by the International Monetary Fund, Germany, France, the European Central Bank and even private investors. Greece has partially lost fiscal and political sovereignty.
The US came dangerously close to breaching its own self-imposed debt limit, first introduced in 1917. Politicians cobbled together a last minute deal to raise the debt limit and cut spending. This was needed to allow the US government and financial markets to keep functioning normally. But there has been no real progress yet on raising revenue and cutting spending to start balancing the budget and put the country on a sustainable fiscal track.
The same political impasse could spread to the rest of Europe. The money for its stability fund needs to be approved by the parliaments of member countries. The voting public has lost patience with bailing out other countries. If they revolt, the stability mechanism will fail. The issue is now one of politics not economics.
This all seems far away from little New Zealand. But in fact we are a juggernaut heading from the same junction. Our fiscal deficit will balloon in the next 20 years, burdening future generations with debt, so the current generation can have ‘free’ health and superannuation, which successive governments have promised but failed to provide for.
Health and superannuation costs will grow exponentially, unless New Zealand embarks on a credible strategy to stem the flow. Governments will be forced to borrow and push public debt levels to that of the US or Greece. If we wait until crisis hits in 15 years or so, we will face similarly unpalatable decisions the US and Europe are facing now.
The Retirement Commissioner recently proposed a gradual increase in the superannuation eligibility age to deal with superannuation costs. But both major political parties refuse to consider raising the superannuation entitlement age, even in the distant future. We also need to change what publicly funded healthcare we can access, where, and how we pay for it. There is not yet a clear strategy on managing the cost of healthcare either.
Lets learn from the mistakes of the US and Europe. It may be more convenient politically to sweep economic realities under the carpet for future generations to clean up. But policies made under duress are poor. Gradual changes to policies to steer the economy for the good of all citizens are possible. But we need to start now.
Jean-Pierre de Raad, Chief Executive of the New Zealand Institute of Economic Research.
NZIER is an independent economic research and consultancy group. Part of its responsibility as a non-profit Institute is to promote debate on New Zealand’s economic challenges. More on this issue and other topics can be found on the NZIER website www.nzier.org.nz.
An occasional column for the Dominion Post newspaper.