Vindication for Steven Joyce

Although it is a year too late.

Former Finance Minister, Steven Joyce

You will all remember how, this time last year, Steven Joyce claimed that Labour, in their election campaign, had an 11.7 billion dollar fiscal hole. Steven was ridiculed by economists and journalists alike, but he stuck to his guns. It was so bad that his poor marks at university for economics papers were dragged out, and it was claimed that his knowledge of economics had not improved. He was the Minister of Finance at the time.

RNZ, in this article from September last year, fell just short of ridiculing Mr Joyce, presumably claiming that what he was doing was effectively ‘politicking’. quote:

Mr Joyce insisted today that outside of laying down its spending on health and education, Labour had left no allocation for increased spending in any other area of government.

“Either they’ve mucked up the allowances and it’s an $11.7 billion hole, or they’ve just ignored the expenditure they’d have to make over the next four years – which is also an $11.7 billion hole.”

He said Labour’s figures would mean a two-year freeze on most government expenditure, with no new money for things like funding for the new Ministry of Vulnerable Children.

BERL, an independent company Labour employed to check its books, stood by its work. Chief executive Ganesh Nana said Mr Joyce was categorically wrong.

“It’s just pure fiction, based on disagreement over definitions. Nerds like me love it, but I wouldn’t expect voters to be at all interested in what an operating allowance is. I would expect voters to be more interested in where is the spending happening, and is that spending actually worthwhile?”

The New Zealand Initiative – a libertarian think tank – said National appeared to have made a basic accounting error in its criticism.

ANZ chief economist Cameron Bagrie also suggested Mr Joyce went too far in saying there was a “hole” and said that term was “too strong”. end quote.

I have no respect for BERL. They only work for socialists. That tells you all you need to know.

But slightly less than one year later, economist Cameron Bagrie has changed his tune. He has now decided that?Steven Joyce was correct?about the fiscal hole.

Well, well. What a surprise. quote:

Steven Joyce is going to be proved right. There is a fiscal hole and a softening economy is making it wider.

I don’t like the term fiscal hole. Good policy should dominate over strict debt targets and economic cycles come and go which are often beyond government control.

But the Labour-led Government’s fiscal hole is looking deeper by the day – and bigger than the $11.7 billion of additional borrowing that Joyce identified. end quote.

Well, there you go. Steven Joyce is not popular on this blog, but he was a competent finance minister. I always thought the comments about his university grades were just downright insulting. Turns out, he was right. quote:

Growth is weaker, the Government is already borrowing creatively to the tune of $6.4 billion via Crown entities (keeping it out of core government net debt metrics) and spending demands are headed one way.

That combination will pressure its fiscal position.

Some are calling for more spending on infrastructure to stimulate the economy, and abandoning debt targets altogether.

That, however, is a step too far.

Turning the dial on fiscal policy also takes time.

Borrowing to try and build more stuff against a backdrop of capacity, credit and cost issues in the construction sector won’t do much anyway. end quote.

Did you see that? We are calling on measures to stimulate the economy, as they did in the 1930s? How has it changed so dramatically in less than a year? quote:

Before the election there was broad agreement from economists, myself included, that there was no fiscal hole in the Labour’s fiscal plan.

The lack of money left in the kitty post the 2018-Budget raised issues of credibility, but the fiscal parameters were technically achievable.

It wasn’t going to be easy, but it was possible, so the Government was given the benefit of the doubt.

But the picture is changing and the Government’s ambitions are looking more and more like pipe dreams. end quote.

Everyone was affected by Jacinda’s fairy dust last year, including Cameron Bagrie, but somehow, it now seems to be wearing off. quote.

The realities of a coalition Government meant more needed to be spent. Spending allocations in the 2019 and subsequent Budgets were increased by $525 million to $2.4b per year.

That looked fine against a backdrop of solid projections for growth. But it was a risky strategy with the economy late cycle as opposed to early cycle.

The economy is not tracking as expected. The Treasury is projecting 3 per cent plus growth. Something closer to half of that is on offer. end quote.

But the stage of the economic cycle hasn’t changed since last year. In fact, not much has changed. So why has a respected economist now come out and admitted that the government is in trouble? quote.

Each 1 per cent change in growth is worth around $800m in revenue.

And with it goes more than $1b per year in tax.

Over four years you lose more than $4b. A second year of the same sort of growth would really hurt.

The Treasury and Government are under-estimating the transitional cost of changing New Zealand’s economic model. As some sectors contribute less to growth than we’ve seen in the past, other sectors will need to step up. That will take time. end quote.

All of this could have been predicted a year ago. And this is without taking into account falling business confidence which, no matter how much Jacinda and Grant Robertson try to ignore it, is real and is costing the economy every day.

It angers me that people like Cameron Bagrie decided to ignore economic theory a year ago, and fell for Jacinda’s fairy dust. But he is not falling for it now. More and more, we are finding supposedly neutral observers pulling away from this government. That is because they can see the writing on the wall, and they do not want to be tainted by it. And with good reason.