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Opinion: In good times, governments should stop spending

OPINION: In 1929, the stock market crash signalled the start of the Great Depression in the United States. The economic collapse spread to other countries, which led to the saying, "When America sneezes, the rest of the world catches a cold."

New Zealand was hit hard. The shock of poverty and unemployment drove voters to the Labour Party, which won its first election in 1935. The new government immediately began welfare spending in a manner now called Keynesian economics after its international promoter, John Maynard Keynes.

Keynesian economics is attributed with bringing the world out of recession and starting a growth period that lasted through World War II, until the 1970s. But Keynes published his theory in 1936, so it was actually another global first for New Zealand, as we led the way a year earlier.

The basic principle of this theory is that governments can take a longer-term view than the free market and can act in an opposite way to the business cycle. When the economy is in recession, government (including local councils) should increase spending and hire more people with job creation schemes. Then, when the private economy is expanding, the government (and councils) can cut back without causing hardship. The cutbacks allow revenues to build up as a buffer against the next downturn.

Hamilton had a great example of this with otherwise unemployed people being hired to dig out the Garden Place hill. You can see the embankment on Anglesea Street where the hill was cut in half by this make-work scheme. The productivity boost to Hamilton has been huge and long-lasting. Imagine climbing that hill every time you travel along Victoria Street.

The theory is sound, but in practice through several business cycles, governments never cut back. Managers who grew their departments in recessions liked the power and pay that went with their new empires. When the good times arrived, more tax income was used to fund further expansion when they should have been downsizing.

The oil shocks of the 1970s caused a recession, but governments had spent their buffers and were bloated. Inflation shot up as the Keynesian requirement for spending was financed by borrowing. New jobs added bureaucracy instead of productivity.

The adjustment of Rogernomics was harsh for New Zealand and a lot of people were hurt. The 1987 crash should have brought a reversal in policy, but there was no rainy day fund and too much debt already. Instead of the quick bounce the United States had, Ruth Richardson continued the cutting in the recession and New Zealand's pain lasted another decade.

The government continued to get the theory backwards with Helen Clark growing the government in competition with the private sector during the global boom period. After the Global Financial Crisis hit in 2007, John Key began cutting back, worsening poverty.

Councils are also supposed to put the theory into practice, but while there have been many expansions, there has never been a cutback.

The business cycle is up, the economy is healthy, Hamilton is growing, and there is plenty of private investment in the likes of the Ruakura Inland Port, Perry's Te Awa Lakes, and inner city redevelopment. This means it is the right time for council to start cutting back on jobs and spending.

In what appears to be good news, Richard Briggs is tasked with finding $94 million in savings. The first question that springs to mind is, Why weren't these cuts made years ago? It appears we have been paying for services we didn't really need. Still, it is nice to finally see a start.

Except it isn't. Instead of being a cutback, the savings are solely to allow debt to be increased in a massive spending program.

We are not absolutely opposed to the long list of maintenance and infrastructure that is needed, nor the nice-to-have playgrounds and more subdivisions. But we are pointing out that the timing is terrible. This is when the buffer needs to be replenished and debt levels reduced. The pet projects should be delayed until the next downturn when the ratepayers don't have to compete with private enterprise for tradespeople. We will get better value for our rates at a time when people need the work.

This is the long-term view that council should be taking. The ratepayers need a break before the next recession breaks them.
* Andrew Bydder is a spokesman for Hamilton Residents & Ratepayers Association and a local architect.



 

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