Economists blame government for “severe and prolonged recession”

A group of economists has told the government that its focus on slashing the budget deficit and reducing public debt is worsening the impact of recession on households and businesses,

The group of 15 independent, union, and university economists has sent a letter to Prime Minister Christopher Luxon and Finance Minister Nicola Willis, saying their approach to managing public finances is short-term and short-sighted.

It said the policy rationale was unclear given that the Reserve Bank (RBNZ) has got inflation under control, and that the policy ignored private and external debt levels, which were much higher and more worrying than government debt.

“Your government’s cancellation of key infrastructure projects and sinking-lid cuts to the public service are powerful contributors to the current severe and prolonged recession,” the open letter said.

It said government spending, as a proportion of the economy, was already low, and government debt was low by international standards and of no real concern to ratings agencies.

The group said an infrastructure deficit put at $104 billion was the result of successive governments’ underspending, leaving the country ill-prepared for the future.

“If nothing is changed now, this under-funding simply passes the burden of adjustments, and investment spending, to future generations.

“Failure to correct this course will lead to higher economic scarring, with the costs borne by those with the least ability to pay.”

The group said foreign borrowing was needed by the private sector and households to cover their spending, and government policy was making it worse.

“Private sector debt is being driven upwards by your government’s fiscal policy in pursuit of surpluses for itself and its aim of rapidly reducing public debt.

“Fiscal policy is adding to the vulnerability of economic activity and exposing New Zealand to inevitable global shocks,” the paper said.

The group said investment in an inflated housing market was factor in driving the high current account deficit, which needed to be covered by foreign borrowing.

It said the current policy approach would increasingly hit the poorest the most, further drive skilled people to leave the country, deter business investment, and hollow out businesses.

The group includes former productivity commissioner Ganesh Nana, whose department was one of the early casualties of the coalition government’s public service crackdown. Other members include former Whatu Ora head Rob Campbell, Professor Susan St John, Council of Trade Unions’ economist Craig Renney, and economists from Auckland, Victoria and Massey universities.

Group spokesperson Nana said it rejected any accusation that it was partisan and out of touch with mainstream economists’ views.

“Many in our group have individually and in other groups pointed to the need to look at our external debt, rather than our government debt, and have been vocal about the infrastructure deficit … and we are aware of the need to build the capacity of the private sector. To call us partisan is a side issue.”

Nana said the group would like a meeting with Luxon or Willis to discuss the issues face to face.