G20: the return to austerity and its effect on NZ

The rest of the world is about to start reining in all those stimulus packages that took the edges off the recession. That could be really good for New Zealand, or really, really bad

If you only caught the headlines from the weekend's G20 summit, you could be excused for thinking all is coming right with the global eocnomy. Such is the confidence that the worst is behind us, that the most advanced economies plan to halve their deficits in three years. Thanks for coming, dust off your hands, back to normal.

This has implications for New Zealand, the question is whether they're for the good or the ill.

Feeling the pressure from markets, and jittery from having watched Greece teeter on the brink of bankruptcy, the G20 leaders agreed to dial back their stimulus of recent years and start paying the bills; and quickly. All the extra spending used to keep people buying and selling since the credit crisis is to be reined in.

Or at least, that's the message being highlighted. The summit's communique was more ambiguous, with something in it for everyone. In paragraphs all around the promise to halve deficits were lines such as:

"To sustain recovery, we need to follow through on delivering existing stimulus plans..." and ... "We will continue to co-operate and undertake appropriate actions to bolster economic growth..."

The communique repeatedly tries to grow its cake and cut it too, ending up with lines like this:

There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth.

Duh. In other words, we're damned if we do and damned if we don't. And given the dangers inherent in too much austerity, that could be a damned good thing.

In the New York Times, Paul Krugman focused on the damned if we do scenario, writing chillingly that, "We are now, I fear, in the early stages of a third depression". His take is that the world's biggest economies – the G20 makes up around 85 percent of the global economy – are cutting way too early, and that without the stimulus any new fruit will wither on the vine. This "premature fiscal austerity" will keep millions unemployed, shrink economies and ultimately fail to reassure investors, creating a downward spiral to depression.

If Krugman is right, New Zealand will lose heavily, alongside every other country, as we're once again blown along like a leaf on the winds of the global economy. We survived the recession by doing little except cutting taxes, gambling that our trading partners' stimulus packages would overlflow. If they cut too hard and too fast, there won't be any coat-tails out there to ride on.

Our hope is that the private sector is sufficiently recovered to step up as governments step back and that emerging economies, especially in Asia, are ready to start emerging again.

Because here's the good news... whatever happens elsewhere, we're still one of the best placed developed economies around, just as we were when the credit crisis first hit. Without doing a thing, we're going to look better and better, especially on the tax front.

The wisdom of Michael Cullen's commitment to saving for a rainy day and refusal to cut taxes during his tenure has been proven. Bill English's conservative instincts in the face of crisis have also served us pretty well.

When we talk about New Zealand Inc's competitive advantages these days, one of the greatest is that we can afford to maintain our public services and our middling tax rates, while other governments slash and burn and look wild-eyed for new forms of revenue.

Ask yourself, how will all these big economies halve their deficits? By cutting spending and increasing taxes, of course. Britain led the way a week ago by increasing their VAT to 20 percent; Japan's new government is talking about increasing sales tax in that country. Germany and France are looking at new taxes. Many more will follow, making us look better and better by comparison.

All around the world, this unsustainable era of increasingly low taxes as countries tried to attract capital and labour is over. Taxes are inevitably on their way back up. That's just one reason I wasn't a fan of this government's tax cuts (aside from being regressive, we didn't need them to improve our mid-term international competitiveness), but given that they're done, it's important now to stress that we don't need to cut any further.

New Zealand can afford to taiho, we can afford to maintain and protect our public sector. The lesson for our government is that further cuts to public spending and tax rates aren't just unfair, they're unnecessary.

Let's hope they're non-ideological enough to see that. And while we're at it, let's hope that we don't end up as the best of a bad lot; that Krugman is overly pessismistic; and that the rest of the world's lack of foresight doesn't drag us down with it, once again.