Prime Minister John Key is governing for the short term by running budget deficits that encompass such middle-class welfare as the 39c to 33c income tax cut, Working For Families tax rebates, interest-free student loans and 20 hours of free early childcare. Key is paying for this over-spending now by borrowing overseas.
The long-term effects are horrendous. This borrowing, much of it from the Chinese Government, is helping to push our currency up to record highs. As happened from 2002 to 2008, this will kill off our non-commodity exporters for another generation. However, a strong New Zealand dollar is in the short-term interests of Key as a politician, because it keeps petrol cheap and makes imports and foreign holidays accessible for voters ahead of the November 26 election.
It's almost as if Key needs a dashboard that flashes up every time he makes a decision to keep spending money the nation doesn't have. Perhaps it could show how much the national debt rises every time he pushes on the budget accelerator. Or maybe how many high value jobs are destroyed every time the currency rises another cent.
But to be fair to Key, he is not the only one. As dictated by its Policy Targets Agreement, the Reserve Bank is also focusing on the short-term inflation outlook. It is letting the stronger New Zealand dollar do its dirty work of keeping inflation between 1-3 per cent over the next couple of years. But what happens in four or five years' time when our export sector is decimated and we are running up massive current account deficits, as forecast by the Treasury? Perhaps Alan Bollard needs the same dashboard with the lost jobs and higher foreign debts.
And consumers need some sort of feedback loop to stop consumption. What if everyone had a flashing sign on their wallets and mobile phones that showed how much debt would cost over the long term and how many high-wage jobs borrowing was destroying? If only New Zealand had a "dumb debt" feedback loop we might turn around the economy.
bernard.hickey@interest.co.nz
