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Home / New Zealand

<i>Keith Rankin</i>: A time to borrow, a time to spend

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By Keith Rankin
6 Aug, 2008 05:00 PM3 mins to read
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KEY POINTS:

Helen Clark and Michael Cullen are describing National's proposal to borrow in order to fund infrastructure projects "incredible", meaning foolhardy and irresponsible. ("Key unveils plan to borrow, PM dubs it 'hilarious"' - NZ Herald August 4, 2008.) All Clark and Cullen are doing is showing how out of touch they are with economic reality.

Financial crises happen when lending slows down significantly in financial markets. The problem usually is a lack of credible borrowers. This is precisely the time that borrowers such as governments funding infrastructure need to step up to the plate.

Governments need to spend more and borrow more precisely when the private sector is spending less and borrowing less. This was the most important lesson of the Great Depression in the 1930s.

This should also have been the main lesson of the long 1987-92 recession. It was then New Zealand incomes fell sharply to 80 per cent of Australian incomes. In those years, New Zealand had serious infrastructure problems and a construction industry experiencing its worst crisis since the early 1930s.

We had mass unemployment of young men. We could have employed them to finish the motorway network, built Britomart, upgrade Auckland's railway and sewerage networks, and built the North Shore Busway for a fraction of today's costs.

Instead, the Government under the stewardship of Ruth Richardson introduced the "Fiscal Responsibility Act". In essence, this was an expression in legislation of the view that, when everyone else had their chequebooks and wallets firmly closed, then government should do likewise.

Helen Clark and Michael Cullen are the true fiscal heirs of Ruth Richardson. Their cure for our present crisis is another dose of Ruthenasia. These are the pro-cyclical policies that give us prolonged recessions and unsustainable expansions.

When retail shops are struggling because of economic recession, what they want more than anything else is more customers. In particular, they want more customers with good credit histories.

Banks and other financial sector businesses are the same. When their industry is in crisis, they more than ever need customers. In particular, the finance industry needs customers like the Government.

In the absence of such good customers that can both rescue the finance sector from its woes (but not rescue the firms that deserved to die) and provide employment for people being laid off from private sector employment, then the financial crisis deepens and deepens.

One could quite correctly say that it would be quite irresponsible of the Government in 2008/09, whichever parties it is comprised of, to not borrow on financial markets to fund the infrastructure, healthcare and education investments that the New Zealand economy needs for its long-term growth.

* Keith Rankin is a lecturer at the Unitec Business School.

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