Tuesday, April 07, 2009

Balance the budget, Bill

Balance the budget, BillBernard Hickey reports that Bill English wants bureaucrats to accept a pay freeze during a time of recession, saying that with debt already up from $30 billion to $45 billion, any rises will endanger NZ's credit rating. 

That's a good reason, but it's nowhere near reason enough: In the absence of plans to sack most of the 38,000 or so bureaucrats who infest Wellington and drain our wealth, prudence dictates that at a time of economic stress they at least accept pay cuts, and that English moves urgently to cut that $45 billion debt, not just wring his hands over it.

And no fear saying such a thing couldn't happen. There are excellent historical precedents.

During the Great Depression, NZ's Forbes Government cut bureaucrats' salaries by ten percent, and moved to balance the budget rather than just minimise debt.  So too, as Steven Kates points out, did Australia's Scullin Labor Government -- "adopting the 'Premiers’ Plan' which sought a cut in public spending, a return to budget surplus and cuts to wages" -- and so too did the United Kingdom, where as Kates reports the Chamberlain Government adopted "a full-scale 'classical' approach.

A policy of balancing the budget and the containment of expenditure was adopted. By 1933, the budget had been balanced and it was from 1933 onwards that Britain emerged from the downturn of the previous four years.

So too did New Zealand and Australia. 

Under the profligate policy settings of the 'Great Engineer' Hoover and then the Great Phoney Roosevelt however, who both encouraged wages and price rises and treated balanced budgets like a Catholic treats contraception, America's depression continued for at least another decade.

The reason the 'classical' approach worked was simple: cutting costs when prices are low allows producers to do more with less.  Cutting government spending cuts taxes, and cutting debt leaves credit markets unmolested by government -- doing both means that, instead of the government hoovering up cash and credit, those twin pilllars of recovery are available instead for producers.

Roosevelt began his presidency saying that the only thing America had to fear "was fear itself."  Not true.  Not even poetically. What it needed to fear was the anti-recovery policies of him and and his predecessor.  As Neville Chamberlain said in one of the few fine moments of his career,

At any rate we [in the UK] are free from that fear which besets so many less fortunately placed, the fear that things are going to get worse. We owe our freedom from that fear largely to the fact that we have balanced our budget.

To that same fact they owed their recovery from the Depression.  Would that the historical lessons were learned by our present generation.

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