Experts call for spending

Spend, spend and spend.

That is the direction the country must go in if it is to successfully dig itself out of one its worst recessions on record, two University of Otago economists say.

Official numbers released yesterday confirmed the country was in a recession.

Gross domestic product (GDP) fell a seasonally adjusted 12.2% for the second quarter to June, following a revised 1.4% fall in the first quarter.

The second quarter fall was the biggest since the current system of measuring data was introduced in 1987.

"I’ve never in my career dreamed that I would say 12% is actually not too bad [for a] quarter-to-quarter change," University of Otago economics senior lecturer Dr Dennis Wesselbaum said.

"With 12% we need to be somewhat happy because it could have been much worse. If I look at the UK they had something like 20% quarter-to-quarter drop. So 12% in Covid terms is actually ... not as bad as it could have been."

Dr Wesselbaum’s colleague at the university’s Department of Economics, Dr Murat Ungor, took a similar view.

"I am not surprised," Dr Ungor said.

"I was expecting a fall around — or slightly higher than — 10% for New Zealand.

"The country experienced the Alert Level 4 and then Alert Level 3 conditions in the June quarter, with severe disruptions to production."

Dr Wesselbaum said the Government now needed to take an "all or nothing" approach to the drop in GDP.

"On the fiscal policy side, well, spend.

"Don’t worry about one or two percentage points [of] more debt. It’s pretty much now or never. This is the time where in 10 years we will look back and say if we had spent a little bit more we could have done much better.

"It’s absolutely paramount we open the spending gate and invest in education, invest in infrastructure, invest in green sustainable technologies. That’s the stuff we have to do now," he said.

The country needed to focus on "long-term sustainable economic growth", Dr Ungor said.

The key to doing that was unlocking the productivity problem New Zealand had long struggled with, he said.

"Governments around the world have already pledged significant amounts of dollars in fiscal support as they rush to contain the coronavirus and shore up financial markets and businesses. New Zealand was not an exception."

Government spending could help growth through "transmission channels", like investment in physical and human capital, Dr Ungor said.

It was important to be aware of "fiscal multipliers" — where the Government could multiply the effect of its spend on the economy.

"For example, if a $1 increase in government spending leads to a $2 increase in GDP, then the fiscal multiplier is 2 for that economy."

"All governments can make decisions to spend money for the productivity-enhancing activities. This is going to be key for New Zealand if we are really serious about the prosperity of future generations."

Compared to countries like Australia (7%) and the United States (9.1%) — New Zealand’s GDP contracted by more and that came down to the strict lockdown here, Dr Wesselbaum said.

"The Level 4 for ... six weeks give or take, that clearly drives this result.

"The lockdown in Australia has not been as strict, the lockdown in the US clearly has not been as strict."

Dr Wesselbaum said signs of a recession in everyday life came in the form of people losing their jobs, taking paycuts, shops going out of business or more houses being sold.

"That’s ... the visual signs of a recession.

"That’s typically what we would expect with this kind of huge drop in GDP."

Dr Wesselbaum said it was important to remember yesterday’s figures were "backward looking" because they covered the three months to June and the country was now well into the third quarter.

 

 

Comments

Yes but judicious spending as in fixing the public owned infrastructure and not out to private business. There is enough to stimulate the economy, the building sector without the huge hand-outs seen to selected private business such as bungy jumping and private school. There is never any excuse for a government to waste taxpayers money - they can it give it back to the individuals, the people of New Zealand, to spend.

 

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