The (Only) Way Out for the Coalition (and NZ) in 2025 is to end welfare transfers to high income families

Budget 2025 should be the austerity budget that Finance Minister Nicola Willis didn't have the guts to deliver in 2024. Instead, her lame first year Budget prolonged New Zealand's economic stagnation (of course, former PM Hipkins and Worst Finance Minister Ever, Grant Robertson, bear most responsibility). The problem is that Willis doesn't want to associated with former National Party Finance Minister Ruth Richardson, who cut government spending by over 5% in her famous 1991 Budget. However, that problem is easily solved.

Here's how. First, we need to go back in time and see what the indomitable Ruth, who I've met a few times, got right, and what she got wrong in the early 1990's. What can we learn from those times? In a line, her cuts were good in the sense of returning the government budget to surplus, and prompting the biggest pay-down in public debt ever in NZ history. However, they were bad because a bunch of the cuts hurt low earners. Macroeconomics has moved on since the 1990s. It recognizes now that cutting benefits in times of recession (and 1991 was such a time) hurts struggling families when they need help the most. After all, it was in the aftermath of the 1929 Great Depression that countries around the world set up welfare states, including unemployment insurance, to help folks who lost their jobs through no fault of their own. Even in the US, benefits are made more generous in times of recession.

So what's the lesson for NZ and Budget 2025? Public debt is currently getting back to 1991 levels, when Ruth did her austerity budget. Instead of cutting benefits for the poor, the New Coalition should slash welfare transfers, but targeting high earners. What are examples? High earners get Kiwi Saver subsidies, totaling $1 billion. They get winter energy subsidies. High earners' children attend University at greatly subsidized rates, whereas low earners whose children leave school to start a business get no such help. The world's 2nd richest man, Jeff Bezos, gets subsidies from Kiwi taxpayers, due to Amazon's movies in NZ. It goes on. How do I know about them? Together with a former Finance Minister, we went through each of them - the total comes to between $10 billion and $20 billion per annum. GDP in NZ is $400 billion, so 5% of that number is $20 billion - a percentage similar to what Ruth cut by in 1991. My preference is for most of the funds to be put in personal savings accounts for all Kiwis, making us less dependent on the government in the future, relieving pressure on public welfare outlays & avoiding the introduction of new (capital) taxes.

Whatever the details, the cuts outlined above would set NZ public debt on a declining path similar to what Ruth kicked off in the early 1990s. Public debt plummeted from 55% in 1993 to 20% of GDP by the end of PM Bolger's government in 2000 (see graph below). Ruth was his first Finance Minister, from 1991 to 1993. Her mistake was targeting low earners for cuts. The New Coalition must, in 2025, target high earners. Or is Willis so determined her four children will go to University without her paying - each receiving a subsidy of $50,000 per year - coming to a total of $600,000 for her own family ($50,000*3 years*4 children) that she will refuse to yield? For NZ, its either the policy we've outlined above, or capital gains taxes in a few years time. Take your pick. Will Willis put her own private needs above the nation's?

Net core Crown debt

Sources:

My famous paper (!) "The Determination of Unemployment Benefits", in The Journal of Labour Economics, which started a large field. It was refereed by Thomas Piketty, who is now a world celebrity on the back of his book "Capital in the 21st Century".

https://www.hbs.edu/ris/Publication%20Files/The%20Determination%20of%20Unemployment%20Benefits_1b1adcf0-73aa-4575-88ca-fb84693759de.pdf

Merry Xmas & End of Year Comments on the Value of DownToEarth Kiwi. (You can even make money out of us).

This blog costs me money - it generates no income. Is that a bad thing? As the third richest bloke in NZ once told me, because he likes putting folks like me down, "If I don't pay for advice then I don't value it". So to end the year, let's ask where the value lies, if any, in this Blog, and even ask the question whether you can make money from it - even though we're essentially non-for-profit. Has our Blog offered insightful & accurate insights, applying the latest knowledge from the subject of economics, to the events of our times? Obviously my answers are biased - but here goes.

First, to address the insult my rich-lister friend handed me about free opinion like mine, here was DownToEarth Kiwi writing in May 2021: "Our prediction is that the cost-of-living is on the way up in NZ and interest rates will be going up up sooner rather than later". Not bad, eh? No-one else I know of in the country called it that way back then. We wrote in April 2021, "how the Reserve Bank seems blithely unaware of inflationary pressures erupting in the country". To the extent any such pressures were acknowledged by its Monetary Policy Committee in 2021, it said that they are "near-term" and "temporary" .. that "medium-term inflation .. would likely remain below its remit targets [of 1-3%]" and that "Inflation expectations remain at or below the 2 percent target midpoint". That was just before rampant inflation blew up NZ over the 2022-2024 period. So who do you trust more? The RBNZ, or DownToEarth Kiwi? Its a rhetorical question, really. At that same time, I helped the owner one of NZ's biggest investment banks avoid losses when its owner was buying bonds. I warned him they would plummet in value when interest rates began to sky-rocket up.

On the note of monetary policy, whether on the Blog or on radio, we did our best to avoid the awful stagnation NZ is currently experiencing. I argued a couple of years ago how the RBNZ should go for a "soft landing". You can read on the Web those views of ours being picked up by some Big Media outlets. What more could I do than call the excessive hikes in the OCR a "dangerous move", as headlined by Newshub. The link doesn't work anymore - they're bankrupt. Instead the RBNZ went for a hard landing - "engineering a recession" - for which there was never a requirement. Inflation and interest rates would have still have followed a downward trajectory - maybe not quite as fast - but the benefit of avoiding the stagnation would have been worth it. We got that call right - look at what has happened. Last year, Infometrics, often in the news since Brad Olsen uses the media to advertise his company, led the headlines saying the economy would grow by 1% this year - we called that claim "silly" on national radio and have been vindicated.

Second, aside from monetary policy, here's an example of our views on the regulatory state in NZ. Nine years ago we did a campaign against over-regulation & red-tape, before the Blog had formally started. Back then, I sent articles to the Herald - now I just post them here - since the Herald started surreptitiously editing them. In 2015, it published my article called "Red Tape Tripping Honest Kiwis", featuring over-regulation of hair dresses & led it with this photo:

In a companion article, we stated, "[In the US, a White House department, the Office of Information and Regulatory Affairs, is dedicated to overseeing the rigorous implementation of cost-benefit-analysis (CBA) across all government agencies. No comparable agency exists in NZ." It took awhile, but nine years later ACT leader David Seymour created his new Department of Regulation, implemented CBA and focused on hair-dresses to launch his campaign. David should know that a hair dresser emailed me - saying that since I wasn't a hair-dresser that I wouldn't have a clue what I was talking about. Maybe he had a point? To be fair, the prize to the first economist in NZ to tirelessly champion CBA, a generation before me, was the outstanding Bryce Wilkinson.

Third, the main reason for this Blog is not to help rich-listers make money, or even influence politics, but instead to keep in touch with my former students - they like to see what the Nutty Professor is up to - hear my views on things - watch me pick fights - way after they've graduated. Such a reason is common in the US for economists working at their Universities, although is very uncommon in NZ. Although I'm not being modest at this point, students tell me they love the classes and that they've opened up the world of economics & politics to them. They love our guest speakers. So whether its former Reserve Bank Governors and Treasury Secretaries like Graeme Wheeler and Alan Bollard, or politicians like David Parker, Sir Roger Douglas, Judith Collins, Simon Bridges, Sir Bill English, David Seymour, Chloe Swarbrick - in spite of differences of opinion - right, left and center - these kinds of folks have all helped make the classes and this Blog the better for it. Thank you to them all.

In summary, why is there probably value in a Blog like this one? Aside from our contacts in business, politics & within the economics world, not a single Business Editor who works for the Big Media outlets in NZ has ever studied economics. Now their game is to subscribe to this Blog & use it as a basis for many of their own stories, usually without acknowledgement. I don't care. But its best to hear it from the horse's mouth. There is still a hugely important role for good reporting & opinion writing. Its of tremendous value. I trust you will continue to enjoy the Blog next year. We will try to write more optimistic ones. And so on that note - in spite of all NZ's issues - we have consistently ranked as one of the top 10 countries in the world in terms of overall life satisfaction - and overall quality of life. We just need to ensure we have the money to help pay the bills to keep that enjoyment happening. Our pressing problem, contrary to the endless articles written by many of my university colleagues, journalists, unionists and such like in NZ right now, is very much not equity - it is efficiency. Once that's sorted out, we will be on our way up again.