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National, Labour and Alberto Alesina

Last week, a famous US economist, Alberto Alesina, died suddenly. The NZ Labour and National Parties should take note of what he stood for at this time of massive public spending and borrowing which will double, if not treble, public debt. To the extent that the Covid 19 package, so far, has offered relief to the vulnerable, it is to be commended. However, to the extent it marks a permanent return to big government, then beware.


Alberto was known for arguing that cuts in high levels of public spending can increase private consumption and investment, leading to a boom. Why? It may lead to a view that taxes are not going to rise, or may even fall. He called this an "expansionary fiscal contraction".


The same logic implies that our government should already be turning its attention to prioritizing quality spending. A signal that it intends to pay off our ballooning debt by cutting wasteful and non-essential programs may lead to more investment and higher growth. But signs that our debt will be paid down by hiking taxes may dampen the economy.


Both of our major political parties are presently looking like taking NZ down the latter route.