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Sunday, 20 April 2014

Forbes economic challenges and responses

Forbes blog has an interesting article on New Zealand's "economic bubble", focusing on the property market. Steven Joyce has responded, pointing out that the blog post is over hyped. The focus of the post was on the overheated property market, while also pointing out that New Zealand households are very highly indebted, and that government debt has increased greatly since 2008.

In many ways the post re-enforces the government's economic policies. For starters, the overheated property market, particularly in Auckland, is being cooled by the government's housing accord. The focus on increasing supply will cool house prices over time: affordable housing to enable first home buyers to get on the property ladder, increasing land supply and resource management reform all mean that more houses will be built, reducing the cost to New Zealanders overtime and the amount they have to borrow (it's worth remembering that household savings rates have been pretty good over the last few years).

Second, the debate over government spending and debt will no doubt be a big issue this election. The government has had to deal with a recession (which started before the global financial crisis), the GFC which led to the collapse of many of our finance companies, and the two Christchurch earthquakes. The "Labour ran surpluses" meme ignores these factors, and seems to imply that a Labour-led government wouldn't have spent up on those things. Of course they more than likely would have, on top of their additional borrowing to ramp up government spending in all other areas, including borrowing to make contributions to the Superannuation Fund. Labour's line has been that the government has run up a large debt which they say is "the biggest debt since Muldoon." This is a silly line, it ignores that the economy has grown hugely since 1984, meaning the size of government debt to the economy is actually much smaller. Since we're looking at getting back into surplus, the pressure will be on the opposition to show that they're not the big spenders they make themselves out to be.

The economic challenges Forbes has outlined are not new, but neither are they fatal. What would be fatal would be a major blow-out on government spending, the end of initiatives to increase housing supply, and increased regulation to make life difficult for house builders, and business in general.