THE «•» PRESS THURSDAY, JULY 12, 1984. Debt: needs and perils

Press, 12 July 1984, Page 12

THE «•» PRESS THURSDAY, JULY 12, 1984. Debt: needs and perils

Like most economic authorities and experts, the economists of the International Monetary Fund have no difficulty in finding faults in the New Zealand economy. Many are there to be found; many should be remedied. Economic experts are rarely successful politicians or political managers. Perception of the problem, or measuring it, will seldom be the same as applying a politically acceptable remedy. Too many competing and conflicting interests have to be considered — if, indeed, the political system is of a kind that requires them to be considered. Time and again, the direct and even simple answer to one problem would make another problem worse. The politically acceptable response is usually a compromise, a qualified response, or slower action than experts would like. Emphasis may still be put on the answer to the most urgent problem; it can seldom be unqualified emphasis. The economy must, of course, live with the results that the electorate expects or demands. This may be bad news for an economy in difficulties and a political leader must at times thrust solutions upon the economy, or on parts of it, to ensure that what is politically acceptable does not lead to economic disaster. New Zealand’s high overseas debt, and the quite separate internal Government deficit between tax revenue and spending, are notable examples of how political or social demands can be- at odds with what economists conscientiously recommend. In the long run a sound economy must underpin political stability and social welfare. In the short run, the smooth working of the economy, free from industrial dispute and supplied with willing and productive people and enterprises, will depend upon the climate between the Government and competing or diverse sections of people. The I.M.F. report that has commented on New Zealand’s finances at the end of 1983 must be taken in conjunction with the diverse expectations of New Zealanders in their many roles — as employees, superannuitants, exporters, farmers, taxpayers, tax consumers, school pupils, hospital patients, managers, or whatever. The report contains no surprises. A demand, several years ago, to alter the tax structure to give more incentive to people on middle and higher incomes, and then a later adjustment to tax rates to accommodate the price and wage freeze, have produced a substantial Government deficit. This could have been avoided had the Government been prepared to make substantial cuts in welfare and in other expenditure that was not very directly calculated to maintain or foster production. The Government tinkered, against a widespread uproar, with what was called the sinking lid policy and 3 per cent cuts.

This was a notable demonstration of the gap between what many an expert would recommend and what most politicians would say could be done, notwithstanding the protest. When the Government’s debt to the public, like the private person’s debt to a financial institution, is represented by productive assets — power stations, transport gear, airliners — that earn their keep and pay for the debt and

its servicing, all should be well. Public debt is also represented by, say, State houses. These, provided that they pay their way in a business as well as a welfare sense, can be counted as a worth-while asset. When borrowing is needed for less obviously productive purposes such as generous welfare payments, the practice becomes questionable. On the overseas front, the Government borrowed heavily, and the result of such borrowing, which is likely to continue under either a Labour or National Government, has been one of the few outstanding sources of debate in the election campaign. New Zealand’s long-standing desire to minimise the unemployment level, its more recent need to adjust the structure of manufacturing and farming, and the Government’s policy to provide alternatives to imported fuel, have been at the heart of the borrowing policy. But for nearly a decade of world recession and the accompanying protectionism in many of New Zealand’s markets overseas, neither the borrowing, nor much of the restructuring or unemployment, would have been on such a scale.

Whether the extent of the Government’s borrowing has been wise must be judged on several factors. Borrowing overseas to keep current expenditure going may be more economical for businesses, and the Government, than facing higher interest rates at home. Borrowing to keep up a flow of raw materials or machinery to maintain employment, to foster export industries, or improve productivity is acceptable. Either purpose must be judged on the country’s ability to service and repay loans without diminishing the long-term success of the economy. A short-term lowering of living standards may be desirable if, in the long run, greater benefits and security of business and trading can be won from the investment.

The present Government has not gone far to diminish living standards temporarily for the long-term benefit. The I.M.F. view is that the Government should have gone further. On one point, the fund certainly gives sound advice, obviously good general advice: New Zealand should limit borrowing overseas to economically productive investments rather than borrowing to sustain consumption. In the recent past, the Labour Party has argued in favour of boosting domestic consumption in the interests of “getting the economy going.” Less emphasis can be placed on this line if the boost depends on overseas loans. The Government must also heed this advice, though the extent to which borrowing has been used to boost local consumption is not known.

The next few years will certainly have to show the wisdom of the investment, public and private, in productive enterprises that save or earn sufficient overseas funds to deal with the loans from abroad. One question that the electors, as final judges, might now ask as a preliminary test is: which of the investments, large and small, should never have been undertaken?