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‘Fiscal time bomb’ has exploded

Fri, 25 May 2012

Most of the intelligent criticism of Bill English’s sixth budget has been for what it doesn’t say.

This debate won’t be found in the media, which has focused on the reductionist Keynesian economics of “austerity” versus “growth stimulus."

This is how a lot of politicians want to see the issue, too, as it conveniently ignores the government’s long-term liabilities in favour of a winners and losers game.

Participants in the NBR-Grant Thornton post-budget debate preferred to tackle the longer play, with Westpac chief economist Domick Stephens saying the fiscal time bomb – inexorably rising superannuation and healthcare commitments – has already exploded with the first of the post-war baby boomers now picking up their Super Gold Cards.

He described the government as “paralysed and fearful of change” in its failure to plan for the ageing population and associated extra heathcare costs.

Within a few years, the costs of National Super are forecast to be 51% of all social spending.

While generally supporting the budget’s strategy on reducing the deficit and its growth presumptions, Mr Stephens raised doubts about the boost for the economy and tax revenue from the expected Christchurch construction boom.

He doubted the country’s productivity levels would be sufficient to deliver what’s forecast, while saying the gains in GST and inflation staying low are also unlikely.

Summing up, he says all the threats to budget outcomes are external: "The spending is certain; the savings less so.”

Panellists John Banks and David Parker were surprisingly in agreement on issues such as the “fiscal time bomb” and any debt-driven stimulus.

They differed, of course, on taxation and a few other topics – but not enough to rebut Mr Banks’ contention that Mr Parker “would fit into any National caucus.” Possibly not something Mr Parker, as Labour’s finance spokesman, would like widely spread.

Why fiscal stimulus fails
The sterility of the austerity-versus-growth debate is highlighted in recent comments by Harvard macro-economist Robert Barro, who is a champion of the “rational expectations” school and central bank inflation-indexing.

Professor Barro says no evidence is forthcoming that large fiscal deficits in the US and elsewhere have worked, except immediately following the global financial crisis in 2008-09.

His article, Stimulus spending keeps failing, is too rich in argument to summarise here, except to say the lack of growth so far doesn’t support the pseudo-Keynesian case

that the problem was that the government lacked sufficient commitment to fiscal expansion; it should have been even larger and pursued over an extended period.

Professor Barro describes this viewpoint – often heard in New Zealand – as “dangerously unstable.”

Every time heightened fiscal deficits fail to produce desirable outcomes, the policy advice is to choose still larger deficits. If, as I believe to be true, fiscal deficits have only a short-run expansionary impact on growth and then become negative, the results from following this policy advice are persistently low economic growth and an exploding ratio of public debt to GDP.

Professor Barro goes on to establish his case with the examples of two countries that have retained a budget balance: Germany and Sweden, which have both enjoyed above average growth of 3.6% and 4.9% respectively in 2010 and 2011.

Where the wild dictators are
As an admirer of Sacha Baron Cohen’s Borat, I am disappointed to report on his latest effort, The Dictator.

It bombs (that word again) because the dictators he parodies – modelled mainly on Gaddafi with bits of Saddam Husssein, Iran’s Ahmadinejad and a few medal-wearing Africans – is too removed from reality: more Peter Sellers (The Mouse That Roared) than Chalrlie Chaplin (The Great Dictator).

For a start, Gaddafi has gone, shot in a drain, while others have been removed more peaceably, though not without some loss of life. While there are visual and verbal gags aplenty, the biggest laugh is a tightrope scene straight out the 1920s.

The film is further blunted by skirting the topic of Islamic terrorism and the role of religion in authoritarian regimes. Even the “off with their heads” victims aren’t really despatched at all; in fact, they end up where most people living under religious and social oppression want to be – New York.

The Dictator ends with a pointed speech against America – the reverse of Chaplin’s defence of freedom – that raises some laughs as well as the question of moral equivalence.

This is a classic ploy of anti-democrats, who do all they can to suppress any freedom to ridicule their own prophets and practices. It may be too subtle to see the film’s gross offensiveness – and there’s plenty, to be sure – as a measure of how far our own tolerance of freedom will stretch.

It’s also no problem that the plot centres on the development of a weapon of mass destruction, or that many dictators are seen from a western perspective are harmless because they are so ridiculous.

But a better film would have exploited other opportunities, because there are still too many dictatorships in the world and little is done about removing them.

In fact, dictatorships make up 40% of the world’s 195 countries, according to Freedom House, and that excludes the many “partly free countries” that go through the motions of holding elections.

Finally...the news from Pakistan
Oddly enough, though, many of the worst countries escape the dictatorship classification.

Heading the list is Pakistan, which this week scored headlines on three fronts – all of them bad.

First, it jailed a doctor, Shakeel Afridi, who ran a fake vaccination programme for the CIA to help identify Osama Bin Laden’s hideout, for no longer than 33 years.

If this report by The Times is correct, US pressure might eventually free him on humanitarian grounds, as he is said to be in poor health and has had death threats fromterrorists who are also in jail.

Second, the BBC reveals Pakistan has the highest number of polio cases in the world and is undermining efforts that have nearly eradicated it. Orla Geurin reports:

Nearly 200 children were paralysed here in 2011 - the worst figures in 15 years. And the Pakistani strain of the virus has crossed borders - causing outbreaks in Afghanistan and China.

Opposition to vaccination from Islamic religious authorities is strong and, ironically, the fake programme that identified Bin Laden hasn’t helped, either.

Third, the BBC also reports efforts are being made to block the Oscar-winning documentary Saving Face – about acid victims in Pakistan – from being shown there.

The reason:

The survivors say they could be at risk of a backlash and even further acid attacks if the film is shown at home.

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‘Fiscal time bomb’ has exploded