From small beginnings
EquitiLink's Richard Flinn asks whether the budget was a Muldoon-sop or a Roger Douglas-solution?
Tuesday, June 2nd 1998, 12:00AM
The Budget speech makes it clear that the Government still believes that the market is the most efficient allocator of the scarce resources of capital and labour. Allowing the free market to work is the best stimulus to long term sustainable economic growth.
The stated intention of the Budget is to stimulate growth by removing impediments to free market competition—a theme which comes through repeatedly.
Consequently, producer board statutory monopolies will go; tariffs are coming down; parallel importing will be allowed, ACC will be exposed to competition, ECNZ will be split up into competing companies, and so forth.
These are excellent initiatives. But we are sceptical of the bona fides of the Government. I fear that we are being offered a sop.
If we are being offered a Muldoon-sop, then the thinking of the Government underlying the budget will be as follows: "Growth is low, to be sure. True, both consumer and business confidence are the lowest since the 1991 deflationary recession. The current account deficit is ballooning. Unemployment is rising. Despite the real spending on health, education, and welfare rising rapidly, we know the outputs are dismal. But these are temporary problems. Everything will come right if we just prime consumer confidence by offering tax cuts, and prime business confidence by engaging in a bit of micro, industry specific reform."
In other words, the Muldoon-sop approach would have the Government assuming a classic interventionist mentality that sees the economy in need of stimulation and some good, old-fashioned pump-priming.
On the other hand, if we are being offered a Douglas-solution, then the Government’s thinking will be as follows: "Things are really quite serious and the world has moved on since the early 90’s. New Zealand achieved some competitive gains from its early deregulation. But now the world has caught up and is passing us. Asia is not just a minor problem. It is a major concern—but then so is our trading position with every other economy that is deregulating and privatising faster than New Zealand. The far more sinister matter than Asia is our Balance of Payments, which reflects our inability to pay our way in the world. New Zealand’s economy will need to be fit, lean, mean and mobile if it is to address this situation. Maximising market efficiency to get the most productive return offshore as New Zealand trades its way into economic growth is an urgent imperative."
In other words, the Douglas-solution approach would be giving us a Budget that is the beginning of a febrile deregulation-agenda that would have no real government spending increases, rapid sale of all central and local government commercial enterprises, fast-track removal of tariffs, speedy removal of producer board monopoly powers, sharply reducing taxes, and a full blown instigation of market disciplines into health, education and welfare to maximise the quality of the "spend."
Which is being offered in this Budget? The Muldoon-sop or the Douglas-solution? What will be the sign?
If the Government returns to hectoring the business community ("get your house in order"; "we have done our bit, now you do your bit" etc) it will be a clear indication that it is dominated by "Muldoon-sop" thinking. On the other hand, if Government pronouncements over the next months have a note of urgency and purpose to take ten more steps beyond those already announced Budget measures we will have a "Douglas-solution."
But which is right? Our view is that no-one ought to under-estimate the radical changes taking place in the world economy and the competitive forces which are being unleashed. The world cares not for New Zealand, and it certainly does not owe us a living. On the other hand we can compete successfully, and our economy can grow strongly, but only if we apply every ounce of energy, initiative, skill and resolution. Towards this objective, the Budget helps, but it is only a small beginning.
P Richard Flinn is general manager, EquitiLink Investment Management.
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