Last week a group of economists wrote to Prime Minister Luxon and Minister of Finance Willis to express their concern at the Government’s approach to fiscal policy, and their alarm at the consequences for the people and communities of New Zealand. In this episode of Head2Head I talk with the group’s lead spokesperson Dr Ganesh Nana. Here is the letter in full. Tēnā koe e Pirimia, re: Your Government’s fiscal policy We write to express our heightening concern at your Government’s approach to fiscal policy, and our alarm at the consequences for the people and communities of New Zealand. We would welcome the opportunity to discuss in more detail, more directly with you as soon as possible, the immediate and long-lasting harm that your Government’s approach to fiscal policy is creating. We summarise our concerns below under four headings. * Reduced current and projected spending is needlessly exacerbating the current recession * A focus on government debt is far too narrow, as it ignores the impacts on private sector debt and external debt * The accumulating harm risks a long-lasting hollowing-out of business capacity and capability * Fiscal policy is in direct conflict with the Government’s stated export target Fiscal policy is needlessly exacerbating the current recession Current and projected reductions in government spending appear to be central to the Government’s fiscal policy. The economic rationale for this approach is unclear. Rather, there appear to be few considerations outside the short-term impacts. For example, your Government’s cancellation of key infrastructure projects and sinking-lid cuts to the public service are powerful contributors to the current severe and prolonged recession. This is substantially worsening the contractionary effects on the economy of the Reserve Bank’s use of the Official Cash Rate to contain inflation. It is important to recognise that even prior to cutting back expenditure, government consumption spending was close to 20% of GDP. This covered spending on health, education, defence, administration, justice, transport, and culture. In addition, deferrals and reductions in projected infrastructure spending has further reduced employment and intensified the economic recession. There is ample evidence that government spending, including the necessary infrastructure and allied networks, has for many years fallen well short of that required for population growth and demographic changes. The Infrastructure Commission has stated that New Zealand has a $104 billion infrastructure gap at present – and that this picture will significantly worsen given current spending projections. These accumulating shortfalls put the nation in a poor position to improve its long-run economic resilience and to prepare for future challenges. If nothing is changed now, this under-funding simply passes the burden of adjustments, and investment spending, to future generations. Failure to correct this course will lead to higher economic scarring, with the costs borne by those with the least ability to pay, as has been demonstrated repeatedly in New Zealand’s history. It will also undermine the resilience of the private sector – particularly exporters – and will continue to constrain the capability of firms to scale up. A focus on government debt ignores impacts on private sector debt and external debt Similarly, the fiscal policy focus on reducing government debt lacks a clear economic rationale. Irrespective of the debt measure adopted, international comparisons of government debt in comparison to GDP remain in New Zealand’s favour. Credit rating agencies continue to view the government’s debt situation without concern. Bluntly, there is no government (or public) debt crisis in New Zealand. The New Zealand economy’s ongoing problem is private sector debt. Im