The austerity argument

The banks’ rush to drop mortgage rates has given homeowners and businesses a pinprick of light at the end of the economic tunnel. But daily headlines of job losses and a stressed public service show the pain is far from over.
Critics of the public service cuts say the Government is making it worse not better – but is it austerity?
Definitely, says Bernard Hickey of The Kākā newsletter. He says Government cost-cutting measures have been too harsh.
“When the Government is cutting public spending when clearly public services are needed then that’s austerity,” he says. “And when you’re doing it and it reduces the size of the government relative to the size of the economy, effectively putting a sinking lid on the size of the government, that’s austerity and that’s what this Government’s doing.”
Politicians in charge avoid the word with its negative connotations, arguing instead for the need for fiscal responsibility, the New Zealand Herald‘s deputy political editor Thomas Coughlan tells The Detail.
He says the effect of the public service cuts along with years of interest rate hikes have been cruel.
“New Zealanders feel like they’re in a funk and the data supports that, we are in a funk.”
An important indicator of economic performance, GDP per capita, has gone backwards in recent years; the economy is not growing at the speed its needs to, to keep up with the growing population. Unemployment is rising as a result of interest rates being hiked, and jobless figures are expected to rise further. 
“If it feels like you’re worse off, you probably are worse off,” he says. 
The triple-dip recession that has resulted from the Reserve Bank raising the official cash rate has been “quite uniquely bad”, says Coughlan.
He explains that the monetary system is built on the fact that high inflation is bad and has destroyed many economies, with rapidly rising prices caused by inflation hurting poor people the most.
“We’ve designed this whole system which allows the Reserve Bank to put the economy through an enormous amount of pain because we collectively have decided as a society that that pain is worth it because inflation is worse.”
Coughlan says people are starting to question if this is the best way to cure the economy of inflation.
Hickey says the Government has failed in its promise to cut spending without cutting frontline services.
“The situation in Health NZ is the perfect illustration of where that is difficult to do, particularly when you inherit infrastructure and a system which is already at breaking point after decades of underfunding.”
He argues it is fiscally irresponsible to screw down the economy now so that New Zealanders in the future inherit higher unemployment, worse public services, and underinvested infrastructure to the tune of $100 billion.
The forecast ongoing cuts to interest rates will help the economy pull through but the Government also needs to reverse its spending trajectory and put more money into areas such as Kainga Ora to build more houses, he says. 
“Yes it can do things to keep inflation low but it can also do things to support the economy when it’s in trouble.”