Matt Nolan

New Zealand budget 2009: Is increasing GST the solution?

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In New Zealand we are currently concerned about a downgrade from S&P.  They want us to be running operating surpluses from 2014, and we aren’t quite sure how to do that in the face of a massive global recession.  The suggestion I have is to increase GST rates from 2011.

Now, if we believed that Ricardian equivalence was holding in its entirety any solution with taxes would be silly – as higher taxes would merely lead to higher private borrowing.  As S&P is truly concerned about our national debt position this wouldn’t help.

However, pure Ricardian equivalence does not hold – especially in the face of a highly uncertain and credit constrained economic environment like the one we have now.

If the government can commit to increasing GST rates from 2011 they can both:

  1. State that they are increasing taxes in a way to fill the budget hole – taking us back to operating surpluses in our forecasts and preventing a downgrade (which would have a similar cost except that all the money would be heading offshore),
  2. Reduce the relative price of spending now compared to the future – increasing “aggregate demand” now at the cost of demand in the future.  Given that prices are sticky in the short-term, and the increase in GST rates enters firm and household expectations of future prices, we only really care about movements in “aggregate demand” in the short term – so this seems super.

The main concern would be that a lift in GST would increase long-run taxes.  However, if the economy moves back to potential (output) and the tax take becomes too large we can just can personal income taxes – thereby flattening the tax base and reducing the tax on savings.  Sounds good to me.

Matt Nolan

New Zealand budget 2009: Expectations

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Defective equilibrium points out that there has been little discussion about expectations for the budget around the NZ blogsphere.  As a result, let me lay down some expectations here.

These are the things I strongly suspect will be in there.

  • Future tax cuts to be postponed into the indefinite future,
  • Provisions for future spending to be slashed further IN REAL TERMS (note that provisions should have been cut because of lower inflationary pressures in the first place),
  • An increase in short-term spending on state houses (mainly refitting) beyond that announced,
  • Further shifting forward of infrastructure projects,
  • A REDUCTION in medium term infrastructure spending – implying that any investment now is taking away from future budgeted spending,
  • Increased funding for the establishment of PPP’s,
  • A funding freeze for most departments,
  • A “shifting forward” of welfare entitlements – implying that future real welfare spending will be cut.

These are random possibilities (although fairly unlikely):

  • A lift in GST rates (to 15%) from 2011,
  • A freezing (or cut) on the income level and entitlements for WFF and some benefits,
  • A PPP involving ACC,
  • A complete withdrawal from the Cullen fund to pay for near term spending promises,
  • An expanded program of state house BUILDING.
Matt Nolan

Cartoon: Recessions don’t hurt everyone

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(Source GWS)

Remember, even during the Great Depression there were people that were better off than they would have been.  There are always winners and losers.

When prices are falling, and when relative prices change, there are people who benefit from that – as well as people that lose out.  During such an event we normally only hear one side of the story …

Matt Nolan

New Zealand budget 2009: Downgrade alert?

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From a member of S&P, Mr Curry:

It is hard to put a timing on it, but we would expect that over the cycle of the Government [it] would be recording operating surpluses within, I guess, the next three to five years.

So that is the requirement to avoid a downgrade.

From the government:

Asked if surpluses could be achieved in five years, Key it might take longer.

Hmmmm.  Thursday will be very very interesting.

(ht Nigel Pinkerton for the pointer to these quotes)

jamesz

When numbers fail

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William Easterly has an absolutely bizarre reader survey on his blog:

Please tell me which you think is more probable:

  1. a country succeeds at economic development, or
  2. a country succeeds at economic development with a wise and capable leadership.

Since the probability of ‘wise and capable leadership’ is less than 1, the probability of option (2) is P(option 1) x P(wise and capable leadership) < P(option 1). Can this survey tell us about anything other than the mathematical savvy of his readership? Read more

jamesz

Feminists’ work not yet done

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Men still have it easy the world over, enjoying more leisure time than women. So says an OECD study reported in The Economist.

The chart shows how many minutes of extra leisure time men have over women per day. It would be interesting to know how much of this extra time women resent. Do women choose to work more because their preferences systematically differ from men’s? Clearly they choose, in some sense, to work more hours than men do, but what motivates that and are women unhappy about it? If women want to work more hours then who are we to stop them?

I struggle with that question: if women prefer to work more and do household chores because of their upbringing then encouraging them to share the workload may not be welfare increasing. Yet it certainly furthers the right of women to be considered as equals in society. One might say that this trade-off depends on how much we value the right to be treated equally, but a rights-based approach seems inconsistent with a utilitarian framework. Can someone more knowledgable on moral philosophy help me out here?