New Zealand's Fiscal Stimulus Needs More Than Tax Cuts

by Mary Swire, Tax-News.com, Hong Kong

18 May 2009

The New Zealand Institute of Economic Research (NZIER) has released a report titled “Short term gain, long term pain?” which considers the impact of the fiscal stimulus the government has announced to boost employment during the current downturn and to help prevent a deeper recession.

According to the NZIER, the NZD10bn worth of tax cuts and infrastructure spending announced since October 2008 will prevent 10,000 jobs being lost over the next couple of years.

However, this job creation comes at a cost. The government is borrowing to fund its expenditure and this debt must be repaid. This debt burden will reduce household spending in the long run.

"Our analysis shows that the government faces a real juggling act in its forthcoming Budget between short and long term objectives", Jean-Pierre de Raad, Chief Executive of the NZIER commented, adding:

"The extra cost of the fiscal stimulus comes at a time when tax revenues are already down. Future superannuation and health cost pressures are growing. The government’s operating deficit is set to reach 3% of GDP over the next few years and debt will rise far beyond comfort levels. This has implications for our credit rating and thus borrowing costs if it is not dealt with.”

“To prevent debt spiralling further, the government will need to do more than putting off the planned tax cuts and getting more value out of its public spending,” de Raad continued, stating further:

"There may be more cost-effective ways of boosting employment. For example, we found that a policy that reduces the cost to business of employing workers is more effective in boosting employment than personal income tax cuts alone. Such a policy could create 22,000 jobs at a similar cost to long-run household spending.”

“These employment effects are temporary. They help the painful labour market adjustment, but do not deliver long term productivity improvements. Well-targeted spending on infrastructure would be an effective way for the government to support long-run productivity improvements at the same time as temporarily boosting employment. Given New Zealand’s longer term growth challenge, any fiscal efforts to stabilize the economy and avoid a more severe recession should have productivity at the centre of the policy radar screen,” he concluded.

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