Is NZ fiscal stimulus lower than the rest of the world?

There have been accusations from some blogs that the NZ fiscal stimulus is too small relative to the rest of the world (No right turn, the Standard). However, I didn’t think this was right.

Now the OECD has shown that this isn’t right:

fiscal-impulse

Now this isn’t to say that the fiscal response is right – it may be too small or too big. But it is to say that we aren’t pumping in a small response relative to the rest of the world. In GDP terms we are sixth – just behind Aussie.

Update: Link to OECD report (ht Keith Ng)

Update 2: Appears that some countries were undermeasured by the report (ht Gareth):

As an illustration, tax cuts decided in 2006 or 2007 but implemented over the period 2008-2010 in Denmark, France, Poland and Spain are not included, although they may have contributed to cushion the economic downturn

This explains why the stimulus in these countries (excl Spain) was so low.  And I can understand why Spain would need a larger stimulus with their high unemployment rate (* note I suspect that the 17.4% figure is an exaggeration – as I think they include more potential types of unemployment than we do)

  • I wonder if that table is out of date now.
    UK stimulus would be way higher than 2% now wouldn’t it?
    cheers
    Bernard

  • @Bernard Hickey

    The report is nearly 2 months old – so it will be a bit out of date.

    However, I’m not sure why UK stimulus would be substantially higher in that time – the cut in GST was already announced, and since then they have stated that they are going to lift income taxes.

    Even if the UK is higher, I am pretty sure that NZ’s fiscal stimulus would hold up fairly well.

  • Gareth

    How did they define what was included as fiscal “stimulus”?
    Comparative fiscal policy to 2008? Or specifically targeted packages?

  • @Gareth

    Do not have the details of that on me. But as it is net fiscal stimulus I would take it as being comparative to 2008 – rather than being about quality, or the change from a predetermined plan.

  • Gareth

    Right, thanks. So it’s more about the general footing the Government(s) decided to move to in general policy than specifically about recession response (certainly still valid and closely interelated of course).

    That’s the issue in NZ I think – one argument is our Government has just made the underlying structural changes it considered necessary to the economy and hasn’t undertaken specific, short-term fiscal responses to the recession.

  • FreneticMonkey

    i think that some people feel there is no stimulus because everything being done was promised in the election campaign and they want something ‘extra’

  • @Gareth

    But if we are talking about fiscal impulse we are discussing the extra spending for 2009. As the RBNZ has been saying – we have one hell of a fiscal stimulus, which is why they have been a little more careful with interest rates.

    A fiscal stimulus won’t count things like “changing laws” which may provide a stimulus but is structural – these are all bankable, measurable, policy changes.

  • @FreneticMonkey

    Indeed – hence why the RBNZ had interest rates so high (as that sort of fiscal stimulus would really be inflationary in normal surroundings). It really shows you just how hefty the spending promises had become …

  • The breakdown of what they take into account is detailed here:

    http://www.oecd.org/dataoecd/4/31/42424234.pdf

    Fiscal cost of revenue reduction: $7,653m over 2008-10.

    Fiscal cost of additional spending: Um, $51m.

    The spending measures doesn’t make a great deal of sense to me. Why are transfers to households negative, and government consumption positive?

  • “The spending measures doesn’t make a great deal of sense to me. Why are transfers to households negative, and government consumption positive?”

    It is because they expect direct transfers to households to fall – through a fall in Kiwisaver subsidies. If the credit market isn’t functioning this money just would have been chucked in a black hole anyway (the MPC=0) so that seems fair enough.

    Thanks for the link though – it has a load of cool graphs!

    In relative terms our package is VERY tax cut heavy – but that makes sense given the more positive outlook for the NZ labour market relative to the rest of the world.

  • Gareth

    @Matt Nolan
    Certainly a fiscal stimulus is a fiscal stimulus (particularly in the eyes of the RBNZ!) but I think this is where some of the confusion arises in the debate. Some people are looking for a fiscal stimulus response to the recession, and we aren’t getting one of those here – we’re just getting a good old fashioned fiscal stimulus through permanent tax cuts that had nothing to do with the recession.

    Thanks Keith for the link and summary.

  • @Gareth

    Ahhh I see I see. Indeed. Well permanent tax cuts, with spending not YET being cut. Either the tax cuts are temporary – or spending growth is going to be severely curtailed in the future.

  • It looks like countries have very different ideas about how to construct stimulus packages. Is that correlated with their political leanings? The impact of the recession on their country?

    Moreover, I’m confused by the smorgasboard on offer. NZ’s package has been criticised as being ‘too big’ AND ‘too small’. So what size package is ideal, Matt? Is it the size that matters or the way that it’s used?

  • @rauparaha

    Well there are lots of issues at play. For one, what is being influenced in the recession. Another one is – what is the initial starting position for spending and taxes.

    Size matters, the way it’s used matters, and no-one will ever agree. All the post is trying to point out is that our underlying “stimulus” isn’t small relative to the rest of the world.

    Criticise it’s composition, its absolute size, its flavour, sure. But don’t say we are doing nothing when the rest of the world is doing heaps – as that isn’t the case.

  • I think it’s far too optimistic to suggest that the structure of New Zealand’s “stimulus package” was the result of rational consideration about the labour market, or even ideology. Cullen was cornered into his tax cut by media and political pressure, and National was cornered by Cullen’s tax cuts into doing pretty much nothing. And so here we are.

  • @rauparaha

    Is it the size that matters or the way that it’s used?

    I think people have been grapling with that question for centuries:P

  • @Keith Ng

    Agreed – it is just a happy coincidence that the policy makes sense given the specifics of our crisis. If we were expecting unemployment of say 10%+, and we felt that the RBNZ was unable to act, and we felt that cash hording was going on, a movement from tax cuts to focussed spending could make sense.

    Hopefully if we are in that case the government can arbitrarily be pushed into again making the appropriate changes 🙂

  • @agnitio

    It is a question that will always vex the discipline – perhaps we need a workshop

  • Miguel Sanchez

    Bernard Hickey :I wonder if that table is out of date now.UK stimulus would be way higher than 2% now wouldn’t it?

    The chart in the OECD report refers to the total fiscal stimulus from 2008 to 2010. I suspect the UK doesn’t rank very highly on this measure because of the spending cuts/tax hikes they’ve flagged for next year and beyond.

  • Gareth

    Amazingly that OECD report has this in it’s methodology section:
    “Discretionary measures which cannot be considered as a response to the crisis, even if they are implemented over the period 2008 to 2010, are excluded from the definition of fiscal packages. As an illustration, tax cuts decided in 2006 or 2007 but implemented over the period 2008-2010 in Denmark, France, Poland and Spain are not included, although they may have contributed to cushion the economic downturn.”

    So by including them, the OECD is specifically saying that all of Labour and National’s tax cuts were specific responses to the crisis. I’m not sure I believe that.

  • @Gareth

    Really – that is a nice catch.

    Very interesting – however, I guess both Labour and National were calling the tax cuts “relief for households”. However, I have no idea why they wouldn’t include that for the other countries!

  • Gareth

    I certainly don’t think you can take the $1b or so of National’s cuts as specific to the crisis given the length of time they’d been clamouring for them and that they were in fact scaled back from what they wanted.
    The Labour cuts you could possibly include given they were “against character” but the 2008 Budget was released just as the global crisis started to ramp up (long before the Maes or Lehman problems) and would have been decided before that.

    Still, you’re right – they all spun them as economic responses at the time.

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  • @Gareth

    I agree that National wants a structural decrease in taxes. However there is another way to look at it:

    National cut taxes and didn’t cut spending – that non-cut in spending could then be viewed as a “stimulus”, as over the medium term they will have to have a lower path for spending in order to sustain lower taxes.

  • Gareth

    @Matt Nolan
    Yeah, very good point.
    I certainly think they are stimulus, just not stimulus as a response to the “crisis”

  • @Gareth

    But …

    you could say that not cutting spending when the government realised that the books didn’t balance was a response to the crisis.

    Now if this is the justification for including our cuts as stimulus I think the OECD should have included the tax cuts for those other countries as well! However, it is possible to frame it this way.

    In this case the tax cut is “structural” but not cutting spending (which is the flip side) is a temporary stimulus in the face of a crisis 🙂

  • Gareth

    Ah yes, I follow. I’ve never seen any indication from the Govt that this was their intent of course, but mysterious ways etc etc…

  • @Gareth

    An accidential stimulus is still a stimulus 🙂

    More seriously though, if the government realised that the economy was smaller but knew that unemployment wasn’t going to rise, they would have had to make a choice between cutting spending or their tax cuts – and they would have done a bit of both.

    However, given events they kept a lot of the spending – that in itself could be called “a stimulus”. It is a weird way of thinking about it – but it is definitely how economists will be looking at it.

  • Of course, this argument may change in a few weeks once the “Black Budget” is reported if the expected spending cuts are to come. But even then, I don’t think the National Government was looking for a balanced budget in the short-term prior to the crisis hitting, so I’m not convinced that they’ve held spending above what they would have (in the immediate term).

    Dunno, I’m no weird-thinking economist ( 😛 ) but I don’t feel that our tax cuts (or resulting overall fiscal position) can be currently be considered a direct response to the crisis like the OECD has painted it.

  • Thanks for hosting the discussion by the way, good to have some figures and stated assumptions to work from.

  • “I don’t think the National Government was looking for a balanced budget in the short-term prior to the crisis hitting, so I’m not convinced that they’ve held spending above what they would have (in the immediate term)”

    In practical terms that is true – and that is why economists expected interest rates to be so high. If the government was going to be irresponsible and blow its budget interest rates need to be high to get the rest of us to save.

    Then the crisis happened 😛

    Personally I think the OECD mistake came from excluding the other tax cuts – not including ours. I don’t see the point at looking at “stimulus ex stimulus we don’t like ” 🙂

    To be clear, I do see your point though – I’m just unimpressed with the OECD for the exclusion