Bad spending can make a recession worse

Matt Burgess writes:

History tells us well-intentioned governments can prolong rather than resolve depressions with poor spending. In the United States, interventions in the economy in the 1930s, first by Herbert Hoover and then Franklin Roosevelt, almost certainly deepened the Great Depression. The Dow Jones did not recover to pre-Depression levels until the mid-1950s. In Australia, by contrast, the federal government led by Joe Lyons, constrained by high debt going into the Depression, focused on careful fiscal management. Australia had largely recovered by 1936.

NZ had one of the best recoveries from the GFC because it didn’t embark on poor quality spending, but targeted extra spending to where it could do the most good.

The new spending comes at a time when the normal checks and balances have been relaxed or discarded by this Government. Regulatory Impact Statements, a check on the quality of spending of most new spending proposals, were recently suspended. Concerns have been raised about the lack of transparency around Covid decisions.

The Government continues to push legislation through Parliament under urgency. Treasury remains underpowered after a decade of poor leadership. A lesson from the Christchurch earthquake recovery is that the surest way to delay a project was to fast-track spending and procurement processes. Good governance has value.

New spending and debt of more than $60,000 per household signals higher taxes in the future. That has the potential to affect investment decisions in the private sector today. There is a real risk that households and businesses could respond with higher savings and less investment, muting the overall impact of public spending on the recovery.

The only question with taxes will be how many new taxes, and how high.