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On the threshold of a new dream

14 May 2020

The government delivers its next budget today.

This could very much be a make-or-break budget for a nation that, like so many others, has just suffered a devastating economic blow in the form of COVID-19.

Get this budget right and New Zealand's economy could leapfrog ahead of its peers. Get this budget wrong and we could be consigning ourselves to a future of relative poverty and lingering unemployment.

This will probably be the most formative budget delivered in more than a generation.

No pressure Jacinda, no pressure.

Let's cross our fingers that the government which has so ably led us through this crisis will continue to show a boldness and decisivness that will leverage our position as "Covid-free" (well almost) to our great advantage on the world economy.

I for one, certainly hope that the economic pain and suffering we've all been through will not have been wasted.

So what are the chances they'll get this right, and what is "right" anyway?

Well there is likely to be an abundance of labour available for employment in the coming months, as a good number of businesses find that they have been unable to weather the loss of cashflow and profits over the past six weeks.

The workers who will have lost their jobs will need to be employed if we are to sustain and grow our domestic economy. That means coming up with jobs -- and not just "Clayton's" jobs but real ones.

If we can't create jobs to keep these people in gainful employment, and thus paying tax rather than being a further drain on the governments already woefully over-extended funds then everyone will suffer. The huge debt incurred by government by way of the payments made to businesses and individuals over the lockdown will have to be repaid and the only place that money is coming from is taxation. If too few of us are in work, the burden of repaying that debt will be a heavy one for those who are still in a position to pay tax.

It's guaranteed that income tax will go up -- if not in this budget then certainly within the next year or three. The government has no option on this one, their hands are tied because the debt has already been incurred.

The ideal solution is that the economy is catalysed into strong growth and therefore the government's tax-take grows organically, without the need for significant rate increases. Another benefit of such growth will be a degree of inflation that will also help to wipe away the effect of the debt currently being carried.

The real challenge for Jacinda and co right now however, is just how do they get a stalled economy up to top speed and beyond -- without going into significant further debt?

State works and infrastructure development is an option. In fact it's not a bad option and one that has been used before. This is the strategy that gave New Zealand its massive pine forest industry, created huge dams and built many of the nation's highways during previous times of economic hardship and high unemployment. Such a strategy makes the nation stronger and delivers benefits for many generations to come.

Another strategy is to incentivise and assist (fiscally and otherwise) private enterprise to create the new businesses and jobs that are needed. This has the benefit that it could be a cheaper option -- although the rewards tend to be enjoyed by far fewer and for a shorter duration. The rich will get richer as the money sunk into these ventures always finds its way to the top rather than the bottom of the income ladder.

Which way will Jacinda go?

Well Labour has always leaned more to the left than the right so I'm picking we'll see a whole lot of state-funded "social/national good" projects used to soak up the excess labour and put money back into the pockets of blue-collar Kiwis.

I'm not saying it's a bad thing, indeed we could do with some more infrastructure development in New Zealand. We've seen far too little spending on such things and if I was in charge I'd be looking strongly at renewable energy projects such as harnessing tidal power -- so as to secure our future in coming era of electric vehicles.

The reality is that perhaps the best approach is a balanced one. Some of the government's focus should be on state-owned infrastructure but some of it should also go towards helping private industry get back on its feet. However, I am dead against "handouts" to industry -- as has been the policy of both National and Labour in recent decades.

DO NOT give any more taxpayers' money to businesses. If you want to help them, create the environment where it becomes attractive for private investors and VCs to put their money into new businesses. Create a tax structure that rewards success but doesn't burden taxpayers with failures. Regular readers will know what I'm talking about here. Think *smart* - don't just throw money at "a good story" as successive governments have done so often in the past (Martin Jetpack anyone?).

What do readers think is going to happen?

What would readers do if they were at the helm of the good ship GodZone?

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