By Bernard Hickey
Low inflation and ever-lower interest rates are taking their toll on the Government's finances, as Finance Minister Bill English has warned.
Treasury reported the Government's Operating Balance before Gains and Losses (OBEGAL) was NZ$889 million in the six months to December 31, which was NZ$92 million worse than Treasury forecast in its December Half Yearly Update. It was also in line with th NZ$990 million deficit seen at the same time the previous year.
Core Crown revenue was NZ$171 million lower than forecast "with lower core Crown interest revenue being the main contributor to this variance," Treasury said.
Partly offsetting the lower-than-expected revenues, Core Crown expenses were NZ$142 million lower than forecast.
English warned this week that the 5-7% nominal GDP growth seen in previous economic expansions had made it relatively easy for the Government to grow its revenues and turn deficits into surpluses.
"But that's not happening. In a sense, government is having to learn how to deal with real dollars - that is, pay off the debt in the same or similar value as when it raised the debt," English told the Finance and Expendigure Committee (FEC) earlier this week.
Treasury said the core Crown residual cash deficit of NZ$7.0 billion was NZ$913 million higher than forecast. Net debt of NZ$66.9 billion or 27.5% of GDP was NZ$1.1 billion or 0.5% higher than forecast, although Treasury said a large portion of this variance was expected to reverse in January due to the timing of payments.
Treasury is forecasting an OBEGAL deficit of NZ$401 million for the full 2015/16 year. English relaxed the Government's surplus and debt targets in December, moving to a target of 'small deficits or surpluses' rather than a hard surplus target. He also relaxed the Government's net debt target to reducing net debt to below 20% by 2020 to 'around 20%' by 2020.
English has also signalled in December the Government would not bring in big spending cuts in response to any deterioration in the fiscal outlook. He repeated that again this week at the FEC.
"As was set put in the Budget Policy Statement, with the OBEGAL now broadly in balance in the immediate future we will not distinguish between forecasts of small negative and small positive balances. In particular we will not sharply reduce operating allowances in response to forecast weakening in the tax take, should that occur," he said.
English repeated his comments in a statement today after the latest accounts, saying Government would keep a tight rein on spending, but would not swing spending in reaction to a deficit.
"Although revenue is slightly under forecast, we are keeping a tight rein on what we can control - our spending," English said.
"We'll have to wait until the final accounts are published in October before we see the actual OBEGAL result for 2015/16 - but now that we are back near balance we will not react to small negative or small positive surplus forecasts," he said.
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English warned this week that the 5-7% nominal GDP growth seen in previous economic expansions had made it relatively easy for the Government to grow its revenues and turn deficits into surpluses..
"But that's not happening. In a sense, government is having to learn how to deal with real dollars - that is, pay off the debt in the same or similar value as when it raised the debt," English told the Finance and Expendigure Committee (FEC) earlier this week.
More to the point Mr English.
A cut in the rate of interest increases the price of bonds. Along with the increase in bond prices the liquidation value of bonds (that is, the amount the debtor must come up with if he wants to prepay, or liquidate, his bond) is also increased. This is just the other side of the coin as it is seen by the debtor.
The price of cash flows is increased unilaterally. Bond issuers will have to pay more, perhaps substantially more, if they want to get out of debt ahead of schedule in buying back their bond before it matures. The effect goes beyond the circle of bond issuers. All debtors who have borrowed at a fixed rate find themselves in the same hole. They are all trapped. There is a stealthy and indiscriminate transfer of wealth from debtors to creditors. Read more
The easy days of funding deficit spending with depreciating debt are over - pet infrastructure schemes will have to be funded by their promoters not the patsy taxpayer.
I think it is past time that the government intervened to change the rules or at least issue a cease and desist order directed at the actions of ideologues intent on driving interest rates to zero.
Worse yet, the die hard of the ideologues are promoting negative now as if it should have always been a part of the orthodoxy;
http://croakingcassandra.com/2016/02/16/negative-interest-rates-some-th…
Instead of paying, say, -50 bps (or -100 bps, -200 bps?) and certainly not lending, might banks opt for convertibility despite the inconvenience and cost of doing so? It wouldn’t be easy, as how would a large-scale global bank quickly turn to storing €20 billion euros in vault cash, but I don’t think you can so readily dismiss that possibility. If one bank did it, then another might and then you have a good, old-fashioned bank run as convertibility of liabilities would be just like it was 1930 or 1893. Read more
Is it time to call for Nurse Ratched ?
We are talking documented belief systems
Craig and Helen work on the principle that making a profit allows them to borrow more
from the bank and increase their asset base. Craig said they were advised at an early
stage to borrow everything from the bank they could, because it was better to milk 800
cows with a 50% debt than 400 cows without debt. The bank manager is the most
important person they know and in anything that they do, ‘cash must fall out of the
bottom.’
http://www.nuffieldinternational.org/rep_pdf/1223389466Gregson,_Sara.pdf
page 24
A perfect analogy;
.. the mechanistic and oppressive forces in society gain ascendance through the dishonesty of the powerful. Without being aware of the oppression, the quiet and docile slowly become weakened and gradually are subsumed.
You are on point with this. Funding growth projects with Government debt without inflation is as stupid as an individual growing a credit card balance to $100,000. A debt trap for Governments and we have a serious deficit.
Maybe I'll be able to pick up some cheap Governments on trademe in the near future.
Very good link SH.........sometimes things just have to fall over before there is change and whether one drives it there fast or slower is up to the people and most do not want to be informed.
Haven't seen any adverts......Bolt hole for sale - payment only in Gold.
What's new? The government continues to dig a deeper and deeper hole for the nation, and will keep doing so until the sides of the hole cave in and crush most of the populace.
Expect more wasting of resources on government boondoggles to prevent unemployment from skyrocketing and more overseas borrowing to keep the façade of success freshly painted.
Meanwhile, dairying, arguably the backbone of the nation, goes further down the drain.
It is only the catastrophic failure of most other nations to address anything of significance that is keeping NZ afloat.
Awaiting the imposition of negative interest rates in a few more countries and the implosion that must inevitably follow.
.
We now have the lowest home mortgage interest rates in 50 years for the 'investors' in residential property who are prolific in posting here on self-interest.co.nz asking for even lower interest rates. While savers (who all pay taxes on the decreasing interest they receive) are asked to continue to fund the property bubble - with no reward for that risk.
And Mr English and The Treasury were unable to forecast the decreasing tax take?
Some excellent points billsay. But you know what's going to happen to the savers when the Auckland property market tumbles (no I'm not predicting a date, and yes it will happen!)? Hard earned savings and pension funds like KiwiSaver will be robbed to keep the banks and reckless borrowers like property investors afloat. So when the 'big reset' happens, the big borrowers will OWE nothing and the big savers HAVE nothing...
Govt has never, never done the right thing economically, structurally, educationally and sensibly, most of all financially, during the good times.
You cannot borrow to the hilt and your way to success, even at the 'forced down' rates prevailing today.
Any fool can over borrow and does. Any fool can spend, like never before.
It is spending wisely that has to be accounted for.
Banks have become the problem, not the solution. The proliferation does not stop them being over sold, no matter how much you import by the back door.
Screwing one portion of the population who actually worked and saved and built this country, then bringing in the wrong replacements is foolhardy to say the least.
Values are not just what money you have. It is also what values, you hold dear and aspire to, not what you bought a Politician with..
Once a home was just that. Now it is seen as an investment. It is all this site and others deem worth mentioning.
And economics is not learned by fiddling the books, either.
Payback is never a bad thing, but now it is debt, above all else.
And these idiots we have leading the pack are the problem, not the solution.
If anyone cannot see that, maybe that is a bigger problem in the making.
Ex-bankers and theorists are not what we want. It is not who can get us deeper in debt, that we need, it is the exact opposite.
I will never, never vote for these jerks. But unfortunately, I have to live and work around them. And listen to the bull-crap they all talk.
Peace be with you all.
And that was the Friday Funny. No seriously.
Quote;
"English warned this week that the 5-7% nominal GDP growth seen in previous economic expansions had made it relatively easy for the Government to grow its revenues and turn deficits into surpluses.
"But that's not happening. In a sense, government is having to learn how to deal with real dollars - that is, pay off the debt in the same or similar value as when it raised the debt," English told the Finance and Expendigure Committee (FEC) earlier this week.'
>>>
So whats this do to all the housing debt, all the dairy debt and the new borrowing to fund infrastructure spend in AKL?
It's all coming apart, you cannot lose 17 billion of dairy payment to farmers and pretend it all going to be ok.
Yes, tourism will surely be our economic panacea. And it will also solve the problem of the coming avalanche of unemployed farmers. How so? The farmers can be employed as escorts to German and other European backpackers to ensure they don't befoul our scenic countryside and to prevent them shoplifting.
One of you economists out there can tell us if this is a profitable strategy. Even if its only break-even it would beat the future deluge of the unemployed being drafted in to building infrastructure with shovels and picks a la the 1930s depression.
A day on the dairy farm tours, Quad tours through the tussock lands, Horseback the pioneer trails. Souvenir Redbands and beanies to tuck into the suitcase......
I was also being somewhat tongue in cheek with my tourism comment......it is a bit of real estate quote that has surfaced around Chch that tourism is going to be the saving grace......how to sell a house when you have nervous buyers is to sell them a possible future.
Just to prove to everyone how thick i am i must ask you the following questions.
How has the 17 billion of payout to farmers become debt?
You say it was white gold but had the gold been sold or was the 17 billion an expected payment or one that was pulled out of thin air.
Did the farmers spend up based on a payout of 17 billion.?
I am getting confused myself now. The money was paid out to farmers when they got a $8 payout, now there is 17 billion less being paid to farmers this year, that is not being spent in the economy, not paying the interest etc., So it hurts us all.
The housing market was relying on the same income to fund their debts as were many businesses. As Bill English has noted, the true cost of interest is not fun for anyone.
Last night milk prices continued there fall in the States. A lot of us are dependent on farmers for income.
Now milk payouts are below the cost of production for many, I don't underestimate how critical this period will be for the country.
Look the TPP was signed in a casino; what else can you expect. We have spent years negotiating trade deals where we threw industry after industry under the bus in the name of "access for our farmers" . Picking winners anyone?
Well it failed and this is as good as it will get. Welcome to Greece.
Remind me...Did a certain Dairy Farmer become an expert on the price of everything and the surplus of 'Nothing"
And you all.."Listened".
Some people will believe anything a so-called ex-spert tells em.
An ex-spert is often referred to as a person who used to be a drip.
Unfortunately one is now is an over paid Government Employee, in charge of Financial mayhem.
Unfortunately he answers to an even bigger problem.
Now they expect us all to drip-feed them, indefinitely..
It seems to be a Worldwide complaint.
Is there a faction afoot to bankrupt us all.
Or is there just a simple Ponzi in action initiated by Government decree.
Not just ours...?.
Give Bill a break. He's the one who is pointing out the debt repayment problem when there is no growth, or inflation to whittle away the debt. " .......government is having to learn how to deal with real dollars - that is, pay off the debt in the same or similar value as when it raised the debt"
I see few other pointing this out at all, even here on interest.co where most of us are worried about the debt mountain.
As for forecasting surplus or deficit. How many of us are as accurate at forecasting our own affairs as the government is.
It is good that he is pointing it out KH......it is just a shame he didn't add and because of this problem we the Government are going to implement some austerity and deregulate so we can fire the economy up again.......no country in the world is going to get inflation unless they deregulate.......
I think this would sum the issue up ;-) Late's, lipstick and lycra control the spending.
it is what it is
Maybe now the powers that be will start to question the model of inflation and debt now that it's pretty obvious that it's structurally flawed. Infinite inflation, infinite growth, infinite debt - tell me again how that's going to work out. Economic theory doesn't work in reality because it cannot control, assume or forecast human behaviour even though that is exactly what it attempts to do.
Maybe not only the government but also the people now have to learn real values not just those measured in dollars and possessions.
I have been saying for some years now that there are only two options: hyperinflation or default. Only question about this is when. But a lot here like the sound of their own voice too much to bother listening or understanding, and you have fallen into this category yourself KH. But I have noticed an change in your posts of late, at least some sort of enlightenment has come over you.
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