By Alex Tarrant
The ball is in the hands of the private sector for the next move in New Zealand's growth story, as the Reserve Bank warns New Zealand's potential growth rate is falling due to a lack of business investment.
Prime Minister John Key said the government was focussed on getting its own balance sheet in order, and indicated it was not willing - at least in the short term - to step in with further policies to foster investment above and beyond current moves like reducing business compliance costs and investment in transport infrastructure.
The state of the global economy was the primary factor for when consumers regained confidence and businesses decided to undertake more capital investment, Key said at his post-Cabinet press conference on Monday.
He was asked about the Reserve Bank's comments last week that subdued investment in capital over the last four years had reduced New Zealand's capacity to grow.
Reserve Bank Governor Alan Bollard said businesses had been scarred by the global financial crisis, and had moved to consolidate their balance sheets. That meant there had been low levels of innovation and risk-taking, which inhibited potential growth, Bollard said.
Read: RBNZ bemoans lack of investment, says has cut NZ’s potential growth rate; Capacity tight
Not sure
“I’m not 100% sure what could be done about that other than what we are doing, which is, firstly, the government’s got its own balance sheet in order," Key said on Monday afternoon.
“That should give businesses confidence - that we’re not going to be either taking more money out of the economy from a borrowing perspective than we otherwise would, and we’ve lengthened our balance sheet," he said.
That meant there was more confidence about the health of the government’s borrowing programme and its own fiscal position, he said.
Companies themselves had got their own balance sheets in order, were holding a lot more cash, and had restructured their businesses to be in stronger shape.
“I think what they are concerned about, if I can speak generally for companies, is, it’s just a very uncertain time. No one’s quite sure what’s happening in Europe, no one’s quite sure what that means for China and Australia," Key said.
“Confidence levels are quite low in lots of countries – it’s not unique to New Zealand," he said.
Will govt step in?
Asked at what point the government might step in to help foster more investment in the economy if businesses continued to hold off, Key replied that it would have to be asked, if businesses were not investing fast enough, what was the rationale for them not investing?
“I think the arguments there are, the government needs to look at what it can do to give them confidence," he said.
“I think, firstly, the government building infrastructure, trying to reduce compliance costs, lowering company taxes, are all initiatives that are important in terms of getting them to invest.”
General business confidence surveys asking whether the government was on the right track in terms of the economy, like the Mood of the Boardroom survey before the election, were “pretty supportive of where National’s going.”
“So we can’t make them invest if they think the international environment is weak. But we can do our best to point out to them that we think we’re getting in the [strongest] shape we can," Key said.
...not in the short-term
Asked how long the government would wait before acting further if business investment stagnated, Key replied:
“Well I don’t think we’re in that position. In fairness we’ve grown in nine of the last ten quarters. Yes, that’s been relatively anaemic growth, and that reflects this very sluggish international position. But I think, before you see New Zealand companies really leaping into substantial investment, they are going to want to have more confidence about what’s happening in the global economy.
“They’re going to want to see Europe on a stronger footing, and they’re certainly going to want to see some recovery in the United States," he said.
While activity in Europe may remain subdued over the next 5-10 years, the numbers emerging from China and the US were more positive.
Asked whether his answers meant the ball was in the court of the private sector for next move, Key replied:
“I think [the] question is, is there some magical lever that the government can pull? I think the answer to that is, I don’t think there is something we can do in the very, very short term.”
The government was doing a “fair bit” of investment in infrastructure like roads.
“I think the private sector [is] taking quite a lot of confidence in what the government’s doing. Speeding up things like the RMA...are really important, because they’ll help them," Key said.
“But...it’s just like New Zealand consumers are currently saving, and have been for the last three years. It’s a reflection on a slightly different anticipated environment. There’s just a degree of uncertainty in the minds of businesses and consumers," he said.
39 Comments
For once Key is right. The only thing a government can do to promote growth is get its great regulatory bulk out of the way. Even better, stop persecuting those in the country that can promote growth by doing business.
Plus there are no 'lever's for an economy. An economy is you and me, not a bunch of aggregates. Thinking like that put the state in our lives, and our markets, and got us into this mess.
There is no proof those "rich pricks" actually promote anything but their own bank balances....in fact there is a clear indication that they are detrimental to an economy...
So I'd tax them at 70% over $500k/annum....if they leave we will probably be a lot better off.
regards
Steven the only thing that is detrimental to the economy is when Government and Councils use leverage from other people's debt via the tax/rates system to obtain their funding.
Maybe you are misdirecting your anger and missing the point. We are all equally enabled to make money.
What, you mean the Herbert Hoover who massively increased Federal government spending, debt and deficits to the extent that FDR actually campaigned against Hoover's profligacy in the lead-up to being elected as his replacement? Looks like you need to brush up on your history.
What, raf, like sports stadiums?
That's not quite what I had in mind. I'm talking core infrastructure: energy, water, transport, education. Stuff that will underpin our productive capacity. Community assets are important also, but I'd prefer to see something that the whole community can use on a daily basis.
In addition to Parata's Education portfolio shortfall arising from the classoom size fiasco - I wonder what they've done to fill this "hole" as well?
No matter whether the 'money' is new or the 'debt' is new - where investment by this government is concerned it has a penchant for making a hash of it.
Yes, the problem with the state doing these 'infrastructure' investments, is that by the time you take in all the bureaucratic cost - from IRD to extract the dosh (and putting philosophic issues of my freedom aside), then through the hands of every relevant ministry - and then add to the fact that the state distorts the free market signals, thus often ends up forcing the consumer of such investment to simply have to take what the machine produces, rather than the machine producing what people actually want, the fabled government multiplier is (way) less than one. So we all end up with our needs and desires not met at all, while living in the prison of taxation.
Just great ... not.
Yep, this is an interesting case in point;
http://transportblog.co.nz/2012/06/11/more-information-about-the-rons/
Finally, the report notes (and this was picked up on by the Radio NZ piece) that some of the RoNS projects will be pushed out to completion a few years after 2020. Looking at that list, it does make one wonder whether NZTA are holding out for a change of government so they can cancel the most stupid of the projects
If its toothpaste OK, if its a hydro dam...no....its then not a Q of choice.....its too large a project and there is only one river to block so there is never going to be competition and you just wasted several lots of resources to supply only one need....so one or more could go bankrupt....huge waste....and Govn look to keep the Ntaion and economy safe, businesses do not they just look at short term profit.
The govn multiplier is actually about 1.4 to 1.5.....now I can understand libertarians dont believe that but then I dont believe anything libertarians say anyway.....I dont follow fundies...
regards
Tell you what, prove your assertion since you claimed it wasnt so first....be my guest.
I mean if you have done any analysis and research to support your un-founded claim you should have both sides of the argument at your finger tips.
Meanwhile,
http://krugman.blogs.nytimes.com/2011/11/17/demand-demand-demand/
"In general, cross-sectional comparisons are proving to be a very good way to test some propositions in macroeconomics. I’d cite, for example, the Nakamura-Steinsson paper (pdf) that uses fluctuation defense spending — which has very unequal impacts across states — to estimate the multiplier on fiscal policy (it’s about 1.5)."
or,
"multiplier of 1.6 (Romer and Bernstein 2009)."
or some more papers.........
(Ramey
and Shapiro, 1998; Edelberg, Eichenbaum and Fisher, 1999; Burnside, Eichenbaum and Fisher, 2004;
Ramey, 2010; Barro and Redlick, 2011; Fisher and Peters, 2010). This approach faces the challenge
that large wars are relatively infrequent. Another challenge is confounding variation associated
with tax increases, price controls, patriotism, and other macroeconomic shocks.2 The second main
approach used to identify the multiplier is the structural VAR approach (Blanchard and Perotti,
2002; Perotti, 2007; Mountford and Uhlig, 2008; Ilzetzki, Mendoza and Vegh, 2010)."
of particular importance as we are at the zero bound right now,
"However, when monetary policy is less responsive|e.g., at the zero lower bound the multiplier can exceed two" a fiscal expansion is particularly
effective since it lowers real interest rates by raising in
ation (Eggertsson, 2010; Christiano, Eichenbaum, and Rebelo,
2011).
"http://www.nber.org/digest/feb11/w16380.html" suggests 1.9 has occured ....though probably exceptional.
So there are times when such an expansion may well be <1 but that isnt right now. Right now it might exceed 1.5....
regards
That is absolutely amazing to observe, Krugman writes this, then several months later he is arguing with Steve Keen that household / private debt doesn't matter again because he is thinking about the banking system now. Krugman appears to be suffering from severe short term memory loss.
while living in the prison of taxation.
Ha, ha, ha. Mark, I strongly suspect that prisons are not one of the things you want the government to stop paying for. Maybe you should not disparage so readily your key government services.
and next time you suggest putting philosophic issues to one side, put philosophic issues to one side. One could argue in philosophic terms that incarcerating people and forcing people to pay money under distant threat of incarceration are two quite different things. One might even argue that if you are already imprisoned by taxation, you should just stop paying tax until you go to prison. This will be an improvement for you because now you are no longer paying for the privilege.
investing in education is a real death knoll.
Seems like you might have missed the lesson where the whole world doesn't need to be shaped around the economy.
Normally one says 'death knell' but maybe you were thinking 'death knoll' a modification of 'grassy knoll' and investing in education has something to do with the Kennedy assasination?
Govns are used to only pay 2 or 3%...7%+ is generally regarded as sums that are un-repayable....
So its like saying you have maxed out your credit card at 12.5% interest and can only just make the payments. Then declaring the new interest rate is 25%...your repayments just doubled.....and worse that means your credit limit needs to be halved and the bank wants its money now.
Which of course you cant pay either of.
regards
So the Q is if Key isnt willing or capable to do anything, then how can he justfify his and Treasury's growth guesses/wild day dreams?
What he is saying is "we can do nothing but we'll keep the absurd predictions as if we did stimulate in a Keynesian way anyway......
Having your cake and eat it comes to mind.
He and National are a monetary failure...
I have no problem with them saying we will do nothing, I do have a problem when they cling to growth projectsions that are reliant on them doing it
regards
Key doing nothing is still Key doing much more that he should for example.Government guarentee of bank deposits, is effectivly a subsidy allowing banks to pay a lower interest rate to depositors than they would otherwise, also allows bank to lend more recklessly as the depositor dosen't care as their money is safe due to Government guarentee and, the bank knows they will be bailout if disaster strikes and the execs have to keep lending to make their numbers.
There is no multipler in Government expenditure you onlu have to look at the US, UK and Europe to see that, screeds of government debt, decades of central planning, now collapse just as USSR. http://j.mp/L32BnJ
Mist42nz - well written and you have hit the nail on the head.
The tax system and its effects has to be dealt with before business is going to invest and maybe the poo will have to hit the fan before the 99% wake-up.
The Government recently advised the Councils to get back to core services and I would hope that the Government would be leading by example.
Many on this sight blame the the banks for the debt laden economy both here and overseas yet they are missing the point, the one on tax. If a business can hoard cash of course it will - why would it pay down debt when it has to pay tax on those principle repayments? The business has to either hoard cash or expand in some form. Government has been able to leverage off debt for years by taxing the principle repayments.
The Labour led coalition knew very well that they could make the economy look good and that people would feel wealthier by the increased valuations in housing and the general population fell for it. However they needed to keep the tax take up to keep the story going.
Some components of Labours system started to falter so they introduced the Working for Families amongst other things which disguised the anomolies of the faltering system. The masses bought into it and kept the regime in place.
Those who are employees (who have mortgages and without any business structure) have had their tax obligations already deducted and then have to pay the principle component from these taxed dollars. Government loves this money, they don't have to collect it the employers do. One of the biggest problems here is that the employees earning power is limited and so therefore the tax-take has limitations. The Government and employees both choke together on the same problem - no growth.
The business/gloabl uncertainty factor has kicked in and any good business is not going to hang a noose around it's neck so naturally business will be taking a cautious approach they know what the problem is and where it lies but they are also a minority when it comes to voting.
If the Government wants business to invest there will have to be some new territory covered. Government moving back to core services and trimming all the bureaucratic cream from the system. Much of the Government spend is wasteful and reliant on the monetary circle to keep things afloat. Productive money becomes unproductive. The reliance on the the bureaucrats spending the money and keeping the flow going only accentuates the problem as the spend goes mainly goes on consumption not production.
When Government obtains leverage off debt in the form of taxation and Councils are also leveraging off this debt by using the valuations to collect rates then we should all know that the system is in deep trouble.
Mist42nz - Maybe I should have chosen my words better. Yes business pays tax on profits but there are ways of reducing the profit and hence the tax a business has to pay. If the business purchases a capital item with that cash such as a tractor, piece of equipment, another building, another business etc, they will pay some tax but this can be offset slightly by depreciation or other extra money borrowed to support the purchase price of whatever goods or services were purchased etc.
If a business had a $300,000 mortgage over property and they made a profit do you think they would pay some of that mortgage off if they didn't have too. No they would take the extra profit and spend it somewhere on something that gave the business an advantage.
Business can also borrow using the cash as a deposit which provides a tax advantage to the business generally. One can be hoarding assets using the cash surplus while obtaining a tax advantage. The asset class may or may not easily be converted into cash. And for some people the asset classes they invested in do not provide a nett profit return which is then offset by other asset classes that are making a profit. So there can be a tax advantage.
I don't think of uncommitted capital as just being extra cash lying around and no-one in their rightful mind would leave it accummulating. Hence the increase in Capital on property was used as collateral to purchase more property or other goods etc.
If you are a normal homeowner and on wages and you used that increase in capital value to go on holiday, purchase goods that were declining in value you have effectively wasted your capital advantage. I would hope most people in business would not have taken this option as they should be more aware.
In the USA there is however a lot of hoarded cash lying around, now either these companies think cash will be king in a deflationary market or if inflation is to bolt they will soon be spending rapidly. This money is sitting on the sidelines waiting for something to happen so I can only assume some sort of directional change is in the winds.
You state that the mentality issue needs addressing - quite simply the market is sending such mixed signals that cannot be explained by the yin and yang of capitalism. If the market was simply a capitalist market we would have direction but it is not it is mixed with Socialism, Corporatocracy and a whole raft of other ideals that are pulling against each other and until this is sorted the market will be directionless.
While PM Key is trying to provide direction it is undermined by the rantings of those in opposition who may get in at the next election. We have also witnessed when any reforms have been suggested that enormous opposition is mounted. The Austrian school of economic theory fully understands that humans are not passive and non-adaptive subjects.
Quite simply if you want the market to grow a clear concise direction is needed and the leaders in business will step forward. We need 5 and 10 year plans in this country not left and right wing groups preaching their agendas of change which just provides uncertainty.
Heads...after a while it becomes so pathetic you become unreadable. Get another chip for the other shoulder. Outright pathetic distain doesn't endear anyone to consider what you utter other than similar "experts". Please present views and logic for a change. You have eight posts on this thread that contribute nothing. Mine at least makes a point.
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