By Bernard Hickey
The government has bet the economy will come right and it doesn’t need to significantly cut government spending to get its borrowing under control.
That all makes sense if you believe in GDP growth rates of 1.8%, 4.0% and 3.0% over the next three years.
The trouble is the Treasury has overestimated GDP growth rates since 2008 by around 2-3 percentage points of GDP as households and businesses elected to repay debt.
The government is essentially betting that households and businesses will start borrowing again and stop repaying so much debt.
That’s an heroic assumption given household debt to disposable income ratios are still well above anything normal and the sort of growth implied by Treasury’s forecasts will be accompanied by floating mortgage rates of close to 8%.
The government has not understood that this time it is different, as Kenneth Rogoff and Carmen Reinhart wrote in their analysis of economic growth and debt levels after financial crises of the last century. Economic growth is significantly slower for up to a decade after a crisis, particularly when a nation is laboring under heavy debt, as New Zealand is.
All this does is delay the inevitable black budget, forced either by a surge in interest rates or by a knock on the door from New Zealand’s real creditors – the Australian banks and the Australian government.
John ‘Smile and Wave’ Key has delivered a ‘Tweak and Fiddle’ budget that will get him re-elected on November 26.
But it hasn’t solved the underlying structural deficit in New Zealand’s government and its economy.
That will have to be dealt with in 2012 or 2013 when the growth doesn’t arrive and both the deficit and the foreign borrowing start rising again.
By then we will be in the same boat as the Portugese, the Greeks and the Irish. It’s a boat steered by the bond market vigilantes and their agents, the credit ratings agencies and the sovereign wealth funds behind them.
Guess who is thought to be the biggest buyer of New Zealand debt right now?
The Chinese government.
43 Comments
That puts Beijing in the box seat when it comes to buying land and dairyland at that...look to see changes in the OIO rules or just a nudge nudge wink wink policy.
We will be in big trouble as soon as the pullback in China kicks up a gear. Europe is buggered with debts crooks and boondoggle money games...the USA is in deep doo doo any way you look at it.
Is Barry inviting Tweak to the Whitehouse to ask him for loan or to offer to send Ben down under to work his magic...as he has in the usa!
"when (it's not an if) we default." Well unless they sent some gunboats....I dont know....the assumption is we need the global economy, but we both know that the future is all local....I suspect they will need us more.....we will have food to swap for oil...
So lets say the extreme un-thinkable happens and a chinese flotilla turns up....what does it gain them? some great land a long distance away from beijing they dont have the fuel to empty...I guess they could ship NZers back to China and import chinese? um....so swap one set of bods held down with guns for another? makes no sense....
"Betting on" is a losing hand....I cant believe they are that stupid they think its a winner...so they must have a plan B or a real plan and this is a setup.
regards
"That will have to be dealt with in 2012 or 2013 when the growth doesn’t arrive and both the deficit and the foreign borrowing start rising again."
Yep and then JK will declare he has to sell all of the SOE stakes and everything else...and oh cut the top rate of tax to 25% to....uh....boost the economy...
and when that doesnt work again?
But he'll have got another 3 years and retire to hawaii.....
regards
As a budget it is a political action not an economic one, so understandable from a politician's perspective (ie the end of the world is 6 months away).
Things they needed to do but were too afraid:
- increase taxes - pull in 1-2bn extra per year
- reduce payroll costs - take out 2bn per year.
Do that lot and I would have considered it a pass mark (just).
You are right about growth - we will have littel growth for years as people (and ultimately the government) pay off debt - if we cn stay standing still we will be doing quite well
Since Key and English like to tinker and fiddle smile and wave and make deals with there financial connections perhaps the goof guy from the the other party goers will turn up and play the spoons...
Phil Goof could spoon out Götterdämmerung for us mere mortals as we await the train of destiny...
...eerrr thats never changed muzza its always the same approach its just your mind that believes there is any real difference...actually we are still in Rogernomics but eerrr that dont work since its not really free market or capitalist its always been corporate socialism its the new face of fascism...the Oskar Shindler model of business is far more effective at keeping the sheep, sheep its a nicer illusion than communism even the Chinese have figured this out....
eeeerrr don brash is just more rogernomics and another central banker...
lol..like I said there is no difference...
its only your mind that thinks theres some sort of difference - its all about the agenda and the agenda is not locally driven and I doubt it includes you since I know it dosnt include me...
...unless you have a spare 40 million or so to buy a seat in the club...and be noticed...
Bernard - with respect, I appreciate that you've got to be controversial in your comments to attract comments and traffic to your blog, but frankly I don't believe you that have any more incite into the level of future GDP than Treasury, indeed less. They get things wrong sometimes, and I read your site, you get things wrong - nothing wrong with that, all opinion is good, but you're not gospel obviously.
The Chch rebuild is expected to add around 2% to GDP, that will happen no matter what else happens in the world. Yes if China or the european banking system implodes (both possible) and commodity prices fall, that GDP number might struggle to break 2%. But none of us know that for sure although I personally thinking the european banking system is highly likely, but the impact upon us still to be determined - this time it will not be a surprise to the unless someone is an ostrich.
I've spent the last 5 years being a massive pessimist but I just don't see what else this Govt could have done and stayed in power with a chance of furthering things in a second term - obviously you think Labour will, and I certainly don't believe you if you say that either. ?
See clip tonight of JK in Parliament and his big jibe to Goff, 'you'll bring in a capital gains tax'- a vote for a National- led government means no capital gains, a vote for any of the others (except ACT which doesn't seriously count) will probably see a capital gains tax. Wonder how middle NZ will react come November?
baaa baaa the clip on lamestream media the information of empty...
Sheep will continue to eat the grass untill the day of reckoning arrives...
Hope phil goof has his spoons ready!
Maybe don will will brush up on his gazoo and do duet with helen they can all hold hands and sing kum ba ya with tinker bill and tweedle key and then dissapear back into some other revolving door job at the UN or IMF...I hear theres a vacancy...
Nobody in their right mind would want to "self-inflict" more taxes - capital gain tax, land tax, any taxes.
The Govt spending needs to be cut right down and limited to minimum level that is absolutely necessary, taxes cut correspondingly, state handouts stopped, personal responsibility and productivity promoted - this is the only way to prevent this country from sliding into the 3rd world living standards.
I agree with you Iain in that I think the rating agencies have been complicit in what happened over the past few years. However, I'm not sure what the point is your making. The rating agencies recently downgraded the Aussie banks and will shortly do the same to their NZ branches - that will cause, admitedly minor, an increase in banks funding costs over time that will be passed onto to NZ borrowers. Are you suggesting that the Govt ignores what they are saying ?
None of us on this blog can decrease what weight global investors place on rating agencies assessment of NZ - if as a country we are smug and ignore them, we'll pay the price (well the borrowers will anyway)
Guys
What Bernard always fails to appreciate is that Govt in NZ is close to 40% of GDP so if they (God forbid) did a brash slash and tax move they'd shoot themselves in the foot, all the recently fired/disenchanted/stressed would up camp and move to Oz, your tax take drops anyway and you rinse and repeat.
We all know this but the great unwashed don't, and certain pollies (Noddy Goff et al) don't ever want them to know, because is suits them to dupe the uninformed into soviet style socialism, so that the patronising prats can sleep at night knowing that they have helped all the 'poor' people not blessed with the brains that they have.
So yes this budget wasn't as harsh at it could be but it does 2 things, a) signals to fat assed bureaucrats that they wil be under the cosh from here on in and b) don't bank on government entitlements because if needs must we will reduce them.
Hopefully they will get another term to keep doing this
Neven
Currency Trader Keys has been gambling with borrowed money- guaranteed by us. Tinker Bill is merely the front man. The kind of money Keys has been borrowing is all about keeping us happy until the election. - Are we all happy- you bet we are.
But what has Keys actually done in the past 2.5 years, not a lot.
We let Cullen and Clark take us for a ride for years and now we are doing the same thing with Keys. Why do we not hold them to account. If Keys only answer is Borrow a lot so he can reduce tax for rich people and then sell off our Power Co's to other rich people then what is the point of letting him have three more years.
The anti Goff spin is amazing. But he is not the point. The point is to keep these people on a tight rein. Not let them wander off selling stuff that is not theres to sell. Borrowing us up to the hilt to keep us happy till election time.
I am at a loss to see where selling state assets can benefit nzers as at prsent treasury demand a return from all state assets, so if they sell up 49 % then the amount the govt gets goes down each year , so how do they do they make for the loss.
I notice no one has even asked this question
What an asinine comment - Have you seen the accuracy of those you claim can do better? " We didn't see it coming, how could we predict it?" blah blah. So you suggest these people continue to be listened to then, yeah great idea.
Only when the NZ public, and by that I mean those who do not even read the news let alone understand basic financial, monetary and economic premises can we take control of our destiny. Iain Parker is correct, and what he states is factually common knowledge, however you will not ever hear about it, because the media is simply part of the same machine globally owned by the same corporations attached to the same investors.
Why people can't get their heads around this is beyond me. Its as though they feel continual crises are unavoidable, and happen accidentally. Just how is it that the global monetary collapse by the “West” is a mirror image of the same cause and effect in every nation it has happened to? Nah won’t happen to NZ because we are special and different.
Is ignorance bliss?
Might have to start calling this the goldie locks budget. Austerity Hickey thinks it doesn't cut enough, while over at nzherald Brian Fallow thinks it cuts too much.
Guess it had to be six of one, half a dozen of the other, with the ratings agencies on one hand and the electorate (in an election year) on the other.
Next year's budget should be more interesting.
Sorry Bernard, but you show a huge lack of understanding of monetary operations.
- "By then we will be in the same boat as the Portugese, the Greeks and the Irish. It’s a boat steered by the bond market vigilantes and their agents, the credit ratings agencies and the sovereign wealth funds behind them."
Greece, Ireland, and Portugal are all currency USERS in the same way the Auckland city council is, not currency ISSUERS like the New Zealand government. Currency users and currency issuers are not even remotely comparable.
Have you ever wondered why Japan, with a government "debt" to GDP ratio that is one of highest in the world (much greater than any of the PIGS), has such low bond yields? Have you ever wondered why Japan doesn't use some of its almost $1T of USD Treasuries to pay off some of its own "debt"?
The simple answer to these questions: the issue of government securities, for a sovereign nation with its own non convertible currency, does NOT fund government spending. The issue of government securities is an optional reserve drain to remove excess reserves from the banking system.
There is no need to be insulting....
Japan borrows most of its money internally from its own ppl and offers low yeilds....this is a poor example of whatever it is you are trying to say as Japan is pretty unique.
Quite why you think that unless we do something big enough to stop the deficit bleed and soon we wont find ourselves in severe doo doo mystifies me....We, unlike Japan have to borrow from abroad....we, under the last Labour Govn finally got the Muldoon debt paid off....we, really need to do better, and its not even hard....we tax at a level to build a rainy day fund....then indeed we wont care about the IMF etc...
Somewhat like Argentia for instance....whatever your theory is, the reality is a defualt or re-structuring can occur and will have huge consquences and none of them good.
regards
Many of New Zealand's government securities are owned by foreigners, because as a nation, we continually run a current account deficit. This, by definition, means that foreigners accumulate NZD financial assets.
Japan, on the other hand, runs a trade surplus, which by definition, means that foreigners can't get their hands on Yen (net result), and Japan accumulates net financial assets denominated in other currencies.
Japan is a pretty unique example.... thats because nations that run trade surpluses are few and far between.
Read my post in http://www.interest.co.nz/property/53545/budget-2011-what-budget-means-… on foreign borrowing,
Argentina is an inapplicable example, as if I remember correctly, they had either foreign denominated debt (which NZ has none of barring minute currency swaps), or a pegged currency.
The government that understands its own monetary system doesn't need to build a rainy day fund - do you actually believe that the government can run out of something they create from thin air (NZD's)?
http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
Read this short book. Its a basic introduction to the currency monetary system under which we operate / implications of economic policy.
No problem. Here is a visual aid:
http://econviz.com/balance-sheet-visualizer.html
I have plenty of other links to more detailed resources and explanations if your keen! It will open to eyes to the realities of monetary operations.
Do you actually know what "money printing" is?
When the New Zealand Treasury spends, it's settlement account at the RBNZ gets debited, and the commercial bank's reserve account (the bank with which the recipient is a customer of) gets credited. This spending process is EXACTLY the same regardless of whether spending is offset (offsetting = crediting of governments settlement account) by the issue of securities to the public, taxes, the central bank directly buying securities, or allowing the Treasury's settlement account to go into overdraft.
The latter two of those options are viewed as "money printing", yet the spending occurs in exactly the same manner.
Read the short book I linked you to for a very basic rundown, then come back.
I hope you are wrong Bernard, but ever since 2008 I've listened to you and have attended Economic Updates by the countries top economists and you have been right. I;ve seen the same economist come back to the seminar room each year and he's admitted he got it wrong. He seemed both embarrassed and perplexed
Everyone on this site, Bernard included, is commenting on economic decisions announced by politicians. The shadowy game of money and politics is as old as humanity itself and has played out throughout the ages and in all cultures. As man has spread itself over the centuries around the globe the complexities of trade and who lords over power have become so complex. Undoubtedly there are systems at work which are beyond our everyday control, and these systems are so interwoven that I'm not even sure it is possible that anyone knows with certainty who is pulling the strings. To believe you Iain (and there is a part in all of us that does!) is to believe in a small group (Illuminatti) who hold all of our pitiful lives in their hands. That may have been the case at some stage in history when complete dominance via the church was possible, but I fail to believe that so much of what the world is comprised today could be controlled by such a small cartel. Such a theory fails to incorporate the enormity of modern global influences and is in itself a simplification of the business world we live in. But hey, who really knows anything.
Re Alex 13.
I do not want to shatter anyones hopes and dreams but Treasury Officials know no more about the future than anyone else. Even the economics that they believe in ( I say believe because it requires belief rather than actual scientific proof) says that you cannot know the future, That is one of the central tenants of understanding the behavious of markets. You cannot predict them.
Maybe reread The Black Swan,
definitely watch John Key on BBC Hard Talk. In it he says something like, that scientists are like lawyers, and if he wants a scientific opinion he just needs to pick the scientist who will give him what he wants.- not verbatum but you get the idea. It was incredibly shocking, It was not right, it was not nice and it disclose something about the man that says, do not let him anywhere near our country. - has mainstream NZ television shown this interview yet?
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