By Selwyn Pellett*
Last week, we saw a tactical response to economic problems from National in the form of their budget and yesterday, a strategic approach from Labour. Other commentators have already labeled National’s budget ‘a zero budget’, ‘a tinkering budget’, ‘a cut, sell and hope budget’ so there is little need to labour the point that National’s approach is very tactical.
See Bernard Hickey's article: 'Smiling, waving, tweaking and fiddling'.
The reality is any budget or policy has to be put in context and measured against strategic objectives. If we are to assume that catching up to Australia is still National's vision for New Zealand then the moves they have made and continue to make are strategically flawed. It’s not clear that catching up to Australia is still the vision but regardless the moves to date won’t get us there.
As a country, we are simultaneously fighting economic battles on three fronts with finite resources. The debate rages about where those resources should best be deployed.
Economic Sovereignty
Having economic sovereignty will mean we no longer live in fear of a credit downgrade because our balance sheet and income statement will withstand any scrutiny and allow prudent borrowing at lower interest rates. This means addressing both our fiscal (government spending too much) and balance of payments issues (the public spending too much relative to export earnings).
Domestic economic recovery
We have to grow our domestic economy, to get people re-employed in meaningful jobs that they have the skills, training and intellect to do and stop the drain of our best and brightest to higher wage economies.
Export recovery
New Zealand needs a fairer tax and monetary system that supports long-term economic growth rather than rent seeking, capital appreciation and speculativebehaviour.
Of these issues, unsurprisingly, politicians typically make the domestic economy their top priority and that leads to the sort of tactical behavior we have seen and continues the spiral of economic decline and loss of economic sovereignty.
Let’s be very clear on this issue. The government has borrowed NZ$16.7 billion in the year to June 30th and that is being put on the “never-never”. Under the government’s budget we do not get back into surplus until 2014 and that’s after selling $6 billion-odd of government assets and budgeting for strong growth. That means that by 2014 we may just regain the ability to start addressing the mountain of debt created in the preceding 7 years.
While our Government debt isn’t that high by global standards, the combination of government and private debt is. When you realise (as the rating agencies do) that the interest payers of both private and public debt are the same individuals, i.e. New Zealand taxpayers and citizens, then you start to see why this issue is so serious. As a nation we are pushing debt into the future while pulling revenue-generating assets into the present and selling them to fund our income gap.
So, selling assets to reduce the interest bearing debt mountain is National's tactical solution. But, as citizens of New Zealand, we will inevitably pay the cost in one form or the other. So, yes, the government's interest bill might go down a little but the cost of power won’t.
So it’s a tax of a different kind that still leaves salary and wage earners with no money to spend, save or invest. This is the cycle that must be broken if we are interested in nation building, and in catching and then passing Australia. Regardless of how popular National’s policies might or might not be, the problem is they simply don’t change the underlying ability of New Zealand to compete with the world.
Labour’s strategic approach
In strong contrast, Labour has adopted a strategic approach. Based on policies it has announced Labour is clearly focused on stimulating a diversified export recovery that will in turn lead to economic sovereignty and rating upgrades.
This means not pushing debt into the future and not selling future cash generating assets (announced in Labour’s policy). Despite every criticism leveled at the last Labour government it did manage to pay down government debt to net zero, it did create the Super Fund that this year generated 20.8% return (taking the fund to $18.8 billion) and it did give birth to both KiwiSaver and Kiwibank.
Labour’s policy still, however, has to manage structural changes to the tax system. This will probably mean implementing all or most of the recommendations of the tax working-group (not announced but hinted at). The tax changes we have seen to date are re-distributive rather than structural in nature. A partial reversal of some of the tax cuts (hinted at) that now cost us NZ$130 million a week must surely be on Labour’s agenda?
Personally, I would rather pay more tax than sell off our assets. I make the distinction between selling off our assets versus investing in assets for future returns. For instance, I would support a partial float of KiwiBank. That would create real shareholder returns by eating into the NZ$3 billion to NZ$5 billion profit made here by the Aussie banks, and create a strong, kiwi-owned asset for the future.
See Alex Tarrant's May 19 article detailing the asset sale plans.
But do any float properly
National’s approach to “floating” assets is fundamentally flawed. The floats of SOEs outlined in the budget proposes floating 49% of the asset with the government (rather than the SOE concerned) receiving the cash. That’s really selling 49% of the asset under another name. The SOE doesn’t reap any of the benefits of a cash injection to fuel growth, hence there’s no real investment in the asset.
In its latest policy announcements Labour has also taken on some sacred cows, such as the farming sector, by simply saying, “pay your fair share” in tax. Not more - just the same as. It’s a brave move, but in essence Labour is just bringing forward National’s policies of two years earlier; the policy is National’s, the timing Labour’s.
Ensuring economic sovereignty also necessitates modifying the Reserve Bank Act to include growth and employment objectives as well as controlling inflation (announced in Labour’s policy). This is so critical and its impact has been lost on the media and therefore the public.
Labour is committed to reducing speculative capital flows through controlling demand with such additional tools as Loan-to-Value ratios and counter cyclical use of Adequacy Ratios (announced in Labour’s policy).
Labour is also committed to reintroducing research and development tax incentives at 12.5% of spend (announced in Labour’s policy) so that New Zealand’s export economy can diversify as Denmark’s has. Like Denmark, we need to build new exports on our agricultural base. See Alex Tarrant's article on Labour's R&D tax credit plan.
I have been scathing of both major parties for a lack of vision and leadership. However, the policies announced by Labour over the last year and, specifically over this last weekend, point to long-term structural changes that will support both the diversification and stimulation of the export economy and that is what is required to actually turn our economy around.
It is very interesting that last week Australian banks had a credit downgrade because of Australia’s reliance on commodities. New Zealand has zero growth in the middle of the highest commodity prices we have seen.
What state would we be in right now if the commodity cycle were in a trough instead of a peak? That is why we need diversification of the export economy and that seems to be where Labour's policies are targeted.
* Selwyn Pellett is a technology entreprenuer who founded Imarda and was co-founder of Endace. He is a spokesman for the Productive Economy Council.
28 Comments
Great isn't it how people come up with'solutions' that actually are tailored to their own individual circumstances, BH you are no better than the next bloke on that score.
What we really need is a political party that encompasses the disparate groups like a Mana Act Alliance Party, that has a ring about it?
If we're gonna have one from the left , spruiking Labour's shadow budget ( yet to be announced ! ) and policies , it is only fair that interest.co.nz also have an opinion piece from someone on the right to counter-balance the argument .
....... anyone got Matthew Hooton's number ?
GBH,
That may be but the rip-off merchants who individually take more out of the system than any state dependent beneficiary have been blood sucking this Economy with the gratuity of both major parties since Rogernomics and Ruthenasia took hold.
Get the balance between the high and low income groups more in order than it has got to and we will recover and prosper. Selwyn at least thinks about these things while JK and his ilk prefer to go on as usual, evidence the 'do nothing' budget and the undeserved tax cuts.
Roger - did you say from the right, or who has got it right?
http://www.johnwalley.co.nz/151-slip_sliding_away.aspx
"Increasing foreign ownership and offshore debt sets up a flow of interest and profits out of NZ. Given that: we either earn more with what is left or spend less, otherwise foreign ownership will continue to expand making surpluses ever harder to attain – asset sales are not material in this regard (they equal around 0.5% of the GDP in the budget projections).
Any current account deficit effectively demonstrates we are likely on a trend to greater pain and more cuts as history shows us unable to increase earnings. This will not change until the policy framework changes and we effectively control domestic inflation and the value of the New Zealand dollar via capital controls or some form of foreign exchange transaction taxation.
Start thinking in terms of our National debt not Government debt and get real. Currently our cost of funds is being tolerated, but if current trends continue the cost of offshore funds will begin to increase as will the cost of domestic lending (regardless of the OCR) compounding the debt problem (as more of whatever funds are available are soaked up in debt servicing) exacerbating the difficulty of investing and earning more.
We are on a slippery slope and it is getting steeper." And:
http://www.johnwalley.co.nz/152-budget_forecasts_aggressive_gr.aspx
http://www.realeconomy.co.nz/173-labour_beginning_to_offer_econ.aspx
"NZMEA Chief Executive John Walley says, “To see a major lift in our export performance more high-tech, high value add firms are needed. A R&D tax credit promotes this sort of activity so it must be supported as a tool to help rebalance the economy towards the export sector.”
“It is also hopeful that measures to broaden the tax base are to be used to further balance fiscal policy. Both National and Labour claim to advocate a broad based tax system and neither has delivered as land and capital gains remain tax free pushing the burden onto income and corporate tax. Cracking down on tax dodgers as Labour has suggested is important (although there is still no detail on how this would be done) and applying the Emissions Trading Scheme (ETS) to everyone by 2013 must be encouraged. Generally tax havens and exemptions should be eliminated; wherever they exist everyone else is burdened with more than their fair share of tax.”
etc, etc - hit the links and see the charts and related data.
Looks fairly right to me. If not, where not?
Cheers, Les.
PS - what that you on another thread getting all hot an bothered about lack of bank regulation? First advocating land tax and now bank regulation - have you still got sun stroke cobber? Thought you were up in the Phillpines, not on the road to Damascus.
Selwyn, John and Les,
As long as the NZMEA is just targeting currency/ tax issues in favour of exporters and not a comprehensive change in culture among the wider population incl. policymakers/ politicians – you go nowhere.
My question a few months ago of how important manufacturing of NZinfrastructure needs in the sectors of energy, telecommunication, transport are - you even didn’t replay.
NZmanufacturing needs to be a solid, sustainable NZindustry.
http://umasreeraghunath.blogspot.com/2010/11/why-manufacturing-is-important-for-any.html
Agree they are beginning to address the structural side of the tax equation but what about intergenerational welfare, the growing super problem etc? It's like a seesaw - the welfare side needs to lose a whole lot of weight. Simplify that and you also shed alot of the cost of administration of it as well.
I am sure Selwyn is qualified to comment on these issues , but I doubt Labour has some Strategic Plan for the economy . (If it exists , I have never seen this alleged document) I would like to know how Labour would have done things differently given the economic quagmire in which we are stuck .
Where is Labour's Shadow Budget ?
We see Phil Goff blustering his way through this, criticising everything, not making a single sensible constructive suggestion , pissing everyone off, and screwing up at every turn.
Labour have not come up with single credible alternative suggestion w.r.t the budget .
They are simply clueless.
You have to give Labour one thing - their policies are consistent. Between 1999 and 2008 they destroyed much of the tradable productive sector and massively increased the number of people on welfare transfers. Now they plan to finish the job by targeting the agriculture sector and driving those few remaining skilled people who earn over $150k to Australia to satisfy the human emotion of envy. Then the grand plan will be complete - a nation of beneficiaries and beaucrates.
In fairness though - Key has failed to address NZ's structural issues and his refusal to even discuss the time bomb of suoperannuation is grossly negligent. The article is right in that Key and English are just tinkering and their failure to leverage off their popularity and the GFC to act more boldly will create a bleak futire for NZ.
Kate - you are spot on re. welfare
A personal point of view of course.....and absolute rot.....when in effect you outsource production to the 3rd world, that inevitably leads to high un and semi-skilled employment....these ppl then end up in the services sector serving coffee as those jobs cant be outsourced....in effect Labour had nothing to do with eviscarating the working and middle class, globalisation did.
Envy, while I dont know many lefties I dont recall meeting any that think in terms of envy.....usually its a term thrown out there by someone from the right....and is meaningless.
"Boldly" As always the rabid right thinks a situation such as this an ideal one to carry out extremist right wing agendas as its "justified" the fact of course that such right wing hiccups dont work is immaterial.
regards
Most of the talent that was going to leave has already gone.
The ones that are left receiving (not earning) large incomes do not have the talent to make their way elsewhere. The leech always stays with its host until forced to seek blood elsewhere. The rest of us are the poorer.
"Personally, I would rather pay more tax than sell off our assets. I make the distinction between selling off our assets versus investing in assets for future returns. For instance, I would support a partial float of KiwiBank. That would create real shareholder returns by eating into the NZ$3 billion to NZ$5 billion profit made here by the Aussie banks, and create a strong, kiwi-owned asset for the future."
Agree with this....oh and sell Air NZ....its a dodo anyway.
regards
Would love to see PDK's 2c worth here.
It is all just tweaking if we are past peak oil, and there have been some good links shared here regarding the part demographics plays in economics. Since we are likely on the dark side of both then Labour will just tweak around the edges rather than address the core issues, just like National. Scrap the damn lot of them and start again I reckon.
I was busy today. But you're darn tootin'. Here's the thoughts:
As Prof Callaghan pointed out (Nine to Noon) it's pointless attempting a resource-based effort.
Resources - and the linchpin is energy - are finite things, and you are in trouble not when you run out, but at the maximim-extraction-rate point. Usually taken as half-way through the resource, but that's not the all of it - typically you've cherry-picked the best/easiest first, and typically countries which export, use increasing amounts internally. So there's less available from the peak on, it's of lesser quality, and others want it more.
Exporting anything, in that light, makes no sense. Every resource you have, will be worth more tomorrow than today. All - and Pellet is right about asset sales of renewable energy - are best kept.
Goff, Cunliffe (5%!) and English (4%) and any suggesting growth (global average) will continue, is telling porkies. Perhaps to themselves, perhaps to us, but porkies it is. As I've said here ad infinitum, to grow takes a growth in energy supply (not by volume but by work do-able) minus efficiencies.
Where Callaghan failed to join the dots (purposely or not - that is the question) is that anything you export of a non-resource kind, has to be paid for. Meaning someone else has to have the resources to underwrite the wealth. Particularly, the energy.
Kathryn Ryan missed it in spades. Clung on to the 4% (doubling-time 17 years) without challenge, and failed completely to join the above dots.
Note: GBH here thought it was a good interview; I was toying with making a formal complaint. As sooner or later I will.
Internal, local sustainability is the only valid goal, from here on. It can be done as high-tech as we want, as long as it can be maintained.
All other approaches are doomed to early failure.
Grow our domestic economy, Selwyn? Spare me.
Good of you to come to the party PDK:)
The Finns are onto it and I would love to go to this: http://www.nordicbioenergy.finbioenergy.fi/
They have apparently moth balled the manufacturing machinery used to produce gasifiers during WWII, so they will be up and running very quickly if transport fuel supplies are interrupted. I wonder what NZ will do?
NZ? Choke and puke....Labour had opportunties to get some decent sized tallow to bio-deisel plant put in here...they chickened out....National doesnt even see it....at least the SOE's see renewables as their future, though Brownless was apparantly not that impressed with that. Hence why Im so dead set against selling any of the energy SOE's, if they do I think the renewables strategy ie investment will just be converted into "shareholder value", ie cheques will be cut.....some nice short term profits for the greedy's while NZ is shortchanged on the plant it will desperately need.....they are just losers.
Now id they said sell Air NZ tomoroow, I'd jump at allowing that, even a % sell in Kiwibank....the first is a dodo that will go bankrupt and the second could be better for it.
Im sitting here wondering just when the panic starts, as PDK says at some stage Nations'a will realise exporting their resources is plain stupid....then all hell will break lose.....about NZ's only saving grace is we can export food for oil in return....
regards
You're absolutely right, it's funny how National portray themselves as responsible, yet have been our most irresponsible government in years.
Borrowing billions for nothing to show for it, other than lovely big tax cuts for the most well off in the country.
They want to make us have to rent basic services from overseas, after more assets have been sold off.
I voted for them, but are becoming absolutely astounded at how clueless they seem to be.
National do not have a mandate to sell off our Hydro Power Stations. To create them massive changes to local environments occured. Huge amounts of political goodwill was expended. The lives of New Zealanders was sacrificed to build them. Earlier gernerations had to actually pay for them. They allowed vast amounts of our country to be permanently changed for what they believed was the good of the nation. Now John Key never actual refers to these dams. He show no pictures of what he thinks he has a right to flog off. He talks about companies and sell some shares. He will not front up to what they really are. The Hydro dams are part of New Zealand. They exist because New Zealanders created them, and allowed them to be created. I doubt that anything like them will ever happen again in this country. They are not ours to sell, they belong to New Zealand. Take a real look at them and tell me I am wrong.
John Key should be told that the government after him will buy them back at a fair price . Any purchaser should know that this is a deal that should not be done and will be reversed because John Key does not have the right to do it.
Why should we, this generation get the sort term gain from the sale proceeds, Why should our children not get the benifit of the entire country owning this renewable energy supply.
Most New Zealanders oppose selling our Hydro Power Stations because they know that it is wrong. We need to make John Key understand that it is wrong. We are being offered a pretty bad deal, 3 more years of John Key and his lot. vs loosing our nations own renewable electricity supply.
Can anyone here think of a more important thing for a small island nation, over 1400 Km away from its nearest substantial neighbour , to control and own than its own renewable energy supply.
For those of you who do not get it. forget about the whole 49% thing, the idea for john Key is that we loose them to the market. Once they are there they will be revalued up and up, the price of power will go up and up. massive rent seeking behaviour will occur. We simply have to tell him no. Change the deal he has offered to us. Tell John Key that if he wants 3 more years he cannot flog off our Hydro Power Stations.
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