OnPoint by Keith Ng

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OnPoint: Election 2011: GO!

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  • Keith Ng,

    Not necessarily. You could be mortgage free, but with a smaller house.

    You're stretching my analogy. All I'm saying is that when you sell equity to pay off debt, you don't end up any richer.

    To simply rule out any asset sales carte just doesn't make sense.

    I think I spent quite a lot of time saying the exact opposite of that.

    To build on the opening analogy, it's not just about having a house or not having a house, but the size and nature of the house. And it would be a fool that would not actively consider what is best along that continuum.

    Yes. The value of our assets have to be compared with the value of other potential assets, but it also has to be considered alongside the cost of the debt. Right now, that last part is being ignored.

    Auckland • Since Nov 2006 • 535 posts Report Reply

  • Sacha, in reply to BenWilson,

    I'm not crazy in thinking that there's been a total flip-flop on the value of balancing books by National and it's support.

    Marty at Te Standard reminds us of recent history.

    In 2008, John Key’s line was ‘New Zealand doesn’t have a debt problem, it has a growth problem’. In Budget 2010, he said the Crown would be back into surplus in record time. In December, he said debt wouldn’t force a downgrade. Now, he says debt is such a problem we need to slash and sell. When did he mean what he said? Never. It has never been about debt.

    ...

    Debt or its lack is just a convenient excuse for policies that enrich the wealthy (and the illiterate will buy it wholesale).

    In 2008, even though the debt projections were worse (remember, the ‘decade of deficits?’) Key said that debt wasn’t a problem, therefore we could afford to borrow $1.5 billion for the April 2009 tax cuts directed at the rich (does anyone even remember those?).

    In Budget 2010, the net debt projections had improved dramatically to the point where we’ll back in surplus in four year’s time. Our government remained one of the least indebted in the world, and even our country as a whole was less indebted – our net international investment position has improved from debt equaling 93% of GDP to 85% of GDP as people borrow less. Again, this was cause for tax cuts directed at the rich, which aren’t fiscally neutral but will, according to Treasury, cost $1 billion over the next four years.

    But, now, for no apparent reason, debt is supposedly such a problem we need to start slashing spending (the $800 million nominal increase is barely enough to cover health’s minimum increase due to inflation and population growth, everything else will be cut in real terms) and have a fire sale of assets. Yet, despite debt suddenly being a crisis issue, I notice that Key hasn’t reversed the tax cuts that he made when he said debt wasn’t a problem.

    Ak • Since May 2008 • 16794 posts Report Reply

  • Dougal Clunie,

    the “privately owned companies are more efficient” meme

    If true it should be fairly straightforward to show how well the privately-owned Contact has outperformed Might River, Meridian and Genesis over the last 10 years... No?...

    Auckland • Since Jan 2011 • 1 posts Report Reply

  • Craig Ranapia, in reply to Danyl Mclauchlan,

    Brian Fallow – Granny’s Economics Editor – isn’t impressed with what passes for economic policy from either main party.

    And Fallow is exactly right. If I was David Cunliffe, I’d be pissing my pants with glee at getting away with tax policy that’s being paid for with New Zealand’s generous handwavium reserves.

    North Shore, Auckland • Since Nov 2006 • 12040 posts Report Reply

  • Sacha,

    Signal to noise ratio at Standard seems to have improved today - another pertinent historic comparison (has links that I haven't duplicated here).

    John Key 2008: Follow me and we’ll be like Ireland.
    John Key 2011: Follow me or we’ll be like Ireland.

    Ak • Since May 2008 • 16794 posts Report Reply

  • Graeme Edgeler, in reply to Keith Ng,

    Of course, there are good reasons for the state to limit its investments, and it does. It invests exclusively in natural monopolies, in sectors that are heavily regulated (because they are natural monopolies).

    I do not see that AsureQuality, Learning Media and Quotable Value operate as natural monopolies.

    Nor for that matter is TVNZ. Or Air New Zealand. Or Animal Control Products. Or even Landcorp.

    Wellington, New Zealand • Since Nov 2006 • 3009 posts Report Reply

  • Sacha, in reply to Graeme Edgeler,

    and yet those aren't the assets first on the block.

    Ak • Since May 2008 • 16794 posts Report Reply

  • Neil Morrison,

    The mixed ownership model works well for Air NZ so I don't have a problem with looking at extending this to the power companies. I think Key has made a resaonble case for considering it at least.

    I don't think the housing investment analogy sheds much light but if one could sell an asset and not only reduce debt, re-invest but lower, or at least stop any increase, in ones interest rate then that makes for a stronger argument.

    Which is part of Key's argument. We have a high level of debt and sooner or later we will have to deal with that or pay higher interest rates.

    Since Nov 2006 • 932 posts Report Reply

  • Craig Ranapia, in reply to Neil Morrison,

    Which is part of Key’s argument.

    And one worth having but like Labour's tax policy how the hell do you engage with an argument that isn't being made with any degree of seriousness? It's like trying to dance with thin air.

    North Shore, Auckland • Since Nov 2006 • 12040 posts Report Reply

  • Gareth Ward,

    On damn iPhone so will come back with some more substance later (because I genuinely appreciate the intelligent debate Keith) but in short you seem to be mixing arguments.
    Key isn't advocating selling the house to go mortgage free - he's advocating selling the house because you want another one but don't want to go further into debt. So this analogy seems a little off the point, but your points about choosing to invest in monopolies etc deserves some more discussion.

    Auckland, NZ • Since Mar 2007 • 1721 posts Report Reply

  • Sacha, in reply to Gareth Ward,

    Key isn't advocating selling the house to go mortgage free - he's advocating selling the house because you want another one but don't want to go further into debt.

    Oh, you mean leveraged property speculation? Why didn't he just say so..

    Ak • Since May 2008 • 16794 posts Report Reply

  • BenWilson,

    Which is part of Key's argument. We have a high level of debt and sooner or later we will have to deal with that or pay higher interest rates.

    Only, we don't have a high level of debt. If "we" is the Government, that is. Private debt is high, but selling the power companies isn't going to contribute one cent to reducing my debt, unless they also put the power prices down, which "we" the Government will have less power to do than before. Even if a controlling stake is kept in the power companies, all of a sudden their stock prices becomes an important factor, and the market will demand its returns or that will crash. Which will mean we lose even more money, as "our" shares will have shit themselves. The solution will be charging more, which will be easily done since the government will still have the monopoly.

    Private debt is a problem here, sure. But it's not going to lead to the nation's credit being downgraded. It will lead to individuals being downgraded, if they fail to service the debt. If they service it fine, the opposite tends to happen.

    Key asks us to "trust me" when he says we will be downgraded. Could we perhaps ask where he's getting that idea?

    Auckland • Since Nov 2006 • 8599 posts Report Reply

  • Patrick Reynolds, in reply to Neil Morrison,

    But Neil, and this is Keith's point, those companies are giving us a better return on investment now, so to sell them down will impoverish NZ inc. over the medium and long term. Especially if that ownership, or part of it, goes offshore. Which it will.
    Of course Key and Joyce aren't planning to hang around in govt. too long, so money now is better than long term viability: this is stealing from the kids, again.

    Also if we-the-people still own 51% all brave or crazy moves by these companies will still have to be approved by a minister so I fail to see how they can change let alone certainly improve their performance dramatically. Especially as they are currently not run like Soviet tractor factories, which is to say like a Muldoon era Govt. department.

    What will certainly happen is that any ability by these strategic assets to act over the long term instead of chase short term 'share-holder value' will diminish. This is simply using a false panic to further enrich their people, this is not about governance but about moving wealth from all of us to a few of us. And even more of them, ie offshore.

    Auckland • Since Jan 2010 • 35 posts Report Reply

  • Gareth Ward,

    Please just remember everyone that Key has explicitly said he'll sell these assets and only buy others with the proceeds. There is still arguments against that, but we aren't just getting rid of assets here, we're swapping them.

    Possibly the best argument against is that we aren't increasing assets here, but capping our asset investment

    Auckland, NZ • Since Mar 2007 • 1721 posts Report Reply

  • Alex Coleman,

    Key has explicitly said he’ll sell these assets and only buy others with the proceeds.

    I'm not clear about what he meant though. Didn't he mention schools and roads as examples? They don't seem to be in the same category of 'assets' to me.

    Wellington • Since Nov 2006 • 214 posts Report Reply

  • John,

    Great post Keith,
    'Mad Dog' Key seems to be living in a world of his own. If selling assets such as our energy companies is such a great idea why doesn't the other country with a similar fortunate high source of renewable energy sell down their government owned energy companies?
    Go to /www.statkraft.com/ and see what they do to make money from their expertise in this field. On hold at present is a HVDC link across the North sea to the UK.

    Auckland • Since Dec 2007 • 21 posts Report Reply

  • John, in reply to Dougal Clunie,

    Doug,
    A simplistic way to measure Contact's success is to see that they are the dearest supplier of all the companies, Trust power is only a little better and 51% of their profits go to Origin in Australia.

    Auckland • Since Dec 2007 • 21 posts Report Reply

  • Gareth Ward,

    Alex if he intends to use the proceeds on schools and roads then yes I agree - those aren't the same thing at all.

    Auckland, NZ • Since Mar 2007 • 1721 posts Report Reply

  • Andre Alessi, in reply to Dougal Clunie,

    If true it should be fairly straightforward to show how well the privately-owned Contact has outperformed Might River, Meridian and Genesis over the last 10 years... No?...

    I'd be a bit careful drawing straightforward analogies here, even within a particular sector. Most of the time the devil is in the details with this sort of thing (which is why I'd never be completely against the idea of asset sales ever.) Bottom lines don't always tell the whole story, especially if a given privately-owned company is being propped up by external parent companies financially (as happens with a few local companies.)

    You also need to keep in mind that actually creating efficiencies within a corporation is a long-term, (usually) quite expensive and painful operation. Staff are encouraged to leave (with redundancy packages) or else stay and bring the same culture they had under state ownership. New technology costs a boatload to set up, regardless of who owns the company. It can be the work of years for companies to start turning a profit during all this, while other industries allow for a quicker turnaround.

    There are often grumblings in the media about this rebranding exercise or that training seminar costing X thousand dollars in the public sector, and this is part of what drives the belief that state owned assets are "inefficient" (even though it's seldom relevant to the bottom line.) But turning a company private inevitably results in more events like these, just without the corresponding blathering from talkback radio about wasting money.

    Devonport, New Zealand • Since Nov 2006 • 862 posts Report Reply

  • Gareth Ward,

    Plus I suspect that they'll play some tricky buggers as to where exactly the money goes - it's really all just varying sources of income that you can claim independently go to certain things. It's the whole "spending that goes into the Super Fund is all debt but other spending comes from tax" spurious argument again.

    Auckland, NZ • Since Mar 2007 • 1721 posts Report Reply

  • Leopold,

    Thank you, Mr Ng. With the mainstream media obsessed about dyed hair and the chattering classes obsessed about their joe, I was getting afraid that no-one else had noticed

    Since Jan 2007 • 148 posts Report Reply

  • Raf Manji,

    I actually think we should be focusing on how to get cheaper electricity prices and not end up with another Contact.

    Selling us back assets we already own is simply nonsensical. See my reasons here

    http://sustento.org.nz/nz-privatisation-tina-is-back-in-town/

    And if we really need hard cash now we should liquidate the overseas piece of the Cullen Fund whilst stock prices are at elevated levels. There's almost $18bln sitting in that.

    Christchurch • Since Jun 2007 • 14 posts Report Reply

  • Dismal Soyanz,

    Private debt is a problem here, sure. But it’s not going to lead to the nation’s credit being downgraded. It will lead to individuals being downgraded, if they fail to service the debt. If they service it fine, the opposite tends to happen.

    Well, yes and no. One of the lessons that the ratings agencies did learn after the Asian Financial Crisis was that massive private sector capital outflows can have very deleterious effects on an economy even if the government runs minimal debt. The issues are serviceability and sensitivity. How likely is it that private sector players will be able to continue to service their debt? (And in the wake of the more recent GFC, correlations are certainly going to be/have been reassessed.) And on a related note, what are the consequences if they don't? In a nutshell it is about the likelihood that borrowers will continue to service their debt, not so much the fact that they have up until now serviced the debt. A downgrade can (and indeed should) occur before a default.

    Key talks about "crowding out". Typically the mechanism here is along the lines of: government spends more, to fund this it borrows (more), this drives up interest rates, private sector investment declines. I consider that he is right to highlight our level of debt as a country. Our growth (and really the appropriateness of that as a yardstick is another topic) in recent decades has been driven in part by consumption rather than investment. Coupled with a lack of savings on the part of the private sector, NZ's indebtedness does impose a cost (higher interest rates and thus foregone alternative uses of that interest). Note that this is subtly different to the concept of crowding out as used by economists.

    What makes me uneasy is the subtext in Key's speech is that we are at the point where any additional borrowing (by the government or implicitly the private sector) will drive interest rates up higher and the best way to address this is by cutting government debt. Given that public debt is relatively low, it has been well recognised that the problem has been largely a private sector one in that the private sector has not saved enough and (the flip side) it has had to borrow offshore - reducing public debt cannot alleviate this problem. This is pretty much Keith's point.

    Certainly if the external debt position was being driven by households borrowing from overseas to fund mortgages, I can see the rationale for an increased risk premium for NZ. However, the case for saying the same applies if it is public debt is less clear cut. Much depends on how that money is used and the potential benefits from the resulting asset. Nor is it clear cut if the marginal borrowing is to fund say, a processing plant that produces an extra high quality diary product that commands a significant premium in global markets. Key's brush is arguably too broad.

    I'm agnostic about asset sales in general. However, the theoretical ground on which these have been pitched is shaky. If the net debt position is indeed his concern, it would be much better for Key to look at ways to directly influence private sector behaviour toward saving more.

    In light of Goff's own tax announcement earlier, I would say the score is Blah-merchants 2, Meaningful policy 0.

    Wellington • Since Nov 2010 • 295 posts Report Reply

  • Alex Coleman,

    <q>Plus I suspect that they’ll play some tricky buggers as to where exactly the money goes – it’s really all just varying sources of income that you can claim independently go to certain things. </q.

    Yeah, that was weird. I had thought that even the gold standard people agreed that money was fungible. But apparently, it's much more controversial than I thought.

    I guess there is nothing for it but that we all write to Bill (cc Dunne) and ask where our individual tax dollars got spent. If it was me that paid EU prices for mini bar bottles of crap scotch, there will be words, rest assured.

    Wellington • Since Nov 2006 • 214 posts Report Reply

  • Keith Ng,

    I do not see that AsureQuality, Learning Media and Quotable Value operate as natural monopolies.

    Nor for that matter is TVNZ. Or Air New Zealand. Or Animal Control Products. Or even Landcorp.

    I'll concede AsureQuality and Landcorp. Animal Control Product is insignificant. Learning Media does primarily government business, which makes it an interesting (if not particularly relevant) case.

    With TVNZ and Air NZ, they have significant features of a natural monopoly - capital intensive, high barriers to entry, etc. Moreover, when they started out, they certainly were.

    QV - authoritative services seems like a kind of natural monopoly too, but I haven't given it too much thought.

    Auckland • Since Nov 2006 • 535 posts Report Reply

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