Posts by Keith Ng
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Keith Ng. Spanking. Now.
According to the analysis that Nick Smith has been waving around, if we do not cut our emissions *at all* by 2020, we will incur a cost of $60 per person per week.
Sigh. I'll take it.
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You know, I think I spend all those hours on research for no pay, *just* so I can write lines like that.
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I dunno. This is a bit more than some vague social-cost analysis, or time-saved on travel costing. This is the climate change minister completely making shit up on the cost of climate change.
He's poking his elbow to demonstrate how a rectal examination is performed.
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McVicar: Containers – Our Soldiers Would Love Them, even though tents are probably easier to carry.
I see my plan of preemptively out-McVicaring McVicar is working. My McVicar is heaps more McVicar than his McVicar.
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Okay, I'm not looking for those people to make important decisions, lead the country, etc. But shouldn't the Prime Minister be able to understand it?
To be fair, it wasn't a direct quote, and I suspect that it might have been NZPA that screwed it up.
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If abandoning the NZSF were in fact critical in avoiding a credit downgrade...
No, it wasn't.
The NZSF contribution holiday reduced debt by around $21.5b in 2022/23 (or $27.2b, if you ignore the lost tax revenue).
The reduction in new operating allowance allocation reduced debt by around $128b in 2022/23 (according to the Fiscal Strategy Model - though don't quote me on this figure, I'll need to go back to check it.).
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Matthew, your points are:
1) The $8b forecast is uncertain.
As I said in my last reply, the margin is actually quite large (6% vs 8.65%). Over the time period we're talking about, it is very likely that returns on the NZSF will be greater than debt servicing costs, and I doubt anyone in Treasury (or elsewhere) will put money on the reverse.
2) The $8b difference is insignificant.
The $8b was for 2021/22. By 2030/31 (when withdrawals from the NZSF begin) it will be $23.5b. This number will then grow even faster, as the lost tax revenue is combined with the lower rate of withdrawal.
The $23.5b by 30/31 figure takes into account the debt, including servicing costs. It uses the *exact* same methodology as the $8b by 21/22 figure. Same track, different dates - so it is wrong to suggest that one is right and the other is wrong.
3) If borrowing to invest is profitable, then it is more profitable to borrow more to invest more.
The key consideration is New Zealand's exposure to the international credit market. It is a risk that needs to be managed.
It is the same consideration that businesses face. Borrowing to invest is the foundation of most business. They do it because they can invest the money profitably. But it's not prudent to expand to the limit of what they can borrow, because then if their investment doesn't work out, they're screwed. They keep a prudent level of debt, a prudent level of liquidity, and they try to maximise profits within this range.
So, the question to English is that he's just foregone $23.5b of earnings. Did we really need to? Was it done to keep debt at prudent levels, or was it done to give future governments an escape hatch to cut Super (which I support doing, by the way)?
4) Why not more? Why not less?
Good question. The rate of return and the debt risks were assessed as part of the original fund design process. Treasury had deemed it a prudent level which also maximises return. Do they think so now? Well clearly, someone doesn't. We'll know more when all the Budget advice comes out as part of the OIA process.
Again, the onus is on English to explain why it's no longer prudent, not the other way around.
5) The difference is only 3% of NZS spending.
No.
First, the 8% vs 11% figure comes from the Treasury backgrounder on the contribution holiday's impact on the NZSF. This does not take into account the lost tax revenue, which is roughly half the size of the reduction in withdrawals.
Second, this difference is $1.5b in 2030/31. with another $750m in lost tax revenue. You speak as if $2.25b a year was a trivial sum. It's not.
The summed effect between 2030/31 and 2039/40 is an increase to debt (or foregone debt reduction) of $27.8b.
And that's just for 10 years. The trade-off for the 11-year contribution holiday is a lost that will have a constant impact for the foreseeable future.
Yes, you can divide it by many years, then you can work it out as a percentage of spending on a particular item, but it doesn't change the fact that it all adds up, and it adds up to a lot.
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Gah, Gareth, I think it's unhelpful to bring up a hypothetical zero-margin scenario, and it's muddying the waters quite a bit. The central point is that the returns on the NZSF is expected to be substantially higher than the cost of debt servicing. With that in mind, we can talk about what are prudent levels of debt...
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Given all that, if you make a forecast of what the risk-free rate might be and what the market average might be you get a small margin and you can then "forecast" the difference between them and come up with a number.
In this case the Treasury has come up with $8 billion, which sounds reasonable but is not a very large amount in the context of the issue - it is less than the negative turnaround in the Crown finances over the last year, and it has to be put into the context of the Fund being worth over $100 billion in nominal terms by the mid-2030s even with an 11 year contribution holiday. Change your assumptions even a tiny amount and the $8 billion can become $16 billion or can disappear altogether.
That's not true. The margin (6% vs 6.53%) is small because 6.53% is after tax. The estimated pre-tax rate of return is 8.65%. Rubbing that out takes a hell of a lot of changes to assumptions.
Of course, tax revenue goes back to the government, so it has to be counted.
The $8b figure is for 2021/22, so comparing with the mid-2030s balance is unreasonable. The same figure for 2030/31 is $23.5b.
Got to go, but I'll respond to the rest later.
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The Super fund has the advantage of a long time horizon, which makes poor outcomes unlikely (at least if the experience of the 20th century is any guide to the 21st). But there are still bad scenarios. The next 20 years might see the Chinese economic miracle collapse, or a major war, or the peak-oilers proved right. And there's the problem: those bad scenarios for the Super fund are the very ones where it will be most desperately needed, because they are also bad for the NZ government's fiscal position. That's really what makes the risk intolerable.
It's pretty hard to avoid the risk of major global events, and if we had to, we wouldn't invest in anything (apart from ammunition and Tamiflu).
Still, if the NZSF goes belly up, we'll survive. It would have a deep impact on our living standards, but hey, that's what happens when there are major global catastrophes.