Posts by Keith Ng
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Keith: the kicker is the receiving a credit downgrade is not simply $hits and giggles, Treasury estimated that it would add $600 million a year to govt expenditure based on pre 2009 budget debt projections, which ceteris paribus would worth around 13 billion over the time period you are talking of out to 2031.
Plus, debt costs for the rest of the economy would also rise and that would not have a positive impact on other numbers in budget forecasts
Yep, absolutely. But it is very important to stress that the majority of the debt reduction comes from the reduction in future allocated operating allowance, not NZSF contribution.
The Government has managed to smokescreen this very well.
It's very unlikely that the NZSF contribution was a key consideration for taking us off downgrade-watch.
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1) The $8 billion is a Treasury projection. The same sort of projection that said we were in surplus a year ago. Projections are risky. Anyone who has been in business will understand the difference between guaranteed return and risk.
Yeah, so? Do you think that Treasury made its estimate of 8%+ return on the assumption that "Oh, we couldn't *possibly* lose"? These things are all factored in there, so unless you're flat out saying that Treasury is wrong, I don't know what you're trying to say.
You also overlooked what a credit downgrade will do to the difference between borrowing and saving.
Problem is, the contribution holiday is just a part of the debt reduction package. The vast majority of it comes out of the reduction in future operating allowance.
So, let's be wildly generous to your POV: There was a 50% chance of downgrade without the debt reduction package, which would have cost $13b. If you completely discount the NZSF as an asset, then the NZSF holiday is worth, very roughly, 20% of the debt reduction. (If you included the NZSF as an asset in the net debt, as was done previously, then this holiday would actually *add* to net debt).
Anyway, you're talking about a 20% contribution to avoid a $13b outcome that has 50% chance of eventuating. It's a risk that's worth $1.3b. Not $23.5b.
Feel free to change the odds, but I don't think you can make a small portion of a $13b risk bigger than $23.5b.
You are guilty of the same thing as Rob - knee jerk conservatism. If there was no Super Fund today, and Bill English proposed borrowing an additional $2 billion a year, while already borrowing $10 billion a year for the operating deficit, I have no doubt you would condemn it.
No, I'd look at the rate of return. That's what rational people do.
2) Treasury does not include tax on the NZSF Fund as a net gain for the economy as if the money was not invested in the fund, it would have been invested in other taxable activities.
No. It would go to paying off debt. That's *your* point, remember?
Paying off debt is not a taxable activity.
3b) You are comparing the cost of borrowing to the economy as a whole, not the Government which is fundamentally dishonest as in 3a) you only look at government debt. So in your nonsense fisking you compare debt to the Govt's debt only (instead of the much much larger NZ debt) but you compare the deficit to NZ GDP instead of Crown Core Income. The $10,000 deficit on $60,000 income example is very close to the Crown account of a $10B deficit on $60b of income.
3d) Even heard of a threatened credit downgrade?
Um, so you're defending your analogy, eh? I think I'll just say that households don't operate in the same way as governments, and leave it at that.
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That there are very few things in the budget that can be labelled 'radical' is testament to the political environment.
Yeah, but that same environment is also a hurdle for disruptive changes like change the tax base towards non-productive activities and consumption...
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Forecasts past the next Parliamentary term are pointless anyway - basically all we've had is National telling S&P "honest man, we'll spend HEAPS less if we're around in 10 years". It's borderline nonsense.
Heh, I spent half of last night arguing that point. It's about drawing a set of targets which needs to be met. Meeting those targets is the hard part, and the success of this Budget relies on English (or whoever) meeting these targets in successive Budgets. However, that doesn't mean that setting the targets is a hollow exercise.
Brian Fallow described it as a fiscal chastity belt - successive governments just have to fight the temptation to hunt for the key.
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Yeah, but that's just a consequence of the economic environment rather than any policy impacts.
Having said that, one thing that people will feel is the Nat's use of fiscal drag to effectively raise taxes for the foreseeable future. Full points for irony!
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George, re: CGT etc, I'm right there with you in thinking that a fundamental rethink of why and how we tax is desirable. I love the idea of consumption tax as well - someone who earns $10m in productive work is a boon to society, even before he pays a cent in tax; someone who spends $10m on a luxury superyacht, not so much.
However, just because an idea is fundamentally good, doesn't mean it's not full of unforeseen thorns and perverse effects. And it represents a massive disruption to the economic system, as everyone scrambles to adapt.
Just sayin', big changes are not easy, especially when you're an incumbent.
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Fascinating and very useful analysis Keith. I should have listened to what you were saying more closely in the lockup.
Heh, nah - you were sitting right next to me, which meant that you heard my argument while it was still in its Rainman-phase. "Narrrh! Narrrh! 88 billion over 14 fiscal years which is 27 of the 30% decrease in debt as % of GDP. Naaarh!"
For the new spending track to be kept to there will be increasing amounts of cuts required to other parts of core Govt expenditure.
The simple truth is the only ways out of this mess fiscally speaking will be to restore the country to growth or to change the way we think about fiscality.
Well... cutting spending is one way to restore the government's position. Sure, it's not cost-free, and it's not pleasant. But if they stick with it hard enough and long enough, it can't really "not work".
Much like amputation.
Still its amusing that Standard and Poors found it nice and compelling.
I suspect it's like NCEA. "To achieve credit rating AA+, student must be able to identify prudent debt level and demonstrate intention to reduce debt, and be able to outline path to reach debt objective to teacher."
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Standard & Poors delivered their verdict at about 4 p.m. What time did Bill English sit down? Fast readers, eh?
Nah. Everyone at the lock up had a copy since 10am. That's quite a bit of nerd-time.
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This will mean the 90's sinking cap all over again, the deferral of maintenance, the underfunding of public services for a decade. But doing it this way means they don't have to announcethey're doing it.
I agree that it's basically a sinking cap, but I think it's going to be anything *but* hidden. It's going to be painfully obvious at every subsequent budget that things are getting squeezed out, and that other things are being cut entirely so that new things can be squeezed in. The risk isn't that no one will notice, the risk is that they'll keep blowing these spending targets because it hurts too much.
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On this basis the government should just borrow a trillion dollars, invest it, and keep the one billion profit that it makes after a year.
You get diminishing returns on investment (i.e. Your first billion would be invested in the best places, but by the thousandth billion, there'd only be really shitty opportunities left); and the more you borrow, the greater your exposure to risk, so the higher the cost of borrowing.
Point being that it's entirely possible to profitable to borrow $20b and invest it, but not profitable to borrow $200b and invest it.