Finance Minister English defends forecasts of worsening current account deficit; Says it's because investment intentions want more capital than NZ savings provide

Finance Minister English defends forecasts of worsening current account deficit; Says it's because investment intentions want more capital than NZ savings provide

Finance Minister Bill English is defending projections showing New Zealand's current account deficit almost doubling in four years, saying the main driver of the deterioration is that New Zealand's improving savings rate is still not good enough to fund investment intentions during that time.

Speaking at a post-Budget breakfast hosted by ANZ in Wellington on Friday morning, English said that was a positive factor given the fact the deficit was tipped to get worse, as rising investment would produce more earning capacity in the New Zealand economy.

Budget 2012 forecasts show Treasury expects New Zealand's current account deficit to worsen from NZ$8.7 billion in 2012 to NZ$16.8 billion in 2016. That's a move from 4.2% of GDP to 6.7% of GDP. New Zealand's net international debt position with the rest of the world is expected to deteriorate from 72.1% of GDP in 2012 to 80.8% of GDP in 2016.

While households had changed their behaviour more than expected and increased their savings rate, those savings were still not enough to fund rising investment intentions in the New Zealand economy, English told the breakfast function.

"That growth in investment is driven by businesses whose balance sheets are in pretty good shape actually, wanting to invest and expand because they are succeeding," he said.

"It’s also driven by the one-off of Canterbury, and related to that, a shift in residential investment as people pick up a bit more confidence," he said.

New Zealand's current account deficit had blown out to eight percent in 2006/07/08.

"That was driven by excessive consumption, a lot of which was funded by excessive debt. All the wrong reasons to have a bad current account, and it was a sign of a very unbalanced economy. The export sector was shrinking right through that period [while] we all thought we were doing so well. And the non-tradable sector - government, finance companies, real estate - was booming," English said.

"Now we all know that party’s over. The current account deficit is likely to deteriorate. The one positive factor is that it will be driven by investment, not consumption. That deterioration will be driven by people investing in future capacity and earning capacity," he said.

“But you can see our savings rate still has some way to go to fill that gap."

This also explained the inflow of investment into New Zealand from offshore.

‘Because for that investment to happen, we can’t source it all, someone else has to provide it. And it’s all adding to that stock of long-term international obligations that New Zealand has," English said.

English said he thought the government was on the right track to turn the deterioration around, but that it could take perhaps a decade to get back to where the government wanted to be in terms of the current account.

What Treasury says

In Budget 2012 Treasury said the widening of the current account defecit reflected the expected increase in investment driven by the Canterbury rebuild and part-financed from overseas reinsurance inflows.

"The inflows are recorded in the capital account of the balance of payments. Statistics New Zealand estimates over NZ$15 billion of reinsurance inflows for the earthquakes have been paid to New Zealand insurers to date, reflecting the high level of insurance coverage by Canterbury businesses and households," Treasury said in the Budget.

"The large proportion of home and business equity protected by insurance policies means that households and businesses can continue saving, contributing to a rise in national saving.  The Government’s programme of fiscal consolidation further supports national saving," it said.

"The net international liability position is forecast to rise from 72% of GDP at the end of 2011 to 81% of GDP at the end of March 2016, driven by a fall in international assets as insurance claims are settled.  

"At the end of the forecast period, a small proportion of the insurance claims remain to be settled and the current account deficit remains above its sustainable level, suggesting that the net liability position will deteriorate further.  The Treasury estimates that a current account deficit of 4% of GDP would stabilise net international liabilities at 85% of GDP," Treasury said.

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So where is he seeing this ?
The one positive factor is that it will be driven by investment, not consumption. That deterioration will be driven by people investing in future capacity and earning capacity," he said.

Tinker, tweak, hope and spin .....
"Total debt, not government debt, is the major issue for New Zealand say the New Zealand Manufacturers and Exporters Association (NZMEA). The Budget released yesterday detailed how the Government hope to move out of deficit by 2014/15 but it is the current account deficit that is forecast to expand and that has the potential to cause a debt crisis here.
NZMEA Chief Executive John Walley says, “The current account balance shown below demonstrates that NZ Inc has been in deficit for a long time. This essentially means that New Zealand as a whole has been either taking on more debt or banking a lower return as assets are sold offshore for the past couple of decades.” See chart here:
“The distinction between Crown and private debt is essentially academic with governments around the world bailing out lending institutions, so the management of our current account must be the focus.”
“The 2012 Budget projected the current account to get significantly worse out to end of the forecast period.”
“On the revenue line a broader tax base including capital gains and active exchange rate management are the keys to promoting productive investment over asset speculation thereby improving export growth.”
“On the spending lines the entirely predictable burgeoning superannuation costs have to be addressed, it is a pity that Government don’t listen to Peter Dunne on this issue.”
“On the savings side the sooner Kiwisaver becomes compulsory the sooner we will no longer bemoan the absence of savings in New Zealand.”
“Until we develop the mettle to deal with the big issues our economy will continue to falter as we mess around the edges. Private debt, not Crown debt, is the issue facing New Zealand.”
Deckchair anyone?
Cheers, Les.

What makes people think that elected MP's will do anything that will improve the NZ economy?  From my experience they are all muppets, whose only goal is to be re-elected.  They do this by giving free money to the majority of the electorate.  As George Bernard Shaw wrote "A government that robs Peter to pay Paul can always count on the support of Paul" 

"A typical dairy farm in 2009/2010 carried approximately $6m of assets, $3 million of debt, earned $850,000 in revenue, paid $115,000 of wages and paid around $11,000 in tax* (the average share-milker paid tax around $33,000). A software business with double the revenue would have no debt, has $100,000 of assets, pays $600,000 in wages and pays $100,000 in tax. The New Zealand version of the Dutch Disease has made us poor - farming is generally a low margin business so there are fewer spillover benefits to the wider economy.
What does this mean when the financial sector is generally attracted to low risk ventures? The software business exists in a competitive environment, has few assets and therefore is much less attractive as a lending proposition than tax advantaged, asset backed farm, in spite of the cash flow differences. It is worth noting that the Australian banks soak up close to 20** times the tax paid to the New Zealand tax authorities on the average dairy farm. Spot the long term threat there? More broadly this debt bias in the New Zealand economy means that most years the banking segment of the NZX top 50 companies earn more than the remaining top 50 companies put together. Is that not a worry?"
Interesting numbers, eh. Maybe if this problem had been addressed in yesterday's budget we'd have less of a problem with current account deficit?
When will NACT get to grips with this?
Oink, oink, flutter, flutter. Or should that be, moo, moo, baa, baa, la, la land, Mr Key, Mr English?
Cheers, Les.
** Not only the "backbone of the New Zealand economy" then! People should be getting medals for this outcome .... 

Quite.  But it has been successive governments policy in the western world to make housing accessible for the poor.  Even now there are comments to that end about.
Provision of cheap mortgage finance (and the regulatory structure behind it) created more buyer demand which drove up pricing on a supply/demand basis.
Land pricing everywhere was subject to the same upward pricing pressure affecting productive assets like commercial real estate and farm prices.
Net result has been high private debt, inflated asset prices in many classes and government socialisation of banking debt.
Sadly pumping asset bubbles up wins elections and having to oversea letting them down loses elections.

Take a look at:
Watching the comments over the weekend Parker stunned the "expert panel" on the The Nation with the question beyond National Super, R&D incentives, Saving and Exports what else is their - they all looked like stunned mullets...
On the other hand English says Super is not a problem for years and the widening current account is investment driven - maybe but investment in low returning, low tax activities don't do much for export growth.
Is it just me or is the record stuck on "extend and pretend"...
We know from our own experience that a current account deficit can only be balanced by selling stuff, using savings or borrowing and sooner or later no saving, no stuff and no capacity to borrow is the end game.  No amount of pretence or spin will sort this problem, only real change. 
As Parker said if we change nothing, nothing changes.

Good to see the current account being talked about, even if it is a hard one to fix. I think Bill does actually understand the problem, which is extraordinary for a politician. Most cannot organise their own lunch money.
There is no easy way out of debt.... Either you default (ie crash the housing market), pay it off, or inflate it away. Crashing the housing market does not get you re-elected, so Bill is hoping a bit of paying off and a bit of inflation will work. So far he has been right, there has been time, much to my surprise.

Roger - given our history do you really think we will get this monkey off our backs with Bill E tinkering, tweaking and,  "hoping a bit of paying off and a bit of inflation will work."?

We have been lucky so far....

"lucky so far" - sounds like something the NACT Economic Strategy Group would say ....
Or do you mean the 1% (or 4 to 5%) have been lucky so far, as NACT will never grasp the nettle properly, because that would mean prescriptions like NZMEA is suggesting - properly removing tax harbours on property, along with measures that effectively restrain non-tradeables inflation, overvaluation of land-based assets and NZD?  

No Les, I think most of those ideas are soft in the head. I would look at phaseing out the tax deductibility of interest.  Why mess about?

Think a little bit harder about - have a NZ gold $ - and a lot of problems could be solved in this country.

Yes, well I think the Reserve Bank should buy a tonne of gold a day when the NZ dollar is over 80 US cents. That way we accumulate some strategic gold reserves. Hopefully we will never need them but gold has value in dark times.

Ahh Guys what do you think will happen to our currency the second it is 'backed by gold'?

robby217 - to understand the concept, please listen to the entire video. There are two currencies. People have a choice.

Yes Roger, another good idea.

A little bit of inflation goes a long way too. At 5% a year it only takes 7 years to reduce the real value of a debt by half. Compound interest is powerful stuff.  I suspect the cpi is not the right measure to use as nominal wage growth is probably more relevant, ie wage inflation.

All else being equal, sure, but I don't think we can count on that. The sooner some more robust approaches are put in place the better, otherwise it'll just be Groundhog day with this one.

Well, that was my thought too. However I have been surprised how well gradualism has worked for National.

BE/JK and indeed NZ is now caught between a rock and a hard would take a severe event to make any Govn make significant changes....and even more importantly the right changes.  Really JK and BE inherited 9 years of doing nothing Labour, "it will be alright" despite the RB saying do something...the only mitigation for Labour's abysmal record is National would have been no better.
So my conclusion is we are heading for a severe fall...just needs a trigger and the longer you stay vunerable to that repeated dice roll the more certain it will occur......
So sure BE is gambling on making 2014/15....he has no other option....and what will trip him is external so he cannot influence that he might as well ignore it..........and he is....too far down the hole now.

What makes people think that elected MP's will do anything that will improve the NZ economy?
Sadly, true.

The current account deficit is the single most critical thing to get under control. Forty friggin years in the red and finally the politicians get it. But where is the programme to correct it?Selling assets offshore will only make things worse. We need to get the saving rate up says Bill. So why are we getting taxed on non profits - the inflation component of your interest earned. Why are we paying tariffs on our exports yet all the crap in creation comes into NZ tariff free - even our so called free trade partner, China, levies tariffs against us.
Why have we allowed, encouraged even, overseas outfits to come in and take over our Banks, retail, shopping malls, breweries, forests, farms, mining operations, oil and gas, power companies, tourist operations. telecommunications. Even parking lots and rubbish collectors are foreign owned FFS.
Repatriated earnings and interest payments are bleeding this country white. What's the programme Bill?

We allowed it because we as voters would rather spend the money we earn on imported toys and speculation on property, simple.....
A lot of ppl get a second property to offset PAYE or other tax with the hope of a tax free gain at the end....Put in a CGT and while it wont directly raise money it will discourage ppl to offset so pay up tax up front.  Of the ppl in my office that have second properties they happily admit the only reason they have extra property is the PAYE offset and tax free in the meantime they get a 50% tax credit I think they said...

bleedin' brilliant ....

While households had changed their behaviour more than expected and increased their savings rate, those savings were still not enough to fund rising investment intentions in the New Zealand economy, English told the breakfast function.
"That growth in investment is driven by businesses whose balance sheets are in pretty good shape actually, wanting to invest and expand because they are succeeding," he said.
Is this man in complete denial.
Yes that's right:
For the 12 months ended April, there was a trade deficit of $541 million.
In April 2011, the trade surplus was $1.157 billion.

There is an immediate need to finance the trade deficit and incur a funding cost that will immediately add to the current A/C deficit - hardly the stuff of investment financed by our efforts and saving - borrowing to invest means investing for foreigners to reap the rewards/profits and repatriate them offshore. 

Were I the opposition I'd be writing a question to get him to stand by his claim in Parliament - something needs to be done about his outright lies.

i read an article a while back (might have been brian Gaynor) which basically said in the early 90s our CA deficit was around 0%, since then our tradeables have actually improved marginally and pretty much ALL of the blowout was a result of overseas borrowing to allow us to bid up the cost of our own housing. So if we want to reduce the deficit, START WITH THE HOUSING MARKET FOR PETES SAKE. Every year that we have elevated prices is another year when we bring another batch of FHBs into the market who will increase aggregate debt and overseas payments. If it looks bad now when interest rates are benign, it will look a whole lot worse when they rise. If you wanted to lower your fuel costs, woudl you look to make marginal improvements to your car engine when the major productivity loss comes from a petrol tank leak? Start with whats easy. Its hard to improve exports (of course we shoudl still try), but its easy to fix wasteful spend.

here here
start with the long overdue planning reform that Key harped on about before coming to power, some 4-5 years ago.
It's not rocket science for Christ's sake! Friggin unbelievable
Need to get Key and English on to a plane to Adelaide, where liberal planning controls and lack of development contributions (more competitive construction costs help a bit too) is seeing new three bedroom houses being delivered to the market within a 30-40 minute commute of the CBD for circa 280K
Do that and you'd see the economy boosted through much greater construction activity, and sane house prices limiting increases in aggregate debt. Saner house prices also mean people have more money left over to spend in the economy and/or save

I think Prof. Steve Keen and other housing experienced economists would disagree with the idea that borrowing pushes up housing by a trivial amount. He has detailed data that shows the affect of the housing startup grants put in place by the Australian Federal Government was anything but trivial.
Remember you can only buy a house for cash unless the banks loan you the money - which they got mostly from overseas.
You also overlook the fact the financing was cheap because of the complicit fraud of rating agencies.

I didn't word that very well. I was saying that without a loan from a bank the only option is to pay cash - and with our low savings rate how many of us can do that?

What bank loans do is create more demand, more buyers - because they can enter the market using some one else's money(the bank).

I dont know that low savings rate makes any odds when a house is so over-priced....for myself saving say $5k a year is a hard task...whan a house is $360k average....that's 72 years...hello reality check....and yet ppl think housing will go significantly higher...
This cant happen to property specualtion?
yeah right....

I believe mist42 has a very good point (assuming this is one of his/her points). Bidding up the prices between ourselves of our own houses in itself has zero impact on the current account deficit, apart from the admittedly non trivial interest margin going overseas. There is no other good or service being paid for to an overseas entity. The main impact is that someone in the chain who sells out, spends the money on something else: a car, travel etc. There is of course new housing construction, or improvements to housing, that will also have materials in them that are imported- although probably a relatively small share of value add. The fact that housing is improved is a valid addition to genuine capital, that is worthwhile, if the market thinks it is. A new kitchen has a value in uesfulness and pleasure. A new house has obvious use (unless its in Spain) Others have fooled themselves in the middle of the chain that they have made more profit then they have, and then spent the dough on cars, travel, electronics etc.
It's fundamentally the spending on overseas travel, cars, electronics and other imported goods that drives the current account deficit; (as well as of course the fact that we no longer own anything after 25 years of neglect or indifference by the Reserve Bank, so we have to pay rent of $14 billion a year on our loans and own industries). This spending on overseas items is enabled by the housing bubble and the borrowing against it. (I think mist42's point). We could not borrow against travel, or cars etc.

Why is it the RB's fault?  I think its dumping too much at the RB's door when it should be dumped on successive Govn's door steps. 
I dont think I would say its "neglect" either or rather I'd like a better word/wording for a more active or intentiaonal not wanting to do they knew there were problems and had the opportunity and financial wriggle room to do something easily and gradually, its more wilful blindness IMHO. In fact I think there is enough warnings out there from the RB and yet ignored the I am reluctant to blame the RB, Treasury yes more so.

"The current account deficit is likely to deteriorate. The one positive factor is that it will be driven by investment, not consumption."  
So far, so impressive...   Very promising.   But then:
"It’s also driven by .... a shift in residential investment as people pick up a bit more confidence"
So... Kiwis are going to re-ignite their love of housing, and that is going to be the saviour of the NZ economy, and will eventually reduce our chronic current account deficit!
What Bill thinks of "investment" so far as NZ goes is clearly different from what an economist might call "investment".
I must say I really find it depressing that a key politician can have such a belief.

Labour is no better.

I didn't suggest they were.  They sprayed $$ around like a drunken sailor, all based on a consumption- & borrowing-fuelled bubble. 
However, I think the topic in question, and the article, is about National, and English's bizarre claims.
Correct me if I'm wrong. 

Philly, you are right. The Nats have been in office for over 3 years, and the blame Labour mantra no longer has any credibility; especially while the Current Account gets progressively worse. Remember also that global current accounts are a zero sum game, so there is no blaming the GFC. In fact NZ has had its best terms of trade since the 1950s and the Nats have blown the lot and made it worse, giving them top billing to be the worst government since the 1970s.They haven't even paid attention to the current account.

Stephen, when you are so far down the hole on private debt, you dont get out in three years especially  when your are in a crippled would take 10 years, even in good times things with things like a work through...

I used to think English was terrible, then I came around to thinking he was OK up to halfway though the Nats first term, then I reverted to thinking he IS terrible

Thing yer all fergetting, chaps and chapesses, is that in common with the rest of the West, there are only two ways out of this mess:
the hard way
the rilly, rilly, rilly hard way.
A few of the issues:

  • electoral system now has more Tax Consumers than Tax Payers as voters.  Turkeys don't vote for Thanksgiving...
  • a lot of awareness by Bill E and other heavy lifters that there is bubbular value everywhere:  houses (still! in terms of the Median Multiple), dairy farms.  But the counterparties to them bubbles are the banks, and no-one is going to march up to the surface of the things with a Pin on a Stick.....
  • NZ is an expensive country to do stuff in (try drop-shipping a single container-load to customers over the length of the South Island...) - geography and a sparse population account for a lot of this:  neither fixable in a hurry
  • A general lack of scale:  that's why building input costs are tens of % above those in Oz and US, and that small scale encourages local predatory practices (duopolies in building and supermarkets, f'rinstance) against which ComCom is reducing to hand-waving
  • A legacy of bureaucracy and top-down solutions (the Social Laboratory of the World! - ok if yez fancy the life of a Lab Rat) which tend to discourage initiative and start-ups - there's always some minion with a clip-board to wag fingers and say ' you'll need a Consent fer That!'

Now, folks, there's nothing here that another coupla million people, and the right to arm bears, wouldn't solve.  But now p'raps yez all can see that t'will be a Long Hard Slog out of this mire.

Some counterpoints:
Even if one recognises bubbles does not mean a pin prick is the wisest way to deal with them.
Try getting a courier across Sydney in 60 minutes.  Or shipping anything into Sydney port and out again.  These sorts of business "problems" are everywhere and not a lot worse here I don't think.
Bureaucracy is also not special in NZ, Australia has an entire extra layer called State government and just getting council construction consent in Sydney (as a specific example) can take 9 to 12 months.
If everyone wanted to live within spitting distance of millions of people and heaps of business opportunity there are any number of large faceless rats races to move to.  One of the best and unique things about NZ is the lack of a desperate pressing mass of humanity.

Has Bill stopped to wonder why Kiwis don't save any money? but instead speculate of property?

Maybe it's because the tax incentive is still strongly weighted favouring one thing? Either he is a bit slow on it, or he just doesn't want to face the truth.

Or perhaps it is not politically saleable for any government to address and why therefore no government of any leaning has.

Possibly, if they haven't done anything meaningful because they are scared of getting voted out, then they should stop whining about Kiwis not saving any money, they are realistically the only people in a position to do something about it.

But if no direct action is possible talk is the main thing left.  Ask any parent trying to give their growing teenager room to make their own mistakes.

"those savings were still not enough to fund rising investment intentions in the New Zealand economy, English told the breakfast function."
For lots of reasons we need compulsory Kiwsaver and at big rates.  Like about 15%
I like philthy's comment just above in regard to the government.    "they are realistically the only people in a position to do something about it."

I would suggest that maybe you are confusing the government with your parents.

Yes housing prices and the related debt are big problems cheap credit is a major contributor.
Low savings rates how about increasing the savings rates with realistic interest rates if they are truely serious in a balanced economy.

Realistic interest rates ...
Excellent point.  Mispricing of risk is one of the major structural frauds that hasn't been dealt with.

  • How many prosecutions have we seen of the rating agencies that stamped junk as gold?
  • What restructuring have we seen of the whole ratings system?
  • What changes have happened in the regulatory bodies who chose not to exercise the controls at their finger tips?
  • Ask Steve Keen how much movement has been made in the academic foundations of thought that drive us here with the promise of the "great moderation"

Vast quantities of socialised banking money is still sloshing around the global system looking for a return and distorting the risk value of everything it touches.  Small country governments like us has very limited options.
In my opinion ideas like The Big Kahuna need to be placed front and centre.

I guess it is the scale of idea and debate I am looking for.

Just updated with some Treasury comments and charts from the Budget

Alex, wont most  of the saving actually be people paying down debts ? Been alot of dairy investment which will need to be defaulted on, I dont see much other investment ,about here anyways.

Been alot of dairy investment which will need to be defaulted on  That's why the big boys really, really need TAF.
Are you in Uncle Sam's country yet Aj?  I thought it was this month you were going?

C/O, wife and two girls leave end of next week to catch up with my second daughter before she returns to London. Im going a bit later as I want to hang around for regional council submissions on irrigation. So im leaving around the 15th, its 36dg up in North California and we have a house now, so getting organised. By the time I get there it will be in the 40's. London for X-mas with the inlaws, we are the poor cousins and by that I mean, way out of our league.  Still itsn great to see how the other half, or .0000001 of the %1 live.
 I hope it all goes well with the TAF vote,  take care and enjoy yourself, things sort themselves out in the end. Lets just hope there is no blood on the floor or at least not ours.

Bill English is basically saying that average NZers wouldn't recognise a current account deficit if they tripped over one.

What happened to Bill's commodity based export lead recovery and the 170ooo new productive jobs!....just so much Beehive BS.
Try looking in a mirror Bill.....take a gork at the cause of the mess.....a bloke that lacks the courage to tackle the real problems....a chap prepared to tweak and fiddle till the cows come home....or get sold to a party mandarin in China.
Show us what you have done to screw the drug pushers eating the heart out of the country....fat chance.

"Finance Minister Bill English admits the 2012 Budget is moderate and tight, but he believes New Zealand will have an economy with fast productivity growth by 2022" herald
Harrrrrrrrrrrrrrrrrrhaaahaaahaaaaaa....2022.....more like 2222!

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