By Bernard Hickey
Last week's piece about how New Zealand was borrowing its way into permanent poverty prompted an outpouring of comment from people saying it had identified the problem, but offered no solutions.
Essentially, the government needs to get back into surplus fast. New Zealanders also need to stop borrowing offshore through their banks and we all need to pay our way in the world. That means much, much more exporting, lower import growth and more saving and investing locally.
So here's 5 ways that New Zealand Inc, which includes governments, businesses and households, could turn around this slide into poverty.
1, Cut the Middle Class Welfare
Dropping Working for Families, interest free student loans and 'free' early childcare would be the fastest way to quickly reduce the budget deficit.It would also reverse one of the great deceptions of the 2000s. We convinced ourselves we should and could afford these improvements to our standard of living, but we hadn't earned it. So we as a nation borrowed to consume. It is not sustainable.
2. Introduce land and capital gains taxes.
The IMF and the Tax Working Group have already told the government that these taxes are needed to quickly and fairly bring the budget deficit back under control. These taxes take back some the windfall gains from the property boom and would take some of the air out of New Zealand's property bubble. These are also tax increases on those who can most afford it.
3. Bring the NZ dollar down.
If New Zealand is really going to shift the momentum of its transformation from consuming and borrowing to producing and investing it must bring down its overvalued currency. Everyone, including the IMF, argues it is around 15-20% over valued. The influx of reinsurance funds, high commodity prices and heavy government borrowing will only increase demand for New Zealand dollars over the next five years and further punish exporters. The Reserve Bank should take on the speculators and drag the currency down. It has done it before. It can do it again. It should also introduce capital controls, as the Brazilians and others have done, to slow down the hot money coming in. A lower New Zealand dollar also acts as a disincentive to consume foreign imports.
4. Restrict bank funding and lending, and companies borrowing offshore
The Reserve Bank is already looking at various 'macro-prudential' options to restrict our banks from borrowing hot money offshore and pumping it into our housing market. These could include a higher Core Funding Ratio, which the IMF has called for, or loan to value ratio limits. The government could also impose a tax on New Zealand corporates borrowing offshore, as the Brazilians have done. Many New Zealand companies have leapt offshore in the last 6 months to borrow cheaply from markets where official rates are near zero. Those companies include Transpower and Kiwibank.
5. Invest heavily in infrastructure
The government and businesses should 'double down' with investment in the physical and intellectual infrastructure needed to improve our productivity. That means better broadband networks, better roads, better rail, better power, better education, more staff training and a much more aggressive approach obtaining the scale and export-oriented approach to lift output per hour worked.
Most importantly, we need some leadership to convince New Zealanders to take some pain now for sustainable gain later. Is our government up to it?
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