Opinion: Selwyn Pellett argues against the government's tactical borrowing and asset selling; argues for Labour's more strategic approach. Your view?

By Selwyn Pellett*

Last week, we saw a tactical response to economic problems from National in the form of their budget and yesterday, a strategic approach from Labour.  Other commentators have already labeled National’s budget ‘a zero budget’, ‘a tinkering budget’, ‘a cut, sell and hope budget’ so there is little need to labour the point that National’s approach is very tactical.

See Bernard Hickey's article: 'Smiling, waving, tweaking and fiddling'.

The reality is any budget or policy has to be put in context and measured against strategic objectives.  If we are to assume that catching up to Australia is still National's vision for New Zealand then the moves they have made and continue to make are strategically flawed.  It’s not clear that catching up to Australia is still the vision but regardless the moves to date won’t get us there.

As a country, we are simultaneously fighting economic battles on three fronts with finite resources. The debate rages about where those resources should best be deployed.

Economic Sovereignty

Having economic sovereignty will mean we no longer live in fear of a credit downgrade because our balance sheet and income statement will withstand any scrutiny and allow prudent borrowing at lower interest rates.  This means addressing both our fiscal (government spending too much) and balance of payments issues (the public spending too much relative to export earnings).

Domestic economic recovery

We have to grow our domestic economy, to get people re-employed in meaningful jobs that they have the skills, training and intellect to do and stop the drain of our best and brightest to higher wage economies.

Export recovery

 New Zealand needs a fairer tax and monetary system that supports long-term economic growth rather than rent seeking, capital appreciation and speculativebehaviour.  

Of these issues, unsurprisingly, politicians typically make the domestic economy their top priority and that leads to the sort of tactical behavior we have seen and continues the spiral of economic decline and loss of economic sovereignty.  

Let’s be very clear on this issue.  The government has borrowed NZ$16.7 billion in the year to June 30th and that is being put on the “never-never”.  Under the government’s budget we do not get back into surplus until 2014 and that’s after selling $6 billion-odd of government assets and budgeting for strong growth.  That means that by 2014 we may just regain the ability to start addressing the mountain of debt created in the preceding 7 years.

While our Government debt isn’t that high by global standards, the combination of government and private debt is.  When you realise (as the rating agencies do) that the interest payers of both private and public debt are the same individuals, i.e. New Zealand taxpayers and citizens, then you start to see why this issue is so serious.  As a nation we are pushing debt into the future while pulling revenue-generating assets into the present and selling them to fund our income gap.

So, selling assets to reduce the interest bearing debt mountain is National's tactical solution.  But, as citizens of New Zealand, we will inevitably pay the cost in one form or the other.  So, yes, the government's interest bill might go down a little but the cost of power won’t.

So it’s a tax of a different kind that still leaves salary and wage earners with no money to spend, save or invest.  This is the cycle that must be broken if we are interested in nation building, and in catching and then passing Australia. Regardless of how popular National’s policies might or might not be, the problem is they simply don’t change the underlying ability of New Zealand to compete with the world.

Labour’s strategic approach

In strong contrast, Labour has adopted a strategic approach.  Based on policies it has announced Labour is clearly focused on stimulating a diversified export recovery that will in turn lead to economic sovereignty and rating upgrades.

This means not pushing debt into the future and not selling future cash generating assets (announced in Labour’s policy).  Despite every criticism leveled at the last Labour government it did manage to pay down government debt to net zero, it did create the Super Fund that this year generated 20.8% return (taking the fund to $18.8 billion) and it did give birth to both KiwiSaver and Kiwibank.

Labour’s policy still, however, has to manage structural changes to the tax system.  This will probably mean implementing all or most of the recommendations of the tax working-group (not announced but hinted at).  The tax changes we have seen to date are re-distributive rather than structural in nature.  A partial reversal of some of the tax cuts (hinted at) that now cost us NZ$130 million a week must surely be on Labour’s agenda?

Personally, I would rather pay more tax than sell off our assets. I make the distinction between selling off our assets versus investing in  assets for future returns. For instance, I would support a partial float of KiwiBank. That would create real shareholder returns by eating into the NZ$3 billion to NZ$5 billion profit made here by the Aussie banks, and create a strong,  kiwi-owned asset for the future.

See Alex Tarrant's May 19 article detailing the asset sale plans.

But do any float properly

National’s approach to “floating” assets is fundamentally flawed. The floats of SOEs outlined in the budget proposes floating  49% of the asset with the government (rather than the SOE concerned) receiving the cash. That’s really selling 49% of the asset under another name. The SOE doesn’t reap any of the benefits of a cash injection to fuel growth, hence there’s no real investment in the asset.

In its latest policy announcements Labour has also taken on some sacred cows, such as the farming sector, by simply saying, “pay your fair share” in tax.  Not more - just the same as. It’s a brave move, but in essence Labour is just bringing forward National’s policies of two years earlier; the policy is National’s, the timing Labour’s.  

Ensuring economic sovereignty also necessitates modifying the Reserve Bank Act to include growth and employment objectives as well as controlling inflation (announced in Labour’s policy). This is so critical and its impact has been lost on the media and therefore the public.  

Labour is committed to reducing speculative capital flows through controlling demand with such additional tools as Loan-to-Value ratios and counter cyclical use of Adequacy Ratios (announced in Labour’s policy).  

Labour is also committed to reintroducing research and development tax incentives at 12.5% of spend (announced in Labour’s policy) so that New Zealand’s export economy can diversify as Denmark’s has. Like Denmark, we need to build new exports on our agricultural base.  See Alex Tarrant's article on Labour's R&D tax credit plan.

I have been scathing of both major parties for a lack of vision and leadership.  However, the policies announced by Labour over the last year and, specifically over this last weekend, point to long-term structural changes that will support both the diversification and stimulation of the export economy and that is what is required to actually turn our economy around. 

It is very interesting that last week Australian banks had a credit downgrade because of Australia’s reliance on commodities.  New Zealand has zero growth in the middle of the highest commodity prices we have seen.  

What state would we be in right now if the commodity cycle were in a trough instead of a peak?  That is why we need diversification of the export economy and that seems to be where Labour's policies are targeted.

* Selwyn Pellett is a technology entreprenuer who founded Imarda and was co-founder of Endace. He is a spokesman for the Productive Economy Council.