By Gareth Vaughan
It's a myth that it never makes sense to borrow to invest, says CEO of the Guardians of NZ Superannuation Adrian Orr, in comments that appear to contradict recent ones from Finance Minister Bill English.
Speaking to the Trans-Tasman Business Circle in Auckland Orr noted the Super Fund, celebrating its tenth anniversary, stands at $24 billion having had $15 billion of taxpayers' money contributed via the Government, and having made $9 billion in investment returns.
"That is 400 basis points above the cost of government debt, almost two times the cost of government debt which is often used as one of those sayings 'oh it doesn't make sense to borrow to invest'," Orr said.
"Just on that myth, it does in certain circumstances. If you are an individual and you are concerned about your job, you've got a mortgage to pay, you're uncertain about your health, then you might be a bit crazy to borrow a whole lot of money to invest in global equity markets for an unknown period of time. That's called taking a significant risk, and mostly related to your liquidity requirements and your time horizon. So yes at certain times it doesn't make sense to borrow to invest."
"But when you're sitting here with a Crown balance sheet with a known purpose, with an inter-generational time horizon, with known liquidity, then the odds are firmly stacked in your favour to be investing for the long-term on the way through," said Orr.
"Our work shows that if you go back to 1929 you can pick any consecutive 20 year period, start at 1929 and go out to 1949, start at 1930 and go out to 1950 and so on, you beat the government risk free rate of return. And over 90% of the time you beat it by 2.5% per annum. And that's our expectation over any 20% period we will beat the return on government debt by about 2.5% per annum.
"We will create wealth but it's because of the long-term investment disciplines we have in place on the way through," added Orr.
The National-led government suspended contributions to the Super Fund in 2009. English recently said this happened because with fiscal deficits and government debt already increasing, it was "imprudent to borrow more to invest in global financial markets."
English said it's the Government's intention to resume contributing to the Fund once net debt has reduced to 20% of GDP, which is forecast for 2020. Labour Finance Spokesman David Parker says the Government should resume payments to the Super Fund as soon as it gets into surplus, which is forecast for 2014/15.
Meanwhile, Orr said the Super Fund has paid $3.3 billion in tax to the Government over the past decade.
"So although we're not being capital funded anymore, we're still actually paying tax. I think we were New Zealand's largest corporate taxpayer last year, just short of $1 billion in tax paid to the New Zealand government."
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