National’s counter-spin on yesterday’s placement by Standard and Poor’s of New Zealand’s sovereign credit rating on negative watch shows increasing desperation, the latest of a torrent of bad economic news. I comment in two parts: the announcement and the counter-spin.
First the announcement’s overview:
- “We perceive New Zealand’s projected widening external imbalances and the country’s weakened fiscal flexibility as increasing risk to the sovereign.
- New Zealand’s vulnerability to external shocks, stemming from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality.”
The S&P Report’s rationale makes the drivers even clearer:
- widening external imbalances
- weakened fiscal position
- under-diversified economy
- high external liabilities
- a return to high current account deficits averaging 5.9% of GDP over the next three years.
- and crucially, that “net external liabilities … predominantly reflect dependance by households on foreign capital to fund consumption and property investments”
In other words: New Zealand does not save enough, it has too much private debt, and that debt was used to fund the wrong things (property speculation not real business investment). New Zealand’s exports are under-diversified and New Zealand will continue structural bleeding on our external accounts after the immediate recession.
The logical repsonse to these problems should be;
- strong action to close the savings deficit (if possible by building good household saving behaviour)
- diversify and increase exports (presumably moving beyond a narrow range of bulk commodities)
- managing the fiscal position to encourage sustainable growth, employment and healthy tax revenues without blowing the fiscal deficit.
- ensuring monetary policy supports the direction of reform rather than acting against it.
It obviously should NOT include:
- borrowing more for tax cuts to upper income earners that neither create powerful stimulus nor correct the underlying imbalances
- reinforcing exisitng bulk commodity exports while reducing investment in innovation and R&D to divesify and add value to the export base
- cutting back Kiwisaver; cancelling prefunding for the NZ Super Fund; and taking two years to set up a Savings Working Group (and even then proscribing a range of strong policy options)
- pretending monetary settings are ideal when exporters face extreme currency volatility
Bill English and John Key declared S&P lifting their previous negative outlook as a” verdict’ on Budget 2009.
They should be straight-up enough to accept that S&P has now reversed its verdict.
After 18 months of National Government policies National can have only itself to blame.
In part II of this post we’ll check whther their rhetoric matches this reality.