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.
Speaking of an under-diversified economy:
Aussie govt doing start-up co-investments to tune of $160m: http://goo.gl/G2R2f
Mind the gap NZ!
It also should NOT include:
- Roads of National Party Significance
http://www.stuff.co.nz/sunday-star-times/business/4366408/Going-down-the-wrong-road
“In part II of this post we’ll check whether their rhetoric matches this reality”
Most of NZ now know that nat tax cuts and gst increase were nothing but a con. Likewise the cuts in services, and their do nothing to create jobs summit.
Sadly, we’re left in no doubt that their vision of reality stems from their pay cheques and housing supplements.
If John Key and Bill English refuse to set an election date until the economy turns the corner under their TLC, we’ll be in 2016.
No such thing. We must move to a stable state economy that encourages research and development while keeping the economy within the Renewable Resource Base. of course, we do have to define the Renewable Resource Base and that’s going to take a lot of research as well.
The tax cuts that NACT gave to the rich and the tax increases that they put onto the poor will increase those imbalances. The resulting inequality of the neo-liberal order is the most obvious symptom of the imbalances that it creates within the economy.
This can be done by a ban, introduced over time, on exporting raw products like logs. This will encourage more R&D in to completed value added products increasing our manufacturing and skill base. This would have to be supported through the education system as well.
They’ll blame Labour so Labour will have to be ready to shove their face in their policies that caused the blow out in the budget deficit especially the tax cuts.
Excellent piece David. I agree entirely. The last Standards & Poor was held up largely on the foundations left by Michael Cullen, foundations that are being cheerfully kicked out from under New Zealand by Key and English.
Yet I know that somehow the National government will spin this, and continue on the same disasterous route.
Draco
I agree at R & D, I just dont get why the businesses of this country are so HARD to convince of the importance of R & D. It’s one of the first things that get cut in hard times, it should be one of the last.
R & D underpins productivity and growth.
Given a number of business owners vote for Nats and Act (generalisation – ) and those parties and supporters bemoan the lack of personal responsibility taken by peopel in society, why do businesses usually look to govt, if at all, for R & D.
I cant recall, but didnt Labour give a reasonable whack to business R & D, or is it the other way round?
tracey, the answer to your concerns rests – I believe – in the (low) standard and (lack of) experience of technical business management in this country.
Our millionaires would prefer to put their capital into a new apartment complex (something that they can understand) rather than take risks with new technology that they do not.
Further, it has been a long time since this country valued scientists and engineers ahead of bankers and financiers.
Maybe John Key is about to get his wish- that we have an economy based on the Irish model.
How many of you commenters here have actually built a business? I have, and I can tell it is HARD. So cut the condescending crap if you haven’t because you don’t know what you are talking about.
Labour claimed credit for the economic growth generated by the massive increase in private sector debt. You cannot now blame the current Govt for the carnage it is causing…
Leaving aside whether I have built a business or not ( and those who havent include our Minister of Finance) it is condescending, or patently ridiculous to say if you dont have personal knowledge of something you cant comment.
I will bet , Just Right, you have opinions about all kinds of things you have no actual experience of.
As a peron who has built a business, what was your attitude to R & D and what is it now?
Well, I don’t know about you, but I certainly feel indebted to this government!
!
National as Labour Lite has only itself to blame.
Had they stuck in and done what needed to be done when they found that Clark, Cullen and co had emptied the coffers NZ would probably have had a couple of upgrades by now. There are a number of Liabilities that need to be sold – the rail being the first, TVNZ another plus opening ACC to competition.
Then of course there is the iniquitous WFF that needs to be got rid of and replaced by additional tax cuts, student loans to be sorted and so it goes on and on and on to restore NZ to a growing economy.
But we can blame them for making it far worse which is what they’ve been doing with the tax cuts, government spending cuts and implementation of even more the neo-liberal drivel that made it so bad in the first place.
@Just Right
“How many of you commenters here have actually built a business? I have, and I can tell it is HARD”
It very easy to start a business in NZ compared to most of the world, including other western nations.
But on the other hand building a business is like building the pyramids, its was never going to be easy and I think it was never ment to be easy. Especially if your not from the right background, right family, right contacts!!
High risk = high reward, that if you don’t fail
But I think this “It to hard” attitude is partly why I think NZ is failing economically. People are getting soft and not willing to muck in and put the mind and body to it.
Everyone wants easy flash profit and alot of them are not willing to work for it.
As for national, they only look after the top few %.
Doesn’t matter if their behavior could bankrupt the country, they will just privatise a few more assets.
@David Cunliffe
“New Zealand’s exports are under-diversified and New Zealand will continue structural bleeding on our external accounts after the immediate recession.”
This goes back to the 80s and that idiot Roger. NZ local industries (epically manufacturing) where never given a chance to become international competitive or export orientated. ‘shock therapy’ is never good. On the other hand aussies took a more slower approach and they doing much better.
NZ does have high diverse agricultural exports (it just more than meat and milk!!) but that can’t country carry the country forever. Doesn’t help with nations like china who hold down their currency and have low wages and working conditions. It nearly impossible for any other nation to compete unless we drop way down to their level!
A good example is for furniture manufacturers in china. It costs more to buy the timber than to make that timber into a product like bedside cabinet or a table.