As this is my first blog post since the quake, can I preface my comments by acknowledging the devastating loss suffered by too many Cantabrians and their families, of ther lives and homes shattered, and our shared determination to everything necessary to support their rebuilding and renewal.
In this immediate post-quake period we are all exercising restraint – both in the quantity and tone of poitical comment. But the debt question has in fact been brought into starker relief by the quake, so I am moved to observe the following.
Before the quake, National would have you believe that New Zealand had a huge international debt problem, and that the solution to that was for the Government to compress spending and services to pay down this debt.
It was always a half truth: 90% of that debt is private debt and only 10% of it is public (government) debt.
The second deception was that this high debt was “Labour’s fault”. The facts are that in 2008 net debt (including NZ Super Fund assets) were in surplus to the tune of 4.7% of GDP. Virtually no government in the western world saw the collapse coming in advance, but at the least the former Labour Government had the books in strong shape.
Post quake, we are all confronted by huge costs. Families have lost loved ones. Homes and businesses destroyed will take time to rebuild and renew. Infrastructure is hugely dislocated. Much of the CBD will have to come down. Hopefully there will be proper consultation and an eye to the heritage that makes Christchurch unique.
The financial costs are also huge – in Treasury’s February Indicators, around $12 billion (later estimates put it around $15 billion), of which some $5 will fall to the Crown because it is not covered by EQC, its reinsurers or private insurance. Around a further $5 billion in lost Crown revenue will occur due to the reduced tax take from decimated business activity and personal earnings in Christchurch. (I will blog further on the “growth gap” shortly).
So, to use the PM’s very round numbers – there is $10 billion for the public to find over the next four years or so.
Some of that can legitimately be redirected from other investments – for example the “holiday highway” north of Auckland - to help fund Canterbury roading costs.
Mssrs Key and English believe the rest can be borrowed – that is, placed on the international debt pile – and say that is now acceptable becasue it is a “one off”. They are so far dismissing suggestions of any additional support for Canterbury through the tax system. (Raising the EQC Levy only restores its capacity to deal with future disasters, rather than this one).
Why then was the international debt pile so huge that reducing it by slashing Government spending and prolonging the recession was necessary a month ago, but borrowing the lot is no problem now?
Forgive me, but could it be that the answer is not economic but political? Could it be that reducing government expenditure pre-quake was the price of Budget 2009 and 2010′s - largely upper income – tax cuts; and that even Canterbury’s needs have been trumped by the need to protect National’s traditional voter base from even a temporary reduction in these tax breaks?
I feel unclean even thinking that. But the question has to be asked: why not expect the whole community to share part of the cost through the revenue system? Even the NZ Herald agrees with that.
“It was always a half truth: 90% of that debt is private debt and only 10% of it is public (government) debt.”
Which does the rating agency look at? or is it a combination of the both?
OI: the total, of which 9/10 of the leverage is in effecting change in the private debt component – Doh!
Perhaps for the very simple and obvious reason that the government recognises you need to keep reserves for a rainy (or shaky) day. That shaky day has come so it is justifiable to use that funding capacity. It would not be justifiable for business as usual.
You will have to do a hell of a lot better than that if you are not to be accused of simply playing politics.
The second deception was that this high debt was “Labour’s fault”. The facts are that in 2008 net debt (including NZ Super Fund assets) were in surplus to the tune of 4.7% of GDP. Virtually no government in the western world saw the collapse coming in advance, but at the least the former Labour Government had the books in strong shape.
What is your point with that paragraph. You ignore the fact that New Zealand was already in recession before the great financial crisis hit. And that was thanks to land speculation and commodity prices all of which you in Labour ignored all because it temporarily provided economic growth and jobs despite numerous manufacturing jobs going every month during your administration.
Your party did nothing to stop New Zealanders gorging themselves on debt and therefore it was inevitable that the shit was going to hit the fan. So what did your party do? Only leave no surplus for the incoming government. And when your party gets back in, in 2014 or 2017 once again as in 1999 you’ll enter government with surpluses already in place and actual growth forecasts.
But as with 1999 you’ll rely on an economy where debt equals growth and once again New Zealanders will find themselves in pain with added debt.
PS
Meh. The National Government uses reserves in one way: to fund tax cuts for the private sector and the most wealthy individuals in society.
GC
Meh. Cullen had 9 years of budget surpluses, used to pay off a huge amount of public debt; meanwhile Bill and John are down for 3 years straight of Budget deficits.
NZ still has one of the OECD’s lowest public debt to GDP ratios thanks to Cullen et al., and no thanks to English’s mismanagement of Government finances (haha giving tax cuts to the wealthy during the Global Financial Crisis, that guy must have macaroni cheese between the ears).
DC: in my view the last Labour Government permitted the property price bubble to be fueled up and permitted rapidly increasing levels of private debt which happened to help NZ’ers feel like that they were better off and had enjoying better standard of living than their true income would have allowed.
In our new energy expensive but highly capitalised global environment will NZ again succumb to allowing similar highly leveraged price asset speculation to occur, as a sort of short term compensation against far harder and slower to achieve real tradeables economic growth?
Allready Key and English have found the cash to lend TV3 $43 million.
Its not even a SOE! The new Model is to keep private companies afloat from their bad decisions of the private equity owners. I wonder if Whitcoulls knew about this ?
David – you also ignore the fact that Labour increased spending on average $2.8b per annum – for every year of the last five years of your government. That is $14b cumulatively. While acknowledge some increased spending was and in necessary, Labour were excessive. That excess is now unaffordable and is costing the country $300m per week to meet those committments. You know and I know that rolling back WFF, interest free loans and some of the other spending promises is difficult to do and politically untenable. Michael Cullen also knew that wth his wry comment after the WFF mkII was released “Try and undo that”
Labour extended Welfare into the middle classes in an effort to buy the votes and outspend National. Cullen also drove the Tradeables sector of the economy into recession much earlier that any part of the world. NZ as a country went into full recession a full 12 months before the restof the world. So please excuse my when I become cynical about Labour and their mis-management of the economy. Maybe some better management by Labour would allow the country to be more generous and in a better position to help Christchurch, if Cullen had not spent the lot. No matter, Labour will not be returning to the treasury benches anytime soon.
@Gingercrush
During the last Government there were hordes screaming that Labour was preventing them from bashing their kids and using inefficient light bulbs. Can you imagine the yells that would have occurred if Labour tried to regulate house prices and investment?
Perhaps they should have but it would have made governing very unstable.
Maybe the North Korean economic model should have been followed. Is this what you are proposing?
m.s. the banking sector needs to be heavily regulated. That’s what needed to happen (well, in addition to a CGT, land tax and mortgage stamp fee).
@Ginger crush – given that I am emphasising the importance of private debt it is perfectly fair to ask what the previous government did to contain it. Personal view – not enough. More stringent macro-prudential monetary policy (now committed in our policy programme), tougher regulation of the risk-driven excesses of financial markets; and stronger moves to even out the incentives across different investment classes to take some of the heat out of the property bubble – all look good in hindsight.
But as Mickeysavage points out above – we saw no calls for that from the then Opposition. Rather, there were calls for more tax cuts. That would have made the bubble worse and left the Crown accounts less able to stand the subsequent crash. Dr Cullen resisted the taunts of the “chewing gum Budget”.
National has got to do better than “uni-directional Keynesianism”. Ironically enough, policy now seems to be a one way street in the opposite direction. The only common theme appears to be tax cuts for upper income earners. As I speculate above, perhaps the rationale for that is political rather than economic.
@Colonial Viper – should have acknowledged you on finacnial sector regualtion. That is partly happening globally (see Basle III) but we need to ensure NZ is best practice in that regard.
A very good post David, it is a pity National are putting politics ahead of what is best for the country.
Oliver, When Shonkey gave the figures he did not define that the private sector owed most of that debt. A lie by omission is still a lie.
David,
What specific proposals do you have to reduce private borrowing? I’m with you on the need to use investment in education and science to improve economic growth. Whilst that would be good for government debt won’t that simply cause more private debt? This will be especially so if we have to keep importing $US100/barrel oil.
it’s a pity Labour isn’t getting the message across to voters about whose debt this is. It allows National to talk about “the mess Labour left” when actually they inherited a dream set of books compared to most other western economies. But you’d never know this from the MSM.
Todd – It is Labour who are putting politics first. It is Labour who committed the country to massive spending proposals. National have been left holding the baby and trying to manage to economy out of an additional $300m per week, while Labur continue to promise even more spending.
Dorothy – you seem to have your head in the sand. Currently the government debt is increasing by about $15b per annum please tell us how much of the $15b is because of Nationals spending (Note they have only increased spending about $1b new spending per annum each of the last two years)
The country does understand this and as long as Labour continue to blame National I will keep repeating this point.
@dorothy…. what do you expect when the upper management of the msm in nz are no more than paid lackeys of the same corporate interests that own the national party.?
the labour movement, in the past, has had to actually start up it’s own newspaper to counter the news agencies refusing to report anything they said(the standard mk1). the parrellels to red alert are blindingly obvious. this is the only outlet for labour mp’s to actually have their contributions to political debate heard without having them edited into oblivion.
the reality is that nz will never have the sort of mature debate on serious issues as long as we are prepared to support the insults to our intelligence that the newspapers, and tv are throwing at us on a daily basis.
so stop buying the papers, stop watching the 6 o’clock news, and certainly stop watching the creepy poodles sainsbury, campbell, and garner. if a national campaign could be organised to do that, then we could possibly begin to force a more mature approach to political debate. with that lot of dogs, it won’t be easy though.
My back of envelope calc
GST on 15 Billion is 2.25 billion
So does that mean the ‘cost’ to govt is about 2b
About scf bailout.
It is quite simple.
Tax cuts were given to the rich & funded for from borrowing.
It was known that borrowing long term is not feasible & that if the tax cuts remained then Govt Expenditure would need to be cut &/or asset sales.
Most people need a basic amount$ to survive.
The tax cuts given will not be spent on survival basics but luxuries/waste & investment. (only the second is socially good)
Incidentally – Asset Sales (in general) result in reduced long term income, making balancing the Government books – even more difficult.
My recollection of those years are of Cullen and Ballard banging on ad infinitum about our level of private debt, about drought and oil caused recessions, over-valuing our properties, warning us it was going to end in tears.
Did we listen? Did we heck as like… after so many damn years of feeling like I was going backwards no matter how hard I worked, I went out and tried to catch up on all I’d lost in the 90s. And yes, I borrowed to do that. Now, I’m back on an austerity drive, working hard, trying to pay off debt, worrying about my kids and grandkids, watching my budget blown to smithereens by the increasing cost of living, and I feel sick to think that it’s all happening again and for much the same reasons.
For those tempted to blame the imminent double dip recession on the earthquake, hark your minds back to Jan and Feb this year when some, like David Cunliffe” were predicting it, and
English was forewarning it.
Any minute the blinkered supporters of the right (that is those not open to any challenge of their party at all) will tell us that Libya, Egypt etc PLUS the earthquake were not within National’s control. Which will be amusing because the economic crisis was of global making not Labour’s.
The problem with turning to joe and jo average to assist with earthquake recovery is their tax cut is long gone, swallowed up by the rising cost of living, which includes GST, petrol and so on and so forth. So those who say “why should the “rich” pay more? I say, because we cant get money from those who have none.
Forgive me, but could it be that the answer is not economic but political?
Absolutely David.
During the fiscally responsible times of Cullen paying down our National debt, the National party bayed for tax cuts as the solution. When the economy took a hit from the global financial crisis, National called for tax cuts effectively only for the top 10% of earners as an economic stimulous – which they proved not to be – even if they had to borrow to finance them.
Now, in the face of this crisis, National would sooner do anything else at all, rather than reverse those expensive tax cuts.
@monty your comment “Dorothy – you seem to have your head in the sand. Currently the government debt is increasing by about $15b per annum please tell us how much of the $15b is because of Nationals spending (Note they have only increased spending about $1b new spending per annum each of the last two years)”
what a bizare statement, all of it is beacuse of nationals spending. they are the ones in power and do not have to continue paying that. unless you missed it labour lost the last election and national are the ones in power, they have the power to change all of labours previous policys, there is no-one to stop them other than themselves.
you cant blame labour for what national is doing, or failing to do, come up with another argument that makes sense.
No water boy you are wrong. I would dearly love National to cut WFF, reintroduce interest on student loans, , and also means test superannuation, but politically doing so is untenable. Welfare ratchets up under Labour, and then remains at that level during the National years, except for that wonderful budget by Ruth in 1991. Cullen knew this when he made the comment ” try and undo that” . So the $15b deficits are due to Labour. Nationals tax cuts have been fiscally neutral. Blaming National on this blog will not work because I will continue to remind you all of the truth, in spite of your denials.
The thing is – Lab had the money and the surplus to pay for the reforms. And WB is right – if the Nats dont like it then undo it. IF they really were to put ‘our’ money where their bloated gobs are then they would not worry about what is politically untenable, but would do what they believe is right. Instead, they use the politically charged emotive – ‘its labours fault – blame them’. Lets not forget the debt and stupid reforms that Labour had to fix when they did get into govt.
I live on the left – I dont apologize for that. But even I – left side and all – think the interest free student loans are a dog – there are better ways of dealing with that, and I, along with many others, paid our student debt off – interest and all. Did it hurt – oh yeah – but I certainly value the investment that was made and keeping interest free loans in is not fiscally responsible at this time.
As for WFF – I dont disagree it needs looked at and any loopholes closed and the threshold tweaked – but you cant keep blaming labour for policy that the nats can change. I would rather they looked at these two areas before decimating ECE/education. The country as a whole is better off with quality education and taking funding off that area is a big mistake that will cost us big time and for a long time. As for asset sales – thats a short term, short sighted mistake that we will never recover from – time the Nats actually came up with something that works – for all their so called ‘experience’ in finance and so called ‘big business’ mates, they are as visionless as a blind old dog.
And not that I want to sound like a broken record – but face it – the tax cuts were a mistake and at least cullen etal knew they had the money to pay for their reforms. Blinglish and smile and wave knew full well they did not have the money and would lose revenue – how is that fiscally responsible?
@Monty “No water boy you are wrong. I would dearly love National to cut WFF, reintroduce interest on student loans, , and also means test superannuation, but politically doing so is untenable.”
so the 15billion that national continues to spend is because labours is forcing them to spend it? or is it that the 15b is a left policy and national realise that the majority of the population are actually left leaning and for national to follow there own beleifs would see them removed from power.
labour follows its beleifs and ideals, even though you dont
agree with them (which is your democratic right), why do you support a government that is on the right but wont follow its beleifs and policys and instead keeps the lefts policys?
“I dont apologize for that. But even I – left side and all – think the interest free student loans are a dog – there are better ways of dealing with that”
GRRR interest bad, students poor, and with little chance of getting a job to pay loans off! 
!
Oh come on spud – been there – did that – and yes, students are poor, and while I agree finding a job is hard, are we really in an economic climate where we can still afford it? I am not suggesting raising loan interest rates to a ridiculous level – nor forever – but come on. Do you not think we should look at how tertiary is funded – including students, and start looking at better options? Have we asked students/student associations what their ideas are? Heres an idea – actually consult with the tertiary sector and pose this scenario:
“We can not afford the current level of debt – so, what suggestions do you have for cost cutting and streamlining things?”
They are smart people – they will have solutions and ideas. Its also not feasible to continue to fund students who sod off offshore and dont repay their debt – thats not ok either. Its a wasted investment. I am all for seeing a better investment in education across the board – but some things are a little ludicrous. And as for the cost of fees -thats another issue that should be looked at as well.
While we are at it – its about time grass roots education/health/justice etc professionals got asked how they think the austerity measures should be carried out across each sector – after all – its grass roots not policy makers and mps who actually know what cuts are needed and which areas are wasted. But no – not one party is actually smart enough to get accurate information from those who actually know.
Some great comments in this thread hanks folks. Too many to respond to all
@ d14 – cost of SCF bailout circa 1.5-1.7 bn gross. Strangely enough doesnt seem to be in a hurry to crystalise.
@ GK Arnold – right on bro!
@ Dorothy – You will hear us consistently hitting those themes in the House e.g in Budget Policy debate today.
Back tomorrow with more responses…
WaterBoy – I think you are being deliberate in ignoring the reality. Much of the spending of government is committed and you are being simplistic if you think the Government can cut away that spending. Cunliffe knows this and needs to confirm the points I am making are correct. Of course some of the massive spend up by Labour was absolutely necessary as year upon year the costs of health care do increase, the cost of policing the country does increase. But it was the massive overspending by Labour that has caused the problems. The Purchase of KiwiRail for more that twice (3x?) its valuation is a great example. The extension of WFF is another excellent example (that was nothing but pork Barrel politics in oder to win enough votes in the 2005 election wasn’t it Davis Cunnliffe?)
I think and it is interesting to seee even leftie responses here) that moderate interest on Student Loans would not be a bad thing. I would suggest CPI + 1 or 2% interest on student loans would be in order. It would still be the cheapest money in town. WFF should be trimmed back to the original Mk1 version – but maybe over a two year time frame. Not sure about Kiwisaver government contributions (about $1000 per annum) but given the circumstances of the Chch earthquaake – that would probably be a good thing as well (maybe the quid pro could be different and favourable treatment of the interest on the earning in Kiwisaver accounts.)
David – re the SCF Bailout – again you are being deliberately economical with the truth. The Bailout was a committment of the Labour Government. It was also substantially funded by the banks (not sure of the figures) but the gaurantee scheme was introduced during the Global Finance Crisis in response to fear of runs on banks and Finance companies otherwise there would have been no liquidity. Maybe you should talk about the $11b that ACC lost off their balance sheet during the Labour administration – sort of dwarfs the SCF saga doesn’t it?????
@ Monty/Peter M: fine line between getting your lines across and being plain offensive. Perhaps Oliver of the others could give you a hand?
Sorry Monty, i disagree.
the government can cut away that spending and pretty much do what it wants within legal framework.
we get to choose weather or not we like the descisions every 3 years.
In some respects it would have been better if nat had come in and done strait away what it beleves in rather than this slow painful prolonged death of the economy we are going through.
Not long ago key came out and said the government sector is bloated and needs trimming, they also said something along those lines when they got into power 2 years ago.
well if this is the case, do the job now, why waste all the extra money on it? isnt it irresponsible to not take action?
i dont agree with the majority of the rights policys and beleifs, but i would rather do it tough for a couple of years with the knowledge that there is a plan and a direction and things will get better than what is happening at present.
national are so far ahead in the polls they could do whatever they want and beleive will fix the problems we have at present.
@paul – it is better not to have interest on the loans and that allows the poor students to pay them off faster and then get money for themselves that they can use to stimulate the economy! At least Goff criticised the government for wanting to do this, he at least is on the side of the students!
Monty,
, not you too, 
!
This bleepin double dip recession would just leave people with horrible interest. Man, people on here moan that young people can afford to get into the housing market, how is adding interest going to help that?
Man, am bleeped off.
I meant can’t get into the housing market.
Then again, maybe they can just move into the abandoned wrecks in Christchurch, there’s a miserly plan worthy of any evil government!
!
MOnty, it was national who renewed the guarantee to SCF, they had the opportunity not to but didnt. They have broken promises before, why not this one? And why pay $20m to people not actually entitled to it?
Spud, if Phil Goff told you, personally, that pigs could fly, would you believe him? And would you repeat it? And would you give little devil Smileys to this who refused to blindly follow?
The problem with debt and the deficit is that it is structural, brought about by large government liabilities, like welfare, acc and interest free student loans. All things national either promised not to touch or committed themselves to fully fund. It didn’t help that the last labour government lied about the state of the governments books before the last election.
If 90% of the money owed is actually private debt, can you suggest ways of minimising it? By private do you mean the corporations or ordinary people or both and if so how much of each? I assume public debt is what we all owe to NZ as citizens that is spent by the govt on our behalf, right? The killers in Afghanistan for example is an example of our public debt, right? How can any govt justify the huge military budget this year? Why is Labout who sold Telecom and the railways, not speaking out against Labours suggestion to sell half our assets. Does this say both parties agree on selling them off? Since mom and dad investors do not have any money for investment after they pay for food, homes, health and education, isn’t the sell off just for the rich be they our own or foreigners?
Thanks for your answers.