The public does not need to take our word for it that the current government’s economic policies are not working. There is now even more objective evidence in the form of two important credit rating downgrades delivered on “Black Friday”.
I have written an op-ed for the Herald on why the “Ratings Ref” yellow carded NZ. Standard and Poors and Fitch agree on what is fundamentally wrong. They say:
- First “very high external imbalances, accompanied by high household and agriculture sector debt” (S&P). These are mainly house and farm mortgages borrowed through the banks from foreign lenders to fuel our property obsession.
- That’s not a new problem and it has levelled off a bit with the recession. But it is at historically high levels and makes New Zealand “an outlier among peers” according to Fitch.
- Second, “dependence on commodity income” says S&P. Despite record milk prices we are still not paying our way in the world. The current account deficit is a long term issue. But it will worsen to 6.9% of GDP while the Net International Investment Deficit (NIID) will grow from 78% to 85% over the next five years.
- Third “emerging fiscal pressures associated with (our) aging population” (S&P), including health and superannuation. Suspending the NZ Super Fund pre funding hasn’t helped.
The reaction from Bill English on Q & A yesterday was uttlerly inadequate. He maintains the government will keep on doing what it is doing. As if that has done any good so far – $37 billion extra debt, 47,000 more unemployed and 3.6% lower GDP now than when they were elected.
Here is the Government’s spin, and some perspective on it:
- “We have worked hard to control government spending and succeeded”. The problem is that some $37 billion of debt has been added since the National Government took office – some $18 billion in this year alone. While nobody blames any government for earthquakes – and the ratings agencies recognise that both sides of the political spectrum are exercising fiscal restraint, this is not enough to avoid a downgrade. The agencies’ arenot swayed by the prospect of liquidating $5 billion of SOE assets.
- “We are better placed than some other countries”. Being “better placed” than Iceland, Greece or Portugal is cold comfort. Nor is it sufficient, in the face of paralysis in the US and chaos in Europe, to take refuge in Chinese and Australian expansion. The risks of a slowdown in both economies are significant, and s the ratings agencies demand New Zealand takes responsibility for its own future.
- “We are still on track for surplus in 2014-15. So she’ll be right”. As if. The precise timing of short term fiscal balance is not the issue that has worried the ratings agencies. The long term deterioration driven by poor savings performance, weak exports and the mountain of real estate debt is. Clutching at such irrelevant straws only highlights the absence of better ideas.
Proof of the bankruptcy of National’s ideas is in this sobering fact: only one quarter of OECD countries have been downgraded by Fitch in the last three years. The last time this happened to NZ was in 1998. It is nonsense to say we are riding the waves better than most. To the contrary New Zealand is highly exposed, and saddled with a government that has no plan.
Labour has the policies and the political courage to make a difference and to do what is needed: capital gains tax, strong saving policy, monetary reform and strategic economic development. It is vital that we implement them before it is too late.
Be in no doubt: what happened on Friday is a very serious development that will have repercussions for many years. I will write further on what this means for the average Kiwi family.