Written By: - Date published: 3:39 pm, August 3rd, 2008 - 69 comments
Categories: economy, election 2008, john key, national, slippery, tax, transport -
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In a speech described by attendees as ‘more bullet points’, John Key announced to the National Party conference today that National would borrow $5 billion more over 6 years to finance infrastructure – specifically roads and the broadband ‘plan’. The money-man has dressed it up cleverly, of course. A fancy new class of ‘investment vehicle’ will be created – infrastructure bonds. Banks etc will buy these off the Government, which will use the money to build roads and then the bond holder will, over the course of several decades, make huge profits from these bonds. It’s a fancy name, but it’s the same thing – we borrow money off someone else and pay them a mint for it later on. Our public debt would increase from 20% to 22% of GDP as a result. Hundreds of millions will flow overseas every year to pay our debts, rather than being used to fund our hospitals and schools.
Key tells us this has nothing to do with tax cuts; that tax cuts would be ‘hermetically sealed’ from borrowing. If you believe that, you’ll believe anything. First, how could decisions on tax cuts be separated from borrowing? They both appear on the Government’s balance sheet – if you cut tax for the wealthy, you’re going to have to borrow more to make up the difference – or would a Finance Minister English not tell himself how much he wants to cut tax when he’s working out how much to borrow? Secondly, if those tax cuts don’t take place, we won’t have to borrow billions of dollars and spend decades paying back foreign banks. It is only because National plans such big tax cuts for upper income earners that it would have to borrow.
And let’s not forget the macro-economics. When New Zealand borrows money, the amount of money circulating in our economy inceases. But our economy is still pretty close to full capacity (unemployment remains below 4%). So, our economy cannot produce enought extra things to be bought with this extra money. Instead, the extra money floating around means that stuff starts to cost more. Borrowing is inflationary and that’s not a good thing, especially right now in New Zealand where the economy is at full tilt and inflation is already heading north of 5%.
Finally, I know I’ve said it before but is this the ambition that Key keeps promising? More roads and more debt – not even an impressive building programme pouring billions into infrastructure, just $500 million a year for more of the same. Where’s the innovative planning, the imagining of a new and better New Zealand? All we’re seeing is ‘we’ll cut your taxes and build some more roads, and we’ll pay for it all by borrowing from the Aussie banks’.
The same old plan, with a bit more debt. No vision of a world-leading low-carbon public transport system, no cutting edge rail network ready for the reality of peak oil. Hell, even the $1.5 billion broadband ’plan’ remains totally bereft of detail and is coming under criticism from the industry for attempting to do something that isn’t needed in the wrong way, while incidentally restoring Telecom’s monopoly.
National is sorely lacking in a vision for New Zealand, and belief in New Zealand’s ability to be world-leading. They seem more concerned with helping the bottom lines of foreign investors.
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RedLogix
Then they are being unreasonable, I guess it’s probably because some muppets have told them that it’s got noting to do with capital and it’s all about a point of difference between Labour and National policy and naturally National are bad eh.
How are the hospital waiting lists looking while we spend todays cash on new roads for our great grand children to enjoy?
And you seem to have missed this question;
Sure if the people of NZ are happy to fund it all today via taxes and that is an election issue then the choice is that of the voters.
Do you think most people understand the capital funding realities or do you think the buy into or out of the “John Key will plunge us into debt BS’ ?
Burt,
Actually our great grandchildren do not get to enjoy it. They get to maintain it. As all developed nations have discovered it’s one thing to build something, it’s another to be able to afford to keep it going.
How much easier if great-grand-dad hadn’t saddled you up to the eyeballs in debt.
But you miss completely the point yourself.
It is one thing to do a one off increase in debt to fund an asset. As long as the debt serviceability is ok, the cash flow is positive (ie the govt is getting an increased income as a result) and the risk is acceptable … then hell go for it.
But Key is ALSO promising to cut taxes that will put the govt into deficit and require more debt to fund year on year.
This is exactly the same mistake New Zealand made in the 70′s and 80′s. Because the govt is in deficit every year, the debt increases every year, and the interest bill increases every year. (And all interest rates rise every year because the market perceives our risk profile as being poorer.) It is a very easy to get into debt; much harder to get out of.
And in case you hadn’t noticed we are in the middle of a global fiscal crisis that is making ANY credit exceedingly expensive.
RedLogix
A better analogy of the govt are that they are the trustees of the ‘asset’ that is NZ. We the people elect them to run the trust in our collective best interest.
We don’t elect them to take ideological stances and do shit without fully explaining the cost and benefits associated with each of several options.
As Nomestradamus points out to the ever balanced and open minded Steve P. If [xyz] policy was good under Labour, why is it bad under National?
Steve P and yourself might also want to reflect for a moment on how the proposed tunnel under the PM’s electorate was being talked about regards funding.
Yes credit is expensive now, buying a house is expensive now. But it won’t be for long will it. How shortsighted is not planning to borrow now because interest rates are high and credit is tight when it’s just part of a cycle that the funding of the asset will endure in a randomly/cyclical nature over it’s life. It’s justifying it on high interest rates as a bad idea rather than bad timing that is the BS.
Burt,
As Nomestradamus points out to the ever balanced and open minded Steve P. If [xyz] policy was good under Labour, why is it bad under National?
Policy 1. Borrow a prudent amount that can be serviced out of current cash flow.
Policy 2. Borrow a reckless amount that requires going into more debt to service it, AND substantially reduce your income at the same time.
Yes you might call both policies ‘borrowing money’, but only a fool could not spot the difference.
Do I have to keep spelling out the incredibly obvious here?
And if you are betting that the current fiscal crisis is going to be short-lived you are a much braver man than most pundits.
Redlogix:
Let me assist you here:
Is this what you call “[b]orrow[ing] a prudent amount that can be serviced out of current cash flow”?
coge: Do a study running on different assumptions about the future of personal transport. Hell I’m not even a green and I can see the problems with building more roads at this point. They just don’t make any kind of economic sense bearing in mind the risks on the fuel issues.
I suspect I’d have a better-based opinion about oil and its possible substitutes than you. Geology, science, and management background plus all of those interesting courses on economics. The alternate reserves and substitutes are available, but they are going to be far more expensive.
I’d say that the minor prices increases in the 70′s and current show quite a price sensitivity by both governments and consumers about fuel costs. What are you going to fill the roads with? People spending quarter of their income on fuel – or just the rich?
If I’m correct, then effectively the poor without vehicles will be subsidizing the rich drivers for building and maintaining these excessive roads in 20 years. They’ll pay through excessive transport costs.
Looks to me like the money would be better spent on rail and public transport. But as we know National are fiscally impudent and always try to build for things that have already past.
Can someone from the left please tell me what they think is a manageable level of debt. There seems to be alot of scaremongering. But really at what level does debt become a problem.
We are not selling out the next generation if we can afford to service the debt. Not one person has explained why a 2% increase in debt will not be manageable.
We want to be able to maintain today’s infrastructure and build more. The electorate is asking for tax cuts and both major parties are offering this. So can this happen through a small increase in debt, National are saying yes. You guys are saying no but not really explaining why we can’t afford this.
Nostredamus,
Petrol excise duty is only one, relatively minor source of govt income. In fact roading has been subsidised by the General Fund for some years now. It really doesn’t matter how you juggle the line items, it’s the bottom line that counts.
I personally think that it is perfectly plausible for the govt to find an extra $300m out of cash flow over a period of 13 years. That about $23m per year.
Draco TB, On the face of it that seems a good argument. Even with it’s one flaw it is still an important argument to put forward to anybody who suggests borrowing to upgrade either road or rail. Both may turn out to be inappropriate transport solutions in the not too distant future. Some of the technical developments in sail design and airship design could turn the whole freight system on it’s head very quickly if energy costs continue the price trends of the last few years. The tradition of pay-go funding for road improvements makes sense in these troubled times.
The big question is whether a peak oil shift from road to rail can actually be funded that way too. The catch 22 is that since at least 1935 rail capital investment has been either borrowed from banks or taken from roads. In a peak oil crunch the revenue from roads that is currently being used highway capital investment will collapse as quickly as it did in the 1970′s with the result that almost all of the revenue from roads is needed merely to preserve the existing assets. Remember that maintenance of tarsealed roads and ferro-cement bridges is largely independent of light vehicle traffic loads.
Although Mallard has stated that the rail upgrades will be funded from roading revenue there is nothing in the NLTP ten-year forecast to that effect.
The one flaw in your argument is the assertion that future generations get no benefit because productivity remains stable. Of course it does remain stable, but at the improved level. Thus the benefit accrues to future generations, although that may degrade over time.
The best documented example of this is Auckland’s inter-peak congestion which is significantly better than Christchurch’s as a direct result of building the motorways. Thus without the motoways Auckland would either not have it’s current population and not have it’s agglomeration economics due to being for independent cities instead four interdependent cities.
Um, reading your paragraph again there is a second flaw. You assume the combination of interest and inflation will cancel out the productivity increase. Inflation on it’s own will do this even without adding interest. How long it takes to reach this equilibrium point depends on the size of the productivity increase and the rates of interest and inflation, and that determines the amount of benefit that accrues to each generation.
This is how I think your last sentence should read (not sure about adding strikethroughs so please imagine them next to where I’ve inserted my words in square brackets – the editor doesn’t like IE8):
What this means is that present taxpayers will pay almost nothing of the costs [agreed] and get
the bulk[some or almost nothing] of the benefits (increased productivitynow[when the job is finished]) while later taxpayers will pay the bulk of the costs and get <del almost no [the bulk of the] benefit (productivity remains stable).Not one person has explained why a 2% increase in debt will not be manageable.
Because English is lying to you.
Cullen’s last Budget cut the govt books right to the bone, the surplus’s are gone.
Any further tax cuts puts the govt books into deficit. Get it?
This deficit has to be funded by borrowing. Each year and every year.
So Bill English is lying to you when he says that their extra spending will only cost an extra 2%. Sure, that is this year. Next year he has to borrow more.
But that year Key has promised even more tax cuts. And each year the interest bill arrives, bigger than the year before.
More borrowing.
Tax cuts that create a permanent structural deficit, result in accumulating debt. 2% this year, 3% the year after… and after 3, 6 or 9 years of that we are right back in the crap again.
Only this time the crap will be deeper and a lot more toxic. The global fiscal ecosystem is nowhere near as benign as it was when we got into trouble last time.
The alternative is the ‘drowning govt in a bathtub’ game. We’ve seen right wing govts do this over and over. They get into power promising tax cuts (but they never tell you that the cuts will only benefit a minority at the top of the tax scale), they then let the resulting debt accumulate until the bankers call it quits. In response to the crisis they to cut services and welfare that impacts the majority of people below the median income.
And in the meantime, interest rates go through the roof and Mr Key’s real masters are doing very nicely thank you.
If you think I am being paranoid, try Argentina for real-life example.
RedLogix:
I think reasonable minds can disagree on this.
I assume (correct me if I’m wrong) that there’s widespread agreement that major new infrastructure investment is required. So we’re talking, aren’t we, about new infrastructure projects – not about maintaining existing infrastructure from current government reserves?
If we approach the issue on that basis, then infrastructure bonds aren’t financial wizardry – as “Steve Pierson” apparently thinks – but rather an unexceptional way to raise finance against new infrastructure projects. For that reason, they can be transparently decoupled from other government measures like tax cuts. Even Michael Cullen accepts this. And that’s before we get to public-private partnerships, which allows for various mixes of debt and equity financing.
What we don’t yet know is how National proposes to structure major infrastructure projects – and I’ll reserve judgment until I see more specific proposals from them.
But, as I’ve shown, Steve Pierson’s claim that “[a] fancy new class of ‘investment vehicle’ will be created – infrastructure bonds” is just laughable.
RedLogix,
Petrol excise duty isn’t a source of govt income anymore, its been hypothecated since early July. In fact roading has been subsidising the General Fund for some decades now. The subsidy from the General Fund is essential the subsidy from road users to the Crown being returned with strings attached. LTA has to abide by the egalitarian principals enshrined in road revenue legislation ever since road revenue was introduced. The only way 40% of South Island road revenue can legally be transferred to Auckland, Welington and Tauranga is by Cabinet fiat.
Which leads me to these three questions.
1) Why is Canterbury’s receipt of it’s share of the hypothecated petrol tax conditional on Ecan levying a regional petrol tax?
2) When did the Government rescind the decision to allocate the 5 cent regionally allocated petrol tax on a per capita basis?
3) If the Government haven’t rescinded that decision then why is Canterbury’s entitlement missing from the NLTP ten-year forecast?
“The same old plan, with a bit more debt. No vision of a world-leading low-carbon public transport system, no cutting edge rail network ready for the reality of peak oil.”
Peak oil is a load of rubbish, the oil may be scarcer but there are other reserves (tar sands, coal) that can supply hundreds of years of fuel needs at comparable prices.
I considered that the benefit would be there but the problem with it is that the benefit, to pay the interest, needs to grow every year. Benefits from infrastructure will grow most when they are new then slow down and finally stop or even reverse in accordance with the law of diminishing returns (Rush hour in Auckland costs the country a few billion dollars every year even though the roads have been upgraded). This means that the price of the loan will outstrip the benefit and so later taxpayers will be paying for a benefit (growth in productivity) that they no longer receive.
In this part you seem to be talking about the normal inflation that comes with a growing economy whereas I’m talking about the forced inflation that comes with government deficit spending.
As this is deficit spending the rise in inflation will be almost immediate due to the boost of money into the economy. It is this rise in inflation combined with the interest that needs to be paid at the beginning that will eat away and possibly cancel out the most productive part of the infrastructure being built.
This and the above point make it highly improbable that infrastructure paid for through borrowing will be able to pay for itself. Throw in the fact that bonds tend to be interest only until maturity at which point the entire principal is paid making it so that later tax payers will pay the bulk of the cost of the infrastructure (assuming Nationals $3b in tax cuts and the fact that it’s entirely possible that these cuts will mean that such infrastructure will have to be mostly, if not entirely, paid for through borrowing).
Peak oil is a load of rubbish
Swampy is flaunting his/her ignorance even more blatantly than usual. The nice people here can lend you a clue Swampy:
http://www.thestandard.org.nz/?p=1423
http://simontegg.wordpress.com/
But they can’t ramp up to the level to maintain present usage as production of conventional oil declines never mind the increased usage of years and decades to come. They’re also very dirty and cause far more damage to the environment that we depend upon to survive.
Draco TB, OK, it seems to me we’ve reached understanding, which is the most important objective of any discussion. We can probably haggle over the details till the cows come home but I think its more important that we are actually both opposed to the Nat policy for essentially the same reasons.
I don’t suppose Key said anything about a sinking fund?
Most assume debt is bad – its not (well at appropriate levels anyway) the nats are borrowing to fund infrastructure that will hopefully increase GDP by more than the cost of borrowing – this is a very good thing. New Zealand does not have a debt problem! Our global competitiveness on the other hand is severely lacking.
On the other hand I do agree that the borrowing to fund infrastructure and not tax cutsd argument is farcical. But borrowing to fund tax cuts isn’t a bad thing either – it increases incentives to work which also increase GDP and productivity.How’s labour planning to do this?
“But borrowing to fund tax cuts isn’t a bad thing either – it increases incentives to work which also increase GDP and productivity”
Greg, sounds like modern GOPenomics. How’s that working out?
“Greg, sounds like modern GOPenomics. How’s that working out?”
No actually, its not. There’s a big difference. This is not unrestrained borrowing. Debt will stay at prudent levels. My point is there is often a knee jerk reaction that debt is bad, but when the costs of servicing that debt are less then the extra productivity created by it, its a very good thing.
All well and good. But that wasn’t the bit I quoted. That bit seemed to me to be about the idea that tax cuts increase GDP and Productivity… just because. They do. Always. Or something.
Which ties in to what the GOP has been selling. Laffer curve voodoo etc. that tax cuts pay for themselves and “Reagan proved deficits don’t matter” etc.
But as you were, if that’s not what you mean, fine. I’ll wait to see what infrastructure they are talking about though, ’cause at the moment it just sounds like a promise to cut taxes at no cost.
“… but when the costs of servicing that debt are less then the extra productivity created by it, its a very good thing.”
This is obviously true, but what politician would say that their debt plan wouldn’t fit within it. What they say isn’t what counts. That’s how we got in trouble in the first place.
DPF has a post here Clark and Cullen on Debt, which might help add some balance to the debt issues. It’s worth reading.
I like this quote from Dr.
MuppetCullen.Guess all that extra tax take had to be spent somewhere where it couldn’t create further inflationary pressure and now that it’s been spent on debt to the detriment of hospital waiting lists etc the Labour-led govt need to defend their actions.
To quote kiwiblog. some nice little quotes from Helen and Micheal have surfaced. kinda kills this whole argument really.
First Dr Cullen:
“The previous government had established a 30 percent of GDP target when the Fiscal Responsibility Act was passed in 1994, and had reduced it to 25 percent in 1999. When we came into office that year we made the judgement that the Crown finances and the state of the economy could not sustain that lower target, so we restored it to 30 percent of GDP.’ – Michael Cullen 18 May, 2004, Speech to Chen Palmer & Partners Business and Government Seminar
So National had a target of 25%, and Labour increased it to 30%. yet now they are saying 22% is lunacy and madness.
And now Miss Clark:
All these quotes are from 1994, when debt was in excess of 50% of GDP!!’
“I am pleased that economic growth has produced enough tax revenue to declare a surplus and repay debt. But I am appalled at the rate at which debt repayment is occurring at the expense of families, and schools and other essential social and public services.’ – Helen Clark (July 1994) Speech Auckland Labour Regional Conference
“The Government is putting an undue emphasis on debt repayment at the expense of our failing services and infrastructure in New Zealand,’ – Helen Clark (June 1994) Opening address to the Massey University Winter Lecture Series.
“We agree that we should be aiming to ensure that the ratio of debt to GDP in New Zealand is not out of line with other smaller industrialised countries. But Labour does not accept that having the smallest debt to GDP ratio in the OECD is an important goal. Nor do we believe that reducing our debt quickly should take precedence over improving the living standard,’ – Helen Clark (July 1994) Speech to Northern South Island Labour Regional Conference.
“At Budget time our net public debt was equivalent to 42 per cent of GDP – down from 48 per cent a year earlier Given those figures, it is hard to believe that the international credit rating agencies with which the Government is so besotted can have any real concern at our current level of debt,’ – Helen Clark (June 1994) Waikato Labour Regional Conference.
“The Government is obsessed with debt reduction over all other needs for spending,’ – Helen Clark (July 1994) Speech to Wellington Labour Regional Conference.
So when gross debt was over 50% of GDP, Clark time and time again attacked reducing that level of debt, and specifically advocated investing money into infrastructure instead.
I trust we will hear no more hysteria from Helen or Michael on a gross debt setting of 22% of GDP!
I can see why a govt would concentrate on reducing debt. It’s a bloody easy thing to do if you have a surplus. It readies you for more borrowing when you finally need to act and it’s popular.
Well… Not this Labour govt. If this Labour govt were prepared to borrow to finance major infrastructure projects rather than fund them out of current over taxation revenue then it would not criticise it’s opposition when the opposition said it was going to do that. Unless the Labour party are completely hollow and popularism is their only objective, the Labour party have no option but to enter the election with all policy carrots (bribes, incentives, winning ideas – call them WTF you like) funded on higher taxation.
Good luck guys, you have already cut taxes, you say you won’t cut govt spending and you say you won’t borrow. It’s quite a corner chasing the opinion polls has painted you into.
Cullen has already agreed to increase debt from 18% to 20% after the last budget! Where were Helen’s cries of anguish then?
The left say that National will say anything to get into power, quite rightly so. They wont just say anything, but they have to appeal to the masses in order to get into power. But Labour will say anything to stay in power. It’s power that Helen craves, not to serve the people of New Zealand!
Clue: National aren’t going to borrow for infrastructure – surely you haven’t actually fallen for that line burt?
You remind me of an old flatmate from a few years ago who had a bit of a gambling problem. He asked (for the umpteenth time) for a loan one day and I took him aside and told him his gambling was out of control if he was borrowing money for it. He agreed, but explained that he didn’t need money for the pokies – just to buy groceries. Of course he’d already gambled his budgeted food money.
We ended up having to boot him out to cut our losses as he owed quite a bit of money for bills and rent. I expect that’s what’ll happen to Key too if he ever finds enough greedy fools to vote for him.
Felix
You capitalist pig, as soon as he was costing you money you turned on him and sent him off down the path of homelessness. Shame on you not being prepared to spend your own money looking after the needy in society.
Its really not that hard to understand. Tax cuts will be funded by cutting excessive spending and govornment waste brought about by the labour govornment and it’s 9 years of riding a wave of econimic prosperity.
Big infrastructure projects will be part funded by increased borrowing. Labour has done it, National are going to do it, what’s the problem? Helen herself said that borrowing for infrastructure is not a bad thing!!
All businesses do it. You may as well borrow to get things done, and then pay it back when the economy is doing better and there is more of a surplus to spend on debt reduction.
Ah, Andrew – there’s nothing in what either Dr. Cullen or HC said that is inconsistent with what they’re saying today. In the 1990s living standards were dropping considerably and their positions reflect that living standards were a primary concern with debt coming secondary. This is reflected in their move in 1999 to shift the accepted debt level to 30% from 25% but then as living standards and surpluses increased, to drop that debt level. They’re saying the same thing today and being consistent within their values ie, maintaining living standards and living standards while keeping debt low. The issue with Nationals tax cuts and spending increases are that they go too far and are irresponsible.
No, lying to get into power is not right no matter how you dress it up.
Andrew
Home owners do it to.
Draco TB
So what’s different in a recession with soaring fuel prices, soaring food prices and the highest interest rates in the OECD?
Let me guess, It’s National suggesting it not Labour?
How’s that corner looking, talking about debt as a priority before falling living standards when Labour have been screeching at National for wanting to move it at all paints the corner a bit tighter.
“there’s nothing in what either Dr. Cullen or HC said that is inconsistent with what they’re saying today”
Really? So when HC says that it’s lunacy to increase debt from 20% – 22% of GDP, that is consistent with raising debt levels from 18% – 20% after the last budjet?
Rather inconsistent i would have thought.
“In the 1990s living standards were dropping considerably and their positions reflect that living standards were a primary concern with debt coming secondary”
Ummmmmm …. have you opened your eyes lately? We are in a resession dont you know!
“No, lying to get into power is not right no matter how you dress it up”
Just who in fact is lying? National are not lying, they have said they will not sell anything in their first term and then will go to the people to see what they think about certain things that may be sold, or part privatised.
Draco TB, Having argued in favour of infrastructure I now find there are some hooks that even you didn’t mention. They have created yet another fiscal crisis for the NY subway system.
“MTA’s problems stem from state budget cuts in 1995 that reduced state subsidies and forced MTA to finance improvements by issuing $10 billion in new bonds. According to MTA’s budget, those bonds along with existing debt means that MTA is spending $1.6 billion this year in debt service alone.”
http://www.nydailynews.com/ny_local/2008/07/23/2008-07-23_why_we_need_corn_in_subways.html
“People who make under $80,000 are too stupid to understand taxes anyway.’ John McCain