There’s this almost puritan kind of myth that we’ve got so much international debt as punishment for our spendthrift ways. We ‘live beyond our means’, apparently. But it’s not true. If ‘our means’ is the money we make in exports, then most of the time, they exceed what we spend on imports. Yet, we run a $10 billion deficit as a country. Why? Because of the profit outflow.
We hear about the current account deficit all the time and most of us conflate it with the trade balance (ie exports minus imports) but the trade balance is just one part of the current account deficit – the other big part is the income balance. That’s how much overseas investors make in profits on the debt Kiwis owe them and the assets they own in New Zealand minus the profits New Zealanders’ loans and investments overseas make.
The trade balance is usually in surplus – we export more than we import (although not at the moment). It’s this second part – the income balance – that causes the current account deficit to be so massive.
Here’s the latest figures, breaking down how we racked up $10.5 billion in deficit last year:
As you can see, we exported more goods than we imported, imported more goods than we exported and ended up with a small trade deficit. But that’s dwarfed by the nearly $10 billion that was the net outflow of dividends and interest (the ‘current transfers’ is overseas aid, other donations, remittances, and people taking their money with them when they leave the country).
The irony is that to fund the deficit we have to borrow more from overseas or sell our assets to foreigners. And that just means a greater outflow of profits the next year. On and on, worse and worse each year.
Now, let’s go right back and look from the start of the neoliberal era to the present. Remembering that for quarter of a century, the Right has blamed our international debts on us ‘living beyond our means’.
We’ve actually exported $17 billion more worth of stuff in the last 25 years than we’ve imported. But it’s a pittance compared to the net $189 billion we’ve sent offshore in interest and dividends. That $163 billion figure at the end – allowing for currency fluctuations and asset value changes – that’s pretty much the net $150 billion that we owe the rest of the world in the form of debt and overseas ownership of New Zealand assets.
You can see the cycle, we borrow from overseas or let foreigners buy our assets, then we have to pay them interest and dividends, and we pay for those by selling more assets or taking on more debt… and so on.
Now, part of the solution is exporting more and importing less – that’s half of why we need a lower dollar, the other half is to create and protect Kiwi jobs.
Other steps to improve the trade balance include government favouring Kiwi businesses for big contracts (note National sent the rail rolling stock, Novopay, ultrafast broadband cable, and Mighty River website contracts overseas), investing in R&D, and importing less oil – the rising cost of crude means that we spend $8 billion importing the same amount of oil that cost us half as much in 2005.
But more important is reducing or at least stemming the growth of our debt pile with the rest of the world.
Start by looking at the banks. The foreign banks are the biggest owners of New Zealand debt and the biggest cause of the balance on income deficit. They make their money by inflating our housing market. Bring in rules to stop the foreign banks lending so much money into the housing market and not only will you make housing more affordable, you’ll reduce our current account deficit and international debt.
The next biggest source of international debt is foreign ownership of New Zealand assets. Although smaller than our debt via the banks, the rate of return is higher for the foreigner investors. Tackle this by preventing foreign ownership of strategic assets, by not selling our public assets, by putting in rules about overseas landlords for residential property and generally insuring that foreign investment is real investment in new capital wealth – not just buying what we already have.
(The other sector of foreign debt is the government sector – actually, we usually lend more to the rest of the world than we borrow thanks to the Reserve Banks big overseas reserves, but that’s gone negative under National, too).
If we don’t do something, if we keep on just letting foreign capital buy up more of New Zealand and pay for the pleasure by sending a larger and larger share of our GDP overseas each year, then our net international debt is forecast to grow from an eye-watering $150 billion this year to a disastrous $200 billion in four years.
Where does that road end? It ends when our debt pile gets so big that our overseas creditors fear we won’t be able to make our payments and they stampede for the exits – our businesses are suddenly left high and dry unable to get refinancing, the government has to pay much higher interest rates on its debt, and the currency suddenly plunges sending shockwaves through the economy.
Better to manage things and avoid hitting the wall like Greece did, by using the kind of policies I’ve mentioned above. Of course, those are the policies that the Greens, Labour, NZF, and Mana espouse, and which National has rejected in favour of sticking its head in the sand and letting the wealth flow out of our country at the rate of $10 billion a year.