We are borrowing ourselves into permanent poverty
New Zealanders learned this week that our output did not increase in the second half of last year. Yet our spending in total and our wages rose over that period, as did population and spending per capita. How did we spend more per person than we earned per person? Essentially, we borrowed from offshore or we sold assets to foreigners.
Other figures out this week showed we ran a current account deficit of 2.3 per cent in the December quarter. That’s much less than the 8.8 per cent hit in the December quarter of 2008, but it’s still a deficit and means we imported capital equivalent to 2.3 per cent of gross domestic product and spent it. Importing capital is another way of saying we borrowed money or sold assets. … Yet again, we engaged in a national delusion we could spend more than we earned.
New Zealand’s real GDP per capita is now below where it was in 2004. … Over the 10 years of the naughty oughties (2000s), New Zealand borrowed or sold off a total of $350.3 billion. That’s about two times GDP. We used that money to increase our wages and income. We didn’t use that money to reinvest in new equipment or skills to boost our ability to produce more in the future. …
Now, the government has taken over as the borrower-in-chief. On Thursday the Treasury’s Debt Management Office took advantage of a gap in the financial market turmoil to borrow $950 million in one week on international markets. … The upshot of all this borrowing is now whenever our economy looks like recovering, the benefits of any growth are shipped offshore as profits and dividends from now foreign-owned assets here and as interest payments on the debt incurred over the last decade.
Last year, New Zealand paid $15.5 billion in profits and interest payments to foreign investors and creditors. Only $3.3 billion was reinvested. That is the size of the drag on the New Zealand economy. It is unsustainable.
We have to stop spending money we aren’t earning. If we don’t, we will get poorer and poorer until either there is nothing left to sell or we can’t pay the interest on the debt. It’s time we stopped kidding ourselves.
I have some despair of my own to add. First, the economic policies of the current government (borrow to cover tax cuts to the already rich, sell more assets) are guaranteed to make the problem worse, not better. The longer the Nats are in power, the worse it will get.
Second, fixing the problems will require New Zealand to accept that the party is over, that changes are needed, and that some sectors are going to experience some short term economic pain (e.g. raising tax rates for the highest earners again).
Third, that’s a difficult message to sell to the voting public. National are part of the problem, so it’s up to Labour to lead the solution. Will they be bold enough to try?
Fourth, finally, and combining these points, unless the electorate clearly understands the downwards spiral that we’re in, they are likely to vote for the stuffed suit with the smile and wave, rather than the economic medicine. It’s hard to see where an electorate that is educated and informed on the economy is going to come from, especially as the media devotes most of its slobbering attention to sex, scandal and gossip, and spends so very little time on the issues that shape our lives and future.
It is time to think about radical alternatives. How can New Zealand break out of this downwards spiral?
All of my posts for March will finish with this note. While life goes on as usual outside Christchurch, let our thoughts be with those who are coping with the aftermath, with the sorrow of so many who were lost, and with the challenges ahead.