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In face of share market meltdown, Govt’s options limited

Written By: - Date published: 7:15 am, August 26th, 2015 - 55 comments
Categories: auckland supercity, bill english, debt / deficit, Economy, housing, john key, tax, treasury - Tags: , ,

By Simon Louisson

John Key says New Zealand has options in the face of a share market meltdown.

The Prime Minister says that New Zealand is not like Greece (well that’s a relief).

The question is how real are those options?

Enormous debt built up by six successive Budget deficits has limited options.

Government debt under the stewardship of Finance Minister Bill English has soared to $63 billion – some 26.5% of GDP – from just $17 billion, or 9.1% of GDP, in 2009 when National tool office.

And while the economy temporarily revived due to a spike in dairy prices and the stimulus of the Christchurch rebuild, Bill English discarded the concept of the “automatic stabilizer’, where you save in good times so you can spend in bad times.

Remember it is only three four years ago that international rating agencies Fitch and Standard and Poor’s downgraded New Zealand’s credit rating, citing concern over our high external debt.

S&P’s sovereign credit analyst Kyran Curry said then: “the lowering of the foreign and local currency long-term ratings follows our assessment of the likelihood that New Zealand’s external position will deteriorate further”.

Our economic strengths were “moderated by New Zealand’s very high external imbalances, which are accompanied by high household and agriculture sector debt, dependence on commodity income, and emerging fiscal pressures associated with its aging population”.

Downward pressure on New Zealand’s ratings could re-emerge if the external position deteriorated, added Mr Curry.

Shortly after the ratings downgrade, New Zealand’s external position improved, thanks to dairy prices, but that situation has drastically reversed in the last 18 months with the Global Dairy Trade Index down 62 percent from a peak in 2013.

As well, debt in the household and agricultural sectors has increased sharply, and the latter it is about to increase drastically with most dairy farms now being unprofitable.

And now, our economy is tracking on what Treasury euphemistically called “Scenario One” – ie a negative outlook.

Under Treasury’s Budget Scenario One economic forecast, where world prices for New Zealand’s commodity exports fall below the central forecast, New Zealand’s current account deficit jumps to 7.7% of GDP by the end of 2016, far worse than the 3.6% deficit in the year to March 31, 2015.

Such an ugly deficit will certainly make the rating agencies sit bolt upright.

The central forecast had wholemilk powder prices moving back by 2016 to US$3900/MT, far north of their current level of US$1856.

Mr Key told Radio NZ that fears about China’s outlook mainly revolved around the construction and investment sectors while New Zealand was happily exposed to the consumer sector. Well go look at the fall in milk powder prices Mr Key.

The effect of a credit rating cut is to make borrowing by the government or New Zealanders more expensive. It is a detrimental and serious event that has long-term negative economic implications.

So essentially, the option of stimulating the economy via increased spending, or tax cuts, which would each significantly add to debt, is seriously limited.

A second option cited by Mr Key is a potential sharper cut in interest rates than already contemplated by the central bank.

Unlike many of the world’s leading economies, New Zealand has not yet had to cut its interest rates to zero, so with the Official Cash Rate at 2.5% there is theoretically a degree of wriggle room.

However, even there, the rating agencies are poised like Jerome Keino ready to wack us as a sharp cut to interest rates would puff up the Auckland property market further.

S&P just this month cut the ratings of the New Zealand arms of the four big Australian banks, citing concern about the over-valued Auckland market.

It said that most financial institutions would be adversely affected if house prices in Auckland fell sharply, even if they didn’t lend much in that region. The agency said that was because of Auckland’s importance to the New Zealand economy, accounting for about 35% of national output.

Then on Monday, Reserve Bank Deputy Governor Grant Spencer said the potential for a bursting of the Auckland property bubble was a serious danger to both banks, the banking system as well as the economy as a whole.

A sharp cut in interest rates will therefore be problematic without further inflating the Auckland property bubble, thereby risking destabilizing the financial system, something the Reserve Bank has a statutory requirement to protect.

So while New Zealand may have more options than Greece, thanks to this Government’s profligate past spending, including irresponsible tax cuts, our options have narrowed drastically.



Simon Louisson is a former journalist who worked for NZPA, Reuters, AP Dow Jones and The Wall Street Journal, The Press, The Jerusalem Post and as a media and political adviser to the Green Party.

55 comments on “In face of share market meltdown, Govt’s options limited ”

  1. AmaKiwi 1


    In each of the past 30 years, only three OECD countries have NEVER had a year when they had a positive balance of trade: Greece, Australia, and New Zealand.

    IMO, these market drops signal a dramatic turn for the worse in a global sovereign debt crisis. If I am right, National has done everything WRONG. We are more in debt and far less able to cope than we were under Labour in 208.

    • save NZ 1.1

      +1 – the government should have continued to cut debt like under Labour. Instead they have spent the kitty and then some, AND MORE.

      Not content to get us into huge debt the Nats have also been busy selling our assets to their mates, power, land and state housing.

      Not even content to do just that they have ordered state owned companies like Solid Energy to take on more debt until they are now bankrupt so they could get more dividends (while still not being in surplus).

      Not content with that, they lowered the immigration investment criteria so now you get into the country by buying up residential property and farms!

      Not only content to do that, they set up crazy public private schemes like Serco to lose NZ jobs and pay more money to have worse public service, less jobs and the profits being sent offshore.

      Not only content to do that they set up crazy corporate welfare schemes like paying for SkyCities conference centre build and putting a vanity conference centre in Christchurch (where Joe Bloggs doesn’t even have an insurance pay out to provide a roof over their head).

      They are like SO CRAZY and irresponsible. It is like some sort of sick joke.

      And then having MSM do their dirty work by telling joe blogs how amazing they are running the economy.

      Words fail me.

      They are even worse than Muldoon’s crazy ideas.

      They are the LOONY RIGHTIES.

      • Chooky 1.1.1

        +100…”They are the LOONY RIGHTIES.”…corruption!

        ….they are working NOT for New Zealand and New Zealanders

        • save NZ

          And this, money not spent of social welfare but on consultants to take from the poor and give to the corporate rich.

          Cost of private contractors doubles to $11.9m at Ministry of Social Development
          Payments for private contractors at the Ministry of Social Development has skyrocketed to $11.9 million.
          The blow-out has resulted in a bill for taxpayers that is more than double the previous year.
          Figures from the Social Services Committee’s estimates examination reveal that at the same time the public service is being asked to be frugal, the ministry has spent up large on private contractors, including a $2.6m programme provided by Deloitte.
          The ministry spent $5.4m on contractors for the year to the end of March 2014, but that amount ballooned to almost $12m by the end of March this year.

        • save NZ

          +1 – I just hope these National MP’s unscrupulously selling off our country and doing criminal financial damage to the economy, get to taste a Serco prison first hand.

    • DS 1.2


      New Zealand hasn’t had a Current Account surplus since 1974. We have trade surpluses all the time, but they are always outweighed by a severely negative balance of invisibles (profit flows and such).

  2. Ad 2

    The Key/English/Joyce handling of the economy is beginning to feel like the Robert Redford film “All Is Lost”, which consists of a series of flashbacks in which the sailor
    – chose not to plan
    – chose not to tell people where he was going
    – chose not to predict his risks
    – chose to go the unsafe and vulnerable route
    – chose the wrong equipment
    – chose to keep pressing ahead when it was going wrong

    …and then cries out “All Is Lost.”

    Now, I sure ain’t saying “All Is Lost”. Far from it.
    And I would hate to hear any alternative government sounding other than resolute and coherent rather than stoking public fear.

    But this government has consistently failed to plan, form new instruments, chart a course, tell people where it was going, or figured out how to change when things are going wrong.

    National are inferior government in a crisis.

    • One Anonymous Bloke 2.1

      Also, they’re an inferior government when there isn’t a crisis.

    • tracey 2.2

      except the government ministers are not suffering. They are not castaways, they are not bereft or hungry or thirsty.

      • Ad 2.2.1

        And clearly you’re not Robert Redford either.
        Go and figure out the definition of metaphor and come back.

  3. Charles 3

    Cool! The Nats are finally thinking of becoming responsible in the face of a crisis and spending to alleviate effects. This spending will include:

    Proactive job creation, public sector support for self-employment, small businesses, co-operative and community-owned enterprises. Expand the apprenticeship programme and greater availability of bridging courses for immigrants.

    Introduce a tax-free zone at the bottom end of the income scale.

    $6.8 million increase in support Initiatives to employ people with disabilities, mainly in the public sector.

    New top tax rate of 40 percent above $140,000. Tax credit giving an extra $60 a week to families; a non-discriminatory Parental Tax Credit of $220 a week in the first weeks of life for the poorest children; $500 million per year investment in children’s health and education to reduce the harm caused by poverty.

    $21 million a year to extend free GP visits to teenagers aged 13-17, abolish their prescription charges; a further $8 million a year to help GPs deal with the extra workload.

    Increase the minimum wage and ensure it cannot fall below 66% of the average wage.

    Set benefit amounts at a level sufficient for all basic needs of the individual/family: Protect all benefit levels by linking rates to a fixed percentage of the average wage (like superannuation).

    A two-tier benefit system consisting of a universal base rate that is enough to live on, with add-ons for specific circumstances, such as dependants, disability or chronic illness.

    A Universal Child Benefit with the ability to capitalise it towards a home deposit.

    Abolish stand-down periods, treat people aged 18 and over as adults for benefit purposes; no forced work for the dole.

    Oh wait no I was thinking of a Green government. Silly me. https://www.greens.org.nz/policy

    Oh, well then, what will happen is National will use this as an excuse to blame the unemployed, the vulnerable, extend zero hour contracts everywhere, privatise everything, throw those with the least power over their circumstances under the metaphorical luxury tour bus – or into private prisons – while handing out funds to the usual collection of people who don’t need it and waste it.

    • tracey 3.1

      I can always count on your to remind me that I have a pot on the hob… that needs more…

  4. tc 4

    As designed folks, the narrow ‘dairy is the new gold’ focus, hammering R&D, reduction in the govt asset base/revenue, foreign ownership is all good, Cullen fund is evil etc etc is what banksta john’s wrecking crew has been relentless about with TPPA coming along to further give away control and soverignty.

    Granny hardcopy leads today with a dog whistling piece on empty state houses playing her part on the diversion front giving the flag a rest probably.

  5. Stuart Munro 5

    The Key government aren’t actually any good at this economics stuff. They just swallow and regurgitate any daft line from the fantasists at Treasury. Among the many options this government faces the service revolver and the decent thing is not the worst.

  6. tracey 6

    I thought I heard Key imply when asked about plan B that he didnt need one cos PLan A is working?

  7. linda 7

    I think national party voters should. Pay the rest of us cant we are stone broke as it is

  8. Anno1701 8

    makes you wonder if JK is our “economic hitman”

  9. Michael 9

    I hate to give National any satisfaction, but this post is wrong.

    a) National was right to run deficits after the GFC as balancing the books when the economy was not running at capacity would have harmed the economy and worsened unemployment.

    b) Debt being 26% of GDP still places us as one of the lowest debtors in the OECD. We can afford to run more deficits if the economy worsens. Debt below ~60% of GDP is considered sustainable, I believe. (And you don’t really get into a Greece-style crisis until you get to like 100-150% of GDP).

    But one point I will make to criticise:
    a) Increasing debt to cut taxes for the wealthy was extremely stupid. National’s tax cuts for the lower tax brackets made sense – that’s classic Keynesianism. But the top rate should not have been changed.

    • dukeofurl 9.1

      Trouble is this year which is supposed to be a ‘near surplus’ is in reality a cash deficit of $5-7 Billion. Thats 7% of government spending. Any economic slowing and the cash deficit ( which is the amount borrowed) gets to 10% of total spending very quickly.

    • Lara 9.2

      Your first point a) may have been true for a couple of years, or maybe even up to four years after the GFC ended, but not the last couple of years at least.

      The GFC ended (at least, the markets made their final lows and thereafter have been in a bull market since) in 2009.

      So for a couple of years after that then yes, running a deficit would be okay. With the strong caveat that only so long as the extra spending was carefully targeted to STIMULATE THE ECONOMY.

      But six years? Six years after the GFC ended? That’s ridiculous. Those last years were a bull market, a long one, with economic recovery. That’s the time to put money aside to weather the next storm, not continue to run deficits and leave the economy less able to weather the next storm.

      • Colonial Viper 9.2.1

        Don’t mix up the bullish state of the financial markets in the last couple of years – fed by a QE I.V. drip of brand new electronic cash direct injected into the markets daily feeding asset price bubbles as well as ZIRP/NIRP – to the state of the global real economy over the same time frame.

        The Wall St/Main St divide has never been greater.

        • Lara

          This is true, that inequality and the divide between financial markets and the rest of the economy is great.

          But NZ has still had overall growth in our GDP (with the exception of 2011) for most of National’s reign.

          And although there is a gap between financial markets and the rest of the economy (which is highly problematic) there has been some filter through to the wider economy.

          It’s just not true to say that NZ has been suffering from the effects of the GFC enough for deficits to be run consistently all these years.

          • Colonial Viper

            The NZ money supply depends on debt, because our government does not issue the money it needs itself.

            Foreign companies take approx $15B out of the country annually, we import more than we export, and the country runs a chronic current account deficit.

            Net, the NZ economy is depleted of many billions of dollars of cash a year.

            If the government were to also start running a surplus i.e. taking more out of the economy than it spends into the economy, it will further exacerbate this extraction of cash out of the NZ economy.

            The result, over time, will be a recession and economic crisis.

            • Lara

              I agree completely.

              I’m approaching the topic from the mantra of a National supporter. They seem to think a surplus is a good thing, and that National are always just about to produce one, and when they don’t’ keep blaming it on Labour and GFC.

              My point is that is bullshit.

              And I’m aware of how money works, that it is created new as debt by private banks.

              And I’m also aware that this is not the only possible way of structuring our monetary supply, in fact, it seems really dumb to keep doing it this way. Iceland is onto it.

              But while we operate in a money = debt system and while we get into ever increasing debt, the interest must be repaid. If this is the system they insist on then they need to reduce debt in good times so that they are ready for bad times.

              I have read plenty of Bernard LIeater’s ideas, and Margrit Kennedy’s too.

      • Michael 9.2.2

        That’s why I mentioned the tax cuts for the wealthy. Now *that* was profligate. If National had not done that, then the books probably would have balanced themselves a bit faster.

        But other than reversing those tax cuts, National should not have raised taxes or cut spending elsewhere to get the deficit down faster. In 2007/08 the unemployment rate was between 3 and 4 percent. It peaked above 7 percent around 2012 or 2013. We didn’t see a more solid recovery in that rate until 2014. So that’s 5 years after the GFC ‘ended’.

        So sure 6 years after the GFC might be a bit excessive. But we still were quite far from running at capacity until early 2014, so the deficit should not have been forced down. I think if National hadn’t cut taxes for higher income earners, we probably would’ve seen the books balanced by then.

        But I think it was completely justified to deficit spend and keep easy monetary policies until 4 or 5 years after the GFC officially ended, sure. I do agree that we should have seen the books balanced by now, though, so we can be prepared to stimulate the economy in case the China crisis snowballs.

        • Colonial Viper

          Governments cannot ‘balance the books’ if a country has a chronic current account deficit like we do.

        • Lara

          Yes, I do tend to agree with you.

          I’m just really sick of National supporters blaming this governments lack of financial management, the consistent deficits and increasing government debt on the GFC which ended years ago.

          Their supporters are so sure National is a good manager of the economy, all the while they have never actually produced a surplus while repeatedly promising it’s just around the corner, and blaming it all on Labour and the GFC which damn well ended years ago.

          I do agree the “recovery” is a fake. And I expect it’s beginning to all unravel now.

    • Stuart Munro 9.3

      Don’t confuse the incompetent inability to run surpluses with stimulus spending. Those tax cuts were paid for by austerity measures that more than consumed any stimulatory effect. Tax cuts are invariably a remarkably poor stimulus – they feed into the wrong end of the economy.

      We’re in trouble – and the reason we’re in trouble is our economic management is hopelessly captured by neo-liberal cultists. Whatever goes wrong their answer is to steal more public assets.

      This government are looters – only in power for what they can steal. The public should impose martial law on them until the crisis abates. Martial law usually includes shooting looters.

    • Pat 9.4

      debt is approx 37% of GDP…from near zero under Labour

  10. SPC 10

    The OCR was reduced to 3% in July.

    It is not 2.5%, it is forecast to reduce to 2.5% later this year.

    • lprent 10.1

      Agreed. A bit pedantic though

      By now I’d say that the drop is built into everything that the market already does. It is even more likely to go ahead now that the overseas trade is falling.

      The only thing that appeared to have been staying the RBNZ’s hand last year was that it might heat up the Auckland housing market further. However it has become quite apparent over the last 18 months that the money fuelling that is from financing sources outside of the local mortgage markets, and therefore unaffected by OCR rates.

  11. SPC 11

    The most obvious option is to introduce unemployment insurance.

    A pool of money available to pay people for up to 12 months unemployment keeps the economy intact despite job loss – it also means there is no shock to the government budget from benefit cost rise.

    Re property, a surcharge on investment property mortgages would help to calm speculation driven buying and assist resort to a lower OCR/dollar.

    • Craig H 11.1

      I don’t care how it’s done (UBI is my personal preference), but anything that eliminates benefit-bashing is good in my books.

    • Tricledrown 11.2

      That’s not working very well in the US ,ACT style policy.

      • SPC 11.2.1

        Unemployment insurance is not ACT style policy. And they do not have universal unemployment insurance in the USA. They simply have a limited term for UB.

  12. Richard@Down South 12

    The Government crippled the economy when they lead a ‘cut costs at all expenses’ crusade… It didn’t matter what it did to each government dept, as long as costs were cut…

    Private industry was hardly going to look at what the government was doing and go ‘now is a good time to invest and hire new staff (unless you had an up and coming plan/project which had a good chance of succeeding), so most businesses hunkered down, and waited for the ‘economic recovery’ which never came

    Instead, the Government could have made smart choices, invested in real job growth, not changed the GST rate/upper tax rates (a move which was supposed to be revenue neutral but wasnt)… Instead of selling off assets because it is a core belief, they could have kept them and in a few years, we’d have been in a better position than we will be due to the sell off (i believe its 7 years from sale date that we lose any benefit due to what we would have gotten in dividends)

  13. RedBaronCV 13

    I Think I would change the heading “Govts options are limited” sounds like they are caught in something they haven’t contributed to.
    Something harsher like “Govt ensures we have no options ” but I’m sure there are better ways of saying this

  14. Nic the NZer 14

    [lprent: This is a simply awful comment – appears to have been written by a economic idiot doing a diversion comment and not even explaining what their alternatives are. ]

    This is a simply awful article. The author disqualifies himself from ever writing about the economy again due to his total ignorance.

    Question: can NZ ever become like Greece?
    Authors Answer: Yes, maybe.
    Actual Answer: No never, because NZ has its own currency, unlike Greece.

    [lprent: Author never said that anywhere. ]

    Question: should we be concerned about credit rating downgrades?
    Authors Answer: Yes.
    Actual Answer: No never, because NZ has its own currency.

    [lprent: The issue is about debt, specifically sovereign debt which is about how governments raise money offshore in overseas currencies. We raise bugger all sovereign debt inside NZ because our savings levels are too low. Local currency has very little to do with overseas debt except in the export/import balances in paying it back. ]

    Question: should the government stimulate the economy with tax cuts or spending?
    Authors Answer: No, not an option, because it will add to the deficit.
    Actual Answer: Yes, definitely, the government should have already been doing more due to a 5%+ unemployment rate.

    [lprent: He didn’t say anything of the sort. It can only be done if the government wishes to raise debt offshore, or raises local taxes, or causes inflation in prices by printing money or by arbitrary confiscations. (And you didn’t explain any other method). What he said was that using the first was a problem. ]

    Then a discussion about interest rates, apparently the more viable but still problematic alternative. But completely missing the point that the housing market slowing dramatically is a likely underlying cause of the recession at which point your no longer concerned about housing market inflation.

    [lprent: You appear to have been reading a different article. The discussion was about the Reserve Bank’s OCR rate, the rating agencies response to it, and the danger to banks if there was a pop in the housing market. ]

    Obviously by dismissing the best, option for dealing with a likely recession you are going to be left with poor alternatives. Deficit fetishism is doing the country tremendous harm.

    [lprent: And then you didn’t bother to explain what your alternative was. Banned one week for doing a diversion on this post and attacking an author personally. I don’t care if you disagree, but to deliberately misrepresent what the author is saying, and then not even put your own ideas forward is outright stupid. Also tucking this at the end of the comments on this post ]

    • dukeofurl 14.1

      Glad someone pulled apart Nics farrago.

      One other economic lever Key said we could use was ‘lower interest rates’

      Which had me gobsmacked. The Reserve Bank governor is the only one who can set an ‘official interest rate’, and this was because it was taken out of the hands of politicians.

      Last time I checked the only mandate of the RBG was price stability in a certain range. Nowhere is there and requirement ( like other countries) for other economic indicators like reducing unemployment, or growing the economy etc.

      Has Key really thrown the RBG under the bus and the long held economic stability model that goes with it ? Is this the new Muldoon !

    • Wayne 14.2

      Another example of unreasonable banning by Iprent. I appreciate its your blog, but seriously Nic the NZer does not deserve the over the top reaction by you. And if you want to ban me as well because I question your decision, well, its your blog, so its your choice.

      [lprent: Hey don’t tempt me. My usual response to that plea is assist in the self-martyrdom that you are so clearly requesting. I figure that those making that plea should have what they are asking for in full, so I usually quadruple sentences.

      But in this case no. The comment was left in the post with my demonstration of a moderator doing exactly the same style of personal attack in return for a reason. Therefore to allow discussion on why I did it that way. See my comment in reply further down the page. ]

      • dukeofurl 14.2.1

        Banned one week for doing a diversion on this post and attacking an author personally. Im sure this nonsense did it:
        “The author disqualifies himself from ever writing about the economy again due to his total ignorance.”
        Everyone has a go at you wayne but authors are a different category

      • les 14.2.2

        have to agree with you there Wayne..he must have got out of the wrong side of the bed this morning.

        • dukeofurl

          read what the banning notice said, attacking the authors is a big no no.
          writing gibberish didnt help

      • Stuart Munro 14.2.3

        Actually Nic was behaving abnormally stupidly.

        should we be concerned about credit rating downgrades?
        Authors Answer: Yes.
        Actual Answer: No never, because NZ has its own currency.

        So credit downgrades make no difference? They don’t affect for example the cost of borrowing? The interest when for example you’ve blown $101 billion by truly spectacular incompetence is more if your credit rating is lower. Magic foreign investment fairies don’t make that go away.

        Like most of you untruthful ultra-righties Wayne, Nic would not survive what he deserves.

      • lprent 14.2.4

        I am always very unreasonable when people personally attack authors, and that was pretty clearly an attack on the author rather than what they wrote about.

        If it’d been a deconstruction of what was in the post, then Nic would have put in their preferred alternatives and left out the personal attack at the start.

        You’ll note that I did EXACTLY the same kind of attack on Nic that Nic did on Simon. This is part of my usual strategy to demonstrate why people shouldn’t use certain techniques unless they are willing to have the same ones used by me against them. Which is why I have this rather hurt email in my mailbox this morning from Nic.

        We need authors a damn sight more than we need commenters. Which is why attacking them on a personal basis is a risky business if people want to continue commenting here. Attack what they are saying, sure. But do not expect to do so when not offering anything as alternatives or without pointing to actual facts. That is a classic avoidance strategy of someone wanting to be a lazy critic without the moral and intellectual underpinnings to frame an effective criticism. It is what you do when you want to frame a personal attack. And leading off with something like

        The author disqualifies himself from ever writing about the economy again due to his total ignorance.

        is pretty hard to view as being anything apart from a personal attack.

        Normally I try to let authors deal with these as much as possible, and acting as a backup. However you’ll usually find me swinging my size 11’s in the same vein as any arsehole commenter (except far far worse) as soon as it is a post by a guest author, or a new author.

        I find it keeps most of the new authors entering the blogging environment happier if they know someone will deal with people being idiots.

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