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OIA confirms: No reason to cut Cullen Fund contributions

Written By: - Date published: 12:02 pm, July 6th, 2009 - 71 comments
Categories: budget 2009, national/act government - Tags: , , ,

Well, we told you so. The Nats lied for weeks that a credit rating downgrade would be imposed on us if we didn’t cut contributions to the SuperFund. We didn’t fall for that for a minute.

Even before the Budget, we pointed out that, except for the extraordinary conditions of the last two years, managed funds provide better returns than risk-free government debt. We pointed out that if ever there was a time for a long-term investor like the government to be buying assets, it’s now. It’s grown 16% since February.

Papers released under the OIA to Radio New Zealand show Treasury agreed with us all along:

“It would not help strengthen the overall fiscal position and therefore shouldn’t be seen as a measure to help the credit rating.”

These Treasury papers confirm what the earlier Treasury leak said: keeping the contributions would increase gross debt but would increase assets by more, resulting in lower net debt.

[btw, it would be great to be able to see OIA papers like these rather than rely on a journo’s interpretation of them. OIAs aren’t made available to the general public on a website or something after being given to the requester, are they? If not, they should be.]

71 comments on “OIA confirms: No reason to cut Cullen Fund contributions”

  1. Ianmac 1

    “keeping the contributions would increase gross debt but would increase assets by more, resulting in lower net debt.”
    In a nutshell that I can understand! Ta

  2. Draco T Bastard 2

    Well then, all we need is for the fact that NACT have been lying through their teeth to be shouted from the rooftops. Oh, and the fact that they’re actively making our economy worse.

    • gingercrush 2.1

      How?

      I don’t see unemployment at 9.5%. I don’t see banks struggling. I don’t see huge mortgagee sales (a slight increase isn’t itself huge). I don’t see high government debt. Indeed lets see what is happening. An increase in business confidence, an increase in consumer confidence. House prices on the rise. Commodity prices returning. Of course it’d be great to see NZ’s dollar go lower but when you have other markets struggling (Europe and North America). What do you expect.

      I know you would love to paint our economy as horrible. Certainly there are questions about our economy in the long-term such as a horrific current account deficit. But on the whole, our economy holds up well compared to many other economies.

      • Draco T Bastard 2.1.1

        Well, lets see, how about by having it $8 billion worse off than it would be if we didn’t stop payments into the super fund?

        PS. Worse != crashed (yet).

        • gingercrush 2.1.1.1

          For someone that believes the capitalist system is broken. It makes you look like an idiot that you would welcome the government investing in that capitalist system. Since the sharemarket is very much built on the idea on capitalistism. Perhaps you should stop believing your pathetic view of the capitalist system?

          • Draco T Bastard 2.1.1.1.1

            I may not like it but that doesn’t blind me to present reality.

        • sausage fingers 2.1.1.2

          How’s that maths workin’ for you Draco? Treasury’s very point is: borrow $8b (debit on the left: $8b) invest $8b (credit on the right: $8b). Therefore, on day one you are neither better nor worse off and your credit rating cannot be affected.

          So in no way are you $8b worse off by failing to invest in the Cullen fund.

          • cocamc 2.1.1.2.1

            SF
            provided the interest that is charged from day 1 is not more than the returns from the investments made via the super fund. The interest payments will be constant – the returns are not. One day we have to pay that $8b back and that can only be from any growth in what we invested the $8b into.

            • sausage fingers 2.1.1.2.1.1

              Understood. The point I was making is that we are not as Draco would have us believe, suddenly $8b worse off. We had to borrow that so the borrowing balances up the investment, We will be better off if the return is greatee than the interest and worse off otherwise.

          • Draco T Bastard 2.1.1.2.2

            My maths is fine – yours seems to be lacking.

  3. So you mean except for when it didn’t, the superfund outperformed Govt. debt? That’s hardly inspiring.

    As I’ve said before, it’s pretty dubious that skilled investors can actually consistently beat the market. E.g.
    http://www.dimensional.com/famafrench/2009/06/luck-versus-skill-in-mutual-fund-performance.html

  4. Anita 4

    I will check, but my memory of the OIA guidelines is that release under the OIA is considered public release. So you should be able to ask Treasury for the papers and get them immediately (rather than it going through their delaying process again).

    Try ringing Treasury and asking for the same set of papers, they’ll probably ask for it in writing but it should be a very fast turnaround.

    • Anita 4.1

      Try the last five documents linked to on this page. The page contains the documents about Budget 2009 which are most frequently requested under OIA.

      • Anita 4.1.1

        Actually, the whole list is worth a read, there are some really ugly policy possibilities being calculated.

  5. sweetd 5

    This from the same Treasury that couldn’t report correctly a simple thing like MP’s travel costs?

    • Pascal's bookie 5.1

      Yeah that’s them, the same one’s that said Cullen should have cut taxes, deregulation is a good idea, privatisation has merits, neo liberalism isn’t completely stupid etc.

      You know ideological burpers, fucking morons; and even they reckon English is full of it.

  6. burt 6

    Hopefully National will not apply Labour party logic and call for supression of any information that they would rather people did not know about.

    • Anita 6.1

      My impression is that it’s at least as hard to get politically sensitive information from departments as it was last year, probably harder.

      • Maynard J 6.1.1

        Coleman ordered an internal investigation into why the OIA was complied with in one instance, so there is a good indication of what they think of it.

    • Pascal's bookie 6.2

      Why was Worth sacked?

      I’m shocked that ACT can serve in such a secretive govt.

      • burt 6.2.1

        Why wasn’t Taito sacked before he said he might stand as an independent – see two can play at being partisan hacks.

        But you are learning to question what govt do rather than just say move on so I should not discourage you.

        • Pascal's bookie 6.2.1.1

          Are shocked too then burt, like me, about ACT serving in such a secretive govt? After all their talk.

          And I”m sure you’ve got a cite for me saying “move on” about taito, so front with it, cause I don’t remember that..

  7. gingercrush 7

    Can I just say regardless of what Treasury and others say. I am very comfortable that this government has suspended payments into Superannuation. Though they haven’t completely suspended contributions since they did put in another 250 million dollars. I am opposed to borrowing money to put into an investment scheme that won’t pay our for another 20 years or so. I remained opposed prior to the budget, well before credit issues were coming about. I still remain opposed.

    That you lot remain convinced the Cullen Fund is the magic bullet to keep Superannuation payments and levels where they currently are is quite frankly absurd.

  8. gingercrush 8

    You also have a unique case of “pick and choose”.

    For instance you don’t include this piece:
    “Stopping contributions was needed to stop the government going further and further into debt, there was a thought that would put upward pressure on interest rates”.

    Treasury also didn’t believe Orr’s advice that freeze contributions would make people question the Super Fund.

    And in the end Treasury decided on March 25th
    “That the contributions holiday would be a good proposal.”

    —-

    OMG I love the function that if you forget to put in the spam word it goes to an error message suggesting you copy your contents before trying again. As someone whose done that many times, such a function is very welcome.

  9. Tim Ellis 9

    What intrigues me is why, if it is appropriate for the government to borrow for the Super Fund, the last government never did?

    If there is economic value in borrowing $2 billion a year to put into the super fund, why is there not ten times the economic value in borrowing $20 billion a year for the super fund? Why not $200 billion?

    If there is so much faith in the markets to deliver consistently better returns than the cost of debt servicing, why did Labour never do it?

    • Maynard J 9.1

      I can answer that all for you, Tim, but just to make sure I am not wasting my time, would you be able to answer one question: Are you familiar with the concept of ‘risk’? Even if you are only familiar with it in general terms, you can probably apply it to your question and answer it for yourself.

    • r0b 9.2

      Come on Tim, you’re a high flying banker, you know the answers to your own questions, you’re just playing dumb.

      The other side of your question is, if there is no economic value in borrowing a billion (or whatever) for the April tax cuts (oh – sorry – for “infrastructure”) then why is the government doing it? Why budget for a decade of deficits? Why not $0 borrowing?

      Debt is not always good, debt is not always bad because sometimes it improves your long term position, and sometimes it doesn’t. It’s a case by case basis with proper cost benefit analysis. Since Labour was the government the economic circumstances have changed, and the fund’s very recent growth is excellent…

      • Maynard J 9.2.1

        Tim, I decided to do some research for you since I had read a relevant article. It gratifies me to see Vernon Small label your argument ‘spurious.’ (rob figure you will like this too)

        “There have also been some spurious arguments advanced – including by the prime minister who ought to know better (and no doubt does) – that if it is a good idea to borrow to save, why not borrow huge numbers, $50b or more?

        Well, there is a big difference between borrowing prudently and reduction to absurdity. Borrowing $50b creates a risk out of all proportion to the Government’s balance sheet; borrowing $2b a year to keep the fund growing and on track till surpluses return does not.

        Mr Key and Mr English must also know that the fund has been enormously successful, has suffered a bad patch along with the rest of the world in the current recession and is now growing again as markets rebound.

        They also know that in the long term – and there is not much around in an investment sense that is more long-term than the Cullen fund – the fund is virtually certain to outperform the cost of borrowing, and leave us better off.”

        The rest is well worth a read, if you want a cogent analysis that would help you avoid further spuriosity.
        article

    • Draco T Bastard 9.3

      Because, as you’re quite aware, such borrowing would push up the cost of financial capital so that the returns would be less rather than more.

      PS, yeah, I copy/pasted it from my reply to tim over on Red Alert.

  10. gingercrush 10

    Exactly.

    Indeed if the Cullen Fund is so great. Why don’t we set up another fund for future health funding. Something that is going to impact us more than Superannuation,

    Why not set up a fund for future infrastructure spending. Why not set up a fund in the future to cover all future spending by governments.

    Lets go borrow 10 billion dollars every year put them into various investment funds and we’ll have a great future.

    Of course they won’t answer you TE. Because deep down, they know how absurd it all is.

    • Maynard J 10.1

      Er, because we can just fund health directly. And infrastructure.

      Your arguments are absurd because if the government is making any expenditure while it has any debt, you must think that the expenditure should be cut, you have no provision for debt at all.

      Got super savings? And a mortgage? Absurd. Just absurd.

      Unlike your view, the position taken here is not black and white and thoroughly rigid. In some cases, it makes sense to take on debt. That is all there is to it.

      • cocamc 10.1.1

        Maynard J
        I do have super savings and mortgage debt – but I have to live within my means, just cannot have debt from the bank over and above the assets. That’s just crazy – but hey the left just wants to spend spend spend till nothing left

        • Maynard J 10.1.1.1

          And how much do you think the Government of New Zealand has in assets? I do not know off the top of my head but suspect it is a fair bit and that your statemnt would not be made true even if super contributions were continued..

          “but hey the left just wants to spend spend spend till nothing left”

          If by ‘spend’ you mean ‘save’ then yes, although that would make the second part of your sentence a bit flawed.

          • snoozer 10.1.1.1.1

            Maynard’s right. the Crown has $219 billion in total assets. $123 billion in liablities. Net total assts of $96 billion.

            That’s different from the financial assets and debt that we talk about when we say ‘government net debt is whatever %’. This includes the value of land and buildings and other assets the government owns and other liabilities.

            So cocmac, the government isn’t living off “debt from the bank over and above the assets”

            • vto 10.1.1.1.1.1

              snoozer, you are perhaps well named.

              if you are to rely on such assets to get you out of a debt hole then you must have buyers for those assets.

              do you know of some investors who are going to buy these assets at these prices? or maybe even someone with half at, say $100billion? Or 50bill? or even 5billion?

              seriously …

            • Maynard J 10.1.1.1.1.2

              Eh vto? I (& subsequently snoozer) just pointing out that debts do and would not exceed assets. No one is saying there is an instant need to flog them all off.

              Remember the govt is not like a household and their debt does not need collateral that can be realised in the same fashion. No repo men will come and take our dams if you see what I mean.

            • vto 10.1.1.1.1.3

              exactly MJ, hence the uselessness of the asset position of the govt in this debate. which was my point to snoozer. Hence we have no assets and only debt. A govt’s only assets are its taxpayers (and whatever else it can legislate away from people).

            • Maynard J 10.1.1.1.1.4

              Ok. Does not look like that was the point either, that we can ‘use’ those assets. Then again, there are people who call for getting rid of these funds entirely, but that is not for economic reasons but a political ones.

  11. vto 11

    I agree with Tim and Ginger. The sentiment which pervades Standard discussions on this issue, namely that the Fund will always outperform its cost of borrowing, is EXACTLY the sentiment which has brought about the E N T I R E global financial meltdown.

    Wake up folks. Its bollocks.

    I think most of the world has learnt the lesson that asset values and investments do not always keep going up. It seems that many standard posters have not, which is surprising given the vile bile which has been heaped on bankers and speculators and investors and businessmen and capitalists. (does this mean that standardistas brainprints are exactly the same as everyone elses and include a healthy dose of capitalism and consumerism?)

  12. BLiP 12

    More proof – as if any was needed – that the John Key National Government Inc is unfit to hold the reins, and its born-to-rule cavalier dictate has made the situation far worse than it needs to be.

    The NACTS have been having fantasising about getting their grubby hands on the Cullen Fund since its inception – not for any good reason other than it was a good idea that they didn’t/couldn’t come up with. The decision to slice and dice our future is a manifestation of the nastiest level of politics, that driven by petty jealousy obscured by long disproved “free market” magic-nomics pumped out word for word by the indolent media.

    $8 Billion, you say – is there even one person who voted for John Key in despair at this stage, I wonder.

  13. snoozer 13

    no-one says assets always go up but over the long-run managed assets over-perform the risk-free rate of return…. unless the world economy permanently collapses, and maybe even then.

    Tim’s a banker isn’t he? Does he tell all his customers they would be better off putting their money in bonds than in the bank or in shares or into investing in a business? No? Well then, we know he doesn’t really believe what he’s saying.

    • vto 13.1

      well they are on here snoozer, through the constant suggestion that it is worth borrowing to invest.

      • snoozer 13.1.1

        No. The post refers to long-term investors… no-one denies that markets sometimes go down and the suggestion that it’s worth contributing even if it means more debt doesn’t deny that fact. It’s the long-run that counts for a fund that’s going to still be paying out money in 50 years.

        vto. do you honestly believe that bonds will be the top performing class of assets over the coming decades?

        Tim, how about you?

        If you answer no, then congratulations. You’re on the same side as the Treasury and everyone else who can count… and that means the return for the government will exceed the cost of borrowing over the long-run.

        Incidentally, if the Superfund made 16% since Feb, that’s over 14% more than the return on bonds over the same period.

        • Tim Ellis 13.1.1.1

          snoozer, were you making predictions about bond performance back in February? I don’t know much about bond performance, but it you would have been a very bold person to be throwing large chunks of money at the markets six months ago. You would have been downright insane to be mortgaging your house to do it.

        • vto 13.1.1.2

          No snoozer, the issue in this post is not whether or not someone (the govt) is a long term investor, the issue is whether it is prudent to borrow to invest (as that is the reason the investing was stopped).

          Which is quite distinct to borrowing to buy a home or car and those relevant analogies.

          It has never been prudent to borrow to invest.

          But go to it personally if you wish. Just don’t force my wallet open to indulge its ridiculousciousness.

          • Pascal's bookie 13.1.1.2.1

            Actually v, this post is about whether or not English was right to stop payments to prevent a credit downgrade. Which was his stated reason. This post is about Treasury saying that doesn’t make sense.

            • vto 13.1.1.2.1.1

              ah. So it is, he he. Anyway, it has transmovedon since. And further anyway, what would anyone expect of English – he is a politician of the highest order and truth is one of the last cabs off the rank when it comes to what to say next..

            • gingercrush 13.1.1.2.1.2

              Bullshit PB. This post’s title is “OIA Confirms: No Reason to cut Cullen Fund contributions”. Eddie basically lies, because had he/she listened to the radio report properly you would find that Treasury did give reasons to suspend contributions.

    • Tim Ellis 13.2

      No, snoozer, I’m not a banker. I don’t have clients and I don’t offer investment advice.

  14. Tim Ellis 14

    Come on Tim, you’re a high flying banker, you know the answers to your own questions, you’re just playing dumb.

    rob, for an anonymous poster, you do seem to have a strange obsession with what I do for a living. I’ve never held myself out as a high flying banker or a specialist in economic issues. I am neither. I work as an internal audit manager for a retail bank. This is a technical role that has little to do with economics. I post my own opinions on here under my real name. I don’t try to out you or question the integrity of your opinions. You might want to lay off the trolling slightly and be a bit more respectful.

    The other side of your question is, if there is no economic value in borrowing a billion (or whatever) for the April tax cuts (oh sorry for “infrastructure’) then why is the government doing it? Why budget for a decade of deficits? Why not $0 borrowing?

    Debt is not always good, debt is not always bad because sometimes it improves your long term position, and sometimes it doesn’t. It’s a case by case basis with proper cost benefit analysis. Since Labour was the government the economic circumstances have changed, and the fund’s very recent growth is excellent

    I largely agree with your first point. Government should incur debt in some cases, like in infrastructure, for example to transfer the cost of a road over its entire life, rather than making the current generation of taxpayers foot the whole bill. In ACC, levy-payers should be funding the full cost of their future entitlements at the point that they are incurred, rather than dragging the costs onto future levy-payers for benefits they will never see (the exact opposite of Labour Party policy).

    I think there is an argument for partial pre-funding of superannuation, to smoothe the future costs. The same can be said of health, when there will be a major cost bubble in about 25 years. I don’t care what mechanism is used for this, whether it is reducing debt or increasing tax or partial pre-funding or changing expectations of entitlements, but the economics suggest that if we don’t do something then we will hit a very serious crunch in about twenty years time.

    There are risks associated with funding future superannuation with debt. The risks were so high that the previous government didn’t contemplate it.

    If borrowing for the super fund was the answer to our economic problems, then previous governments would have done it and we would be very wealthy.

    • snoozer 14.1

      “If borrowing for the super fund was the answer to our economic problems, then previous governments would have done it and we would be very wealthy.”

      danger of falling into a logical hole here – ‘if X was good it would already have been done, therefore X must be bad’

    • felix 14.2

      Tim, we’ve been over this “anonymous” nonsense before.

      You’re just as anonymous as r0b or anyone else. No-one knows or cares who you are. Whether you use your real name is irrelevant.

      Please drop the petty attacks on “anonymity”, you do it all the time and it’s boring.

      • Pascal's bookie 14.2.1

        And ‘anonymous’ doesn’t mean ‘pseudonymous’.

        Which is why they have a different word for it.

    • r0b 14.3

      rob, for an anonymous poster, you do seem to have a strange obsession with what I do for a living.

      Tim – say rather that you have a strange obsession for telling us what you do for a living, about all your political contacts and connections, and about your longstanding political involvement. So why the faux outrage when people mention any of it back to you?

      I largely agree with your first point. Government should incur debt in some cases

      And so on. Reasonable enough, and showing that your original comment here was deliberately dumb and trolling. You make arguments here that you know to be dishonest Tim. Why?

      • Tim Ellis 14.3.1

        Oh, here we go again. Rob making stuff up and accusing me of lying.

        Play another record.

        • r0b 14.3.1.1

          Not making anything up Tim, but yes I am accusing you of lying I guess, in that sense that making dumb arguments that you know to be dishonest is lying.

        • felix 14.3.1.2

          If you don’t like being called out for lying, Tim, the solution should be fairly obvious.

  15. tsmithfield 15

    One thing that is very clear is that the people managing the fund have done a piss-poor job of it. Sure, they made plenty of money getting the fund to its peak. However, they obviously did nothing to protect their gains.

    This can be done very simply by purchasing very cheap OTM (out of the money) Put options. Put options earn money when the market is falling. For any given stock, OTM put options can often be purchased for a few cents each, and control 100 shares. Although technically OTM, when it comes to a fall that was experienced last year, they very quickly become in the money, and would have protected most of the gains.

    Here is a Wiki article on Put options if anyone wants to find out more?

    http://en.wikipedia.org/wiki/Put_option

    This is a very common strategy for managing risk in stocks and shares. It is unbelievable that the managers of the fund were not conservative in this respect, especially given that it is other peoples money that is being used.

    There is no way I would fund speculating on these markets out of a deficit, especially when there are people with the knowledge that should have done better, but obviously did not.

    • snoozer 15.1

      tsmithfield. The Superfund has outperformed the financial markets it is invested in each year, including on the way down.

      • tsmithfield 15.1.1

        That is a bit of a spurious argument, snoozer. There are a lot of people dabbling in the market who have no idea of market strategy whatsoever. So, I would expect a fund managed by professional people to outperform the general market.

        The fact remains that if they had covered their position they would have avoided most of the losses.

  16. Ianmac 16

    Today I received my letter from John Key justifying why “MY Government is committed to keeping Super entitlements.” He doesn’t say how Super will be funded however.
    And given the fuss Helen edured for signing a painting that she did not paint, how about John signing this document that I am sure he didn’t write! Ha Ha! (I know he didn’t because it was in clear basic English.) 🙂

    • Daveski 16.1

      Agreed, it it was English then Bill should sign up. Unless the GG signs it and then Bill becomes ACT??

    • Anita 16.2

      Whose crest was on the letter? I’m curious about whether it’s taxpayer or National party funded.

      • Maynard J 16.2.1

        There is a scanned copy up on Red Alert now Anita.

      • Ianmac 16.2.2

        House of Representatives (Crown)
        Hon John Key
        MP for Helensville
        Prime Minister
        and signed (?)
        J Key
        Govt expense i guess.

  17. mike 17

    “Papers released under the OIA to Radio New Zealand show Treasury agreed with us all along”

    Treasury smeasury – Can we just ask that they look at the numbers once more and then totally contradict themselves, eg Nats travel bills fiasco…

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