Why selling assets won’t solve our debt problem

Written By: - Date published: 9:41 am, January 27th, 2011 - 38 comments
Categories: Economy, john key - Tags: ,

Everywhere he can, John Key is busy raising the canard of our economy being as indebted as the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) that are in trouble in Europe.  He’s talking about net foreign debt, and he’s suggesting lowering government debt (by hocking our inherited family silver off) is the solution.

But New Zealand’s debt problem is not a government debt problem like the bailed-out countries of Greece and Ireland.  We do not face the risk of bail-out as JK deceitfully suggests, as we are a long way from the government being unable to pay its bills.  While NZ’s net foreign debt position is 85% of GDP, net public debt is forecast to peak at 30% of GDP in 2015 (edit: currently 18.8%). Compare this to the current situation of Italy (115.2%), Portugal (76.9%), Greece (126.8%), Spain (53.2%), and Ireland (64.8%).

National arrived in office with zero net Crown debt, but through the recession and tax cuts for the rich in 2009 and 2010 we are now gathering debt – including $120 million/week for those tax cuts.  But it is still only a small part of the problem.

The problem is personal debt.  At the moment it’s improving – without asset sales – no doubt partly because the Government is socialising the debt of the wealthy through those tax cuts.

So asset sales won’t solve a non-existent government debt problem, will it help with the personal debt problem?

No.

If we sell to foreign investors we lose the profits overseas.  Prices go up (and/or spending on new infrastructure goes down) as they demand a bigger return on their investment; New Zealanders’ costs go up and so does our debt.

If we sell to “mum and dad investors” the assets they already own (also known as extortion if it’s done by the mob), they will currently need to borrow (from overseas…) to pay for their shares.  Or they reduce their other investments – starving the pool of money that is funding our productive exporters that we need to pull us into recovery.

This is another reason why businesses in the productive economy will be supporting Labour this year, along with their fiscal and exchange rate policies.  Where National’s asset sales will starve the investment into our productive economy, Labour’s revitalising kiwisaver, re-starting the NZ Super Fund and other measures to increase saving will grow the sector; instead of National’s starving R&D, Labour knows innovation is the key to future growth and will help fund it.

So if we want to reduce foreign debt we need to introduce measure to encourage savings, not flick off assets.  It the wrong solution to the wrong problem John.

38 comments on “Why selling assets won’t solve our debt problem ”

  1. BLiP 1

    And yet another PR plank collapses under the strain of evidence. The timing of the sell off is near perfect if the real intention was to ensure foreign ownership. Just at the time when most “mum and dad” investors are up to their eyeballs in debt, give the already rich a tax cut to free up a little loose cash to show a modicum of local ownership and then put the silverware on the block.

    Good work National Ltd™ – I’m lovin’ it.

    • ZeeBop 1.1

      We sell lots of exports. Its like a rip at the beach. A huge sucker that can pull you out fast.
      Its like the drain in your sink, it sucks you down. Now all those exports need someone on
      the other side of the currency trade so farmers can bring back their profits. That means
      the kiwi economy has to produce wants, that means kiwis need to buy tvs, buy drugs,
      buy other peopels exports to match our own. Unless of course farmers don’t bring back
      their whole profit, only the money to cover their costs! That means they can grow richer
      in some foreign place where the stores sell stuff cheap as there are more buyers and sellers.
      So it rewards exporters to not climb the currency border! But what elites have done is
      actually make it easier to get out of NZ, by capital farming, by churning business here
      you can make more capital gain on the rise in a bubble market, by entering and exiting,
      so when money does flush into the economy to invest, that money is pushed into creating
      a bubble where the players can realize very quickly a profit. And no productive gain, no
      long term investment, and the money goes overseas to buy a pad in Sydney.
      So its the giant economic rip tide that suckers NZ out of their export dollar, leaves
      farmers heavily in debt, and the best farms owned by foriegners. If you want a better
      economy, introduce a capital gains tax, make pure finance profiteering harder and
      organic company growth more profitable.
      I didn’t see any of the top tax band tax cut, so how were the three rounds of
      tax cuts introduced by National fiscally neutral, if I’m now paying percentage
      more of the total tax requirement of government, paying off all that extra
      borrowing as well that National have built up? How a PM can lie so openly
      on public TV, and how effective the reporters can look trying to pull him
      down and yet not, is a shocking indictment of the state of our lack of democratic
      accountability.

    • Jum 1.2

      Go to the top of the class for stating the obvious.

  2. Lanthanide 2

    Another way to argue it, is that if the share are sold to ‘mum and dad investors’ in NZ, is that the people buying up the shares won’t be the same people who currently have a stake in them.

    In other words, we are taking assets owned by all NZ taxpayers, and selling them to a small bunch of NZ taxpayers that have excess cash on hand to invest in such things – concentrating the ownership of assets into a smaller group of the population.

    • Bright Red 2.1

      and then they sell the shares to who knows who and they’re gone forever.

      • Lanthanide 2.1.1

        No, they’re gone until they’re bought back. That may not be ever, but it’s not like it’s impossible to get shares back. All you have to do is offer an attractive price.

        Who knows? Maybe National would lead us to a nirvana of 6% growth per annum compounding, and we’ll be able to buy back our electricity companies. I doubt it, of course.

        • Colonial Viper 2.1.1.1

          All you have to do is offer an attractive price.

          Or compulsorarily acquire the shares at a price you set. Say the purchase price less 10%.

          You warn potential prospective buyers upfront, so they can make the choice.

          • Lanthanide 2.1.1.1.1

            While it’s possible, this is not very business-friendly, and may cause unforeseen consequences.

            • Colonial Viper 2.1.1.1.1.1

              I think it reinforces a ring fence over what activities NZ is open for on business – just about everything – and what we are not: core strategic and infrastructure assets. Many countries do exactly the same.

              Just try buying a power station of a water company in China, Singapore or Norway as a foreigner.

          • Jum 2.1.1.1.2

            Now you’re talking – warn the scalpers in advance that they will lose the assets that were stolen from New Zealanders, and get back less than they originally paid.

  3. tsmithfield 3

    Sorry, Bunji, you still don’t get it.

    1. The fact that these SOE’s are very low risk assets means that investors will accept very low returns. They are probably a safer investment than money in the bank so investors will accept quite a low yield. The old “risk and return”.

    2. Interest rates are currently very low. This means selling shares now is the optimum time. Investors will be pissed off with the low return they get from banks and will be willing to put their money into something that gives a little bit more return and is very safe.

    3. OTOH, the government has to regularly roll its debt. The yield curve suggests going out that interest rates are going to increase appreciably. Also, borrowing more money to fund government expenditure is going to increase the CD spread, increasing borrowing costs for the government. This means, going forward, debt is likely to cost the government a lot more, even if it is cheap now, because existing debt needs to be rolled.

    4. The capital projects the government invests the money into may in themselves produce a dividend return to the government, that may well balance out any dividend that is lost in the share float.

    5. Point 3 and 4 together, the government may well be cashflow positive due to this move.

    6. The taxpayer is no worse off in real terms because one asset (shares) is being swapped for another asset (cash). That cash may well be used to produce a better return than the dividends lost from the shares that were sold.

    All in all, the share float strategy is very low risk and much better than borrowing more money. A debt problem can’t be solved with more debt.

    • Colonial Viper 3.1

      Forget the finance speak.

      NZ needs to maintain its energy sovereignty in an age of increasing fuel prices and decreasing oil availability.

      Selling our hard energy assets off to China and middle eastern petrostates is the last thing in the world we should be doing at this time of peaking oil production.

      • ZeeBop 3.1.1

        State Asset sales are a fraud, and the MPs who vote for it should be charged and convicted. We do not need more foreigners owning NZ and taking profits overseas! We already own the asset so Key suggesting kiwis can own it is a lie, we already own it damnit!

      • tsmithfield 3.1.2

        Riiight…lets ignore the finance speak when it contradicts the position you want to take.

        • Colonial Viper 3.1.2.1

          The finance speak is irrelevant. No amount of money can compensate for the loss of a nation’s energy sovereignty in a time of peaking oil production.

          Its stupid to exchange hard energy assets during peak oil, for piles of worthless paper US dollars which are simply coming off the printing press. (Or being electronically created in an account and then sent out, the modern way).

    • Bored 3.2

      TS, a little learning is a dangerous thing: rather than criticize your arguments which are at best mechanistic and at worst narrow constructs I suggest you broaden your reading. The likes of Adam Smith is a good place to start especially his critiques of investor behavior. Below is a line copied from a Wiki but it is a good place to start on the subject of economic rent. It is very pertinent to your argument on asset sales.

      In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic or political environment, rather than by earning profits through economic transactions and the production of added wealth.

    • Draco T Bastard 3.3

      They are probably a safer investment than money in the bank…

      That’s because the returns are government guaranteed but that also means that the private owners will put on even more pressure for high returns. They know they can’t lose.

      Interest rates are currently very low. This means selling shares now is the optimum time.

      Nope, keeping something is a hell of a lot cheaper than having to buy it back in such a state that we have to spend a few billion bringing it back to standard (which will happen – Telecom, Rail).

      OTOH, the government has to regularly roll its debt.

      This is what presently happens but not what needs to happen. What the government should do is print the money and pay the bonds off as they come due – not keep rolling them over. If inflation looks to be a problem then increase taxes.

      The capital projects the government invests the money into may in themselves produce a dividend return to the government, that may well balance out any dividend that is lost in the share float.

      If the government has projects that need doing then they should finance them through taxes. They should never borrow and they should never sell off existing assets as this just leaves the country worse off.

      Point 3 and 4 together, the government may well be cashflow positive due to this move.

      Pure speculation and, given what’s happened before, probably not a high chance of happening.

      The taxpayer is no worse off in real terms…

      We’ll be worse off in a number of ways:
      1.) We’ll lose critical assets
      2.) We’ll have to borrow more to cover the loss of savings from those assets
      3.) We’ll have to borrow more due to the private owners of the sold assets taking as much profit out as possible

      Basically, you’re full of shit. We know what happens when we sell state assets – we become worse off. This is what happened every previous time and what will happen again.

    • ghostwhowalksnz 3.4

      What do define as ‘low return’ , the power companies are all ready getting 7.5%, which is greater than the cost of borrowing if the state had just bought them.

    • Frank Macskasy 3.5

      Tsmithfield, John Key’s announcement of partial asset sales raises several questions;

      1. How long before these state assets are fully privatised?

      2. What will privatisation of power companies do for electricity prices? The privatisation of Wellington’s “Capital Power” meant price rises soon after, and Max Bradford’s infamous comment that power prices will come down with competition still rings in our ears.

      3. What is the gaurarantee that private owners will not price-gouge consumers, to recoup their investments?

      4. If it’s good enough for John Key to state categorically that Kiwibank will never be sold, then why are our other strategic companies exceptions?

      5. What guarantee is there that new owners of our power companies will not result in poor performance and collapse, as with NZ Rail and Air New Zealand?

      6. Why should Kiwi Mum & Dad investors buy something which we already own?

  4. John Dalley 4

    “Mum & Dad” investors as smile and wave likes to call them where royally screwed over from past asset sales when the larger institutional investors manipulated the rules to suit themselves resulting in “mum and dad” investors not realizing the potential of there shares. If mum and dad are stupid enough to learn from history then they are dumb F**ks.

    • Irascible 4.1

      “Mum & Dad Investors” are a hypothetical construct created by a PR company to disguise the true true identity – the overseas corporates dedicated to asset stripping rather than real investing. The reality of privatisation of State owned Companies was demonstrated when every “Mum & Dad Investor” got scalped by the Asset Strippers when the local body power companies were privatised by Bradford.

  5. johnm 5

    Ireland which Key said the other day was “bankrupt” and which has a debt problem according to him: Neither assertion was true until the Incompetent NeoLiberal Cowan (Coward) Government crazily decided to cover the bad bets in the property casino market, foreign easy money merchants had made through private banks. Legally they could have saved the Irish People from these greed sharks by legally refusing to cover these market plays,as Iceland did-well done Iceland!, Now they’re imposing AUSTERITY on Ireland to cover a corrupt failed market.

    Before this historic failure Ireland had absolutely no debt problem and had a hard working confident people ,all of this has been ruined by bad criminal decisions. This government here are no better to my mind but Kiwis continue to vote for them as their young people get out to a better place such as Australia.

    • Colonial Viper 5.1

      Question: given Ireland has a major public debt problem, WHO leant Ireland the money?

      And why are those lenders now demanding that the ordinary Irish person pay for it with suffering and poverty?

      • Deadly_NZ 5.1.1

        The IMF Vultures and the first thing they stole was about 20 billion euro pension fund, then they make the govt tax and tax and then tax again.

        “But the Irish were shocked by a key condition for the rescue — that the government use euro17.5 billion of its own cash and pension reserves to shore up its public finances, which have been overwhelmed by recession and exceptional costs of a runaway bank-bailout effort.”

        And this as well is what we can look forward to–

        “This is not a rescue plan. It is the longest ransom note in history: Do what we tell you and you may, in time, get your country back,”

        Yes it look like Shonky jonky knows exactly what he is doing he is one of the greedy bankers, who are raping and pillaging their way across the financial scene.

        Oh and the link I forgot it
        http://news.yahoo.com/s/ap/20101129/ap_on_bi_ge/eu_europe_financial_crisis

  6. Colonial Viper 6

    BTW this is a std NAT ploy.

    They know that selling off SOEs is not going to be popular, so they will “listen” to public feedback, and water down the policy down the track before elections, to show that they are being “moderate and cautious” in their approach.

    • Lanthanide 6.1

      Just like how they showed us 1 tax-cut policy, that wasn’t too unfriendly to the bottom end, and replaced it with the “tax switch” that raised GST.

  7. Janice 7

    As I understand it “Mum and Dad” investors are going to be able to buy at a preferential price lower than overseas investors. Will these mums and dads then be able to sell at the higher price to the overseas investors? What a nice (untaxed) capital gain. Who are these mums and dad? Mr and Mrs J Key, Mr and Mrs W English and Mr and Mrs R Hide, etc, etc.

    • If true, then that’s also a built in incentive to on-sell quickly (to overseas investors) to ensure that you make guaranteed money, rapidly.

      If JK doesn’t see that ‘unintended consequence’ then perhaps he’s not as financially savvy as some would have us believe. Then again, maybe he does see that ‘unintended consequence’, which would make it an ‘intended consequence’ or at least a consequence he doesn’t wish to highlight?

  8. grumpy 8

    Labour and in particular Goff have huge problems with this issue, they sold off a huge number of assets, without warning, including Telecom.

    Nationals plan is much more mild, keeping a majority stake (unlike Labour) and looking at ways to limit foreign ownership (unlike Labour).

    This is the policy Labour wish they had thought of years ago!

    • Draco T Bastard 8.1

      Labour and in particular Goff have huge problems with this issue, they sold off a huge number of assets, without warning, including Telecom.

      Yes, they did – 20 years ago and they’ve learned the lesson that doing so is bad for the country and so have promised not to sell any more. NACT, on the other hand, want to sell more of our assets to make us worse off and themselves and their rich mates better off.

      Nationals plan is much more mild…

      No it’s not. It’s still designed to transfer NZs wealth to the rich few.

  9. Graeme Chisnall 9

    The Govt already gets dividends from these assets mentioned in John Keys “Garage Sale”. Also his mention of these so called “mums & dads” investors buying into these newly allocated shares (which by the way we have already paid for) is a load of cr**. Mums & dads investors have not nor will they invest in the stock market. This “derogatory” term is of old, silly and uninformed investors who know little of stock market investing. This is why the demographic of M&D investors went into the housing investment sector and Finance companies – they want(ed) a regular and consistent return on investment, something they understood. To many the stock exchange is alien and scary. With the recent world market crash and Finance company meltdown, these investors will stick to safer banking institutions. Therefore M&D’s will not buy into these asset sales! As seen before when Auckland Airport was nearly sold, which would have seen all the profits go to the Ontario Teachers Fund (Canada), Labour blocked that sale. All the profits of a well performing NZX entity would have given Ontario Teachers a very comfortable retirement at our expense.
    A total lie about NZ’s debt too. Most of NZ’s debt is in the property sector where too much investment pushed property values to the highest per capita debt in the world. It is NOT Govt debt (other than Nationals borrowing $120m weekly to pay for the rich to get richer) it is personal debt.
    One consistent with National is their ability to lie.

  10. prism 10

    It is notable that news snippets about our ‘overseas debt’ do not refer to the private nature of (most of) it, the property market etc. and the consumer borrowing. The post was timely and thanks for the clear explanation Bunji.

    The irresponsibility and calculated cunning of investors as in the SCF debacle, became a burden the government encouraged and then accepted, and now they are borrowing to recover the tax cuts to the rich.

    One thing about NACT they look after their financiers and supporters. I remember when John Banks got into a position of power he greased his way into the hearts of sportspeople with a juicy settlement. Jolly John Banks and Jonkey
    pay up promptly, up to he expected standard while we remain poor.

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