OnPoint by Keith Ng

849

Election 2011: GO!

Yes, you can sell your house to pay off the mortgage, then you'll be mortgage-free. But you'll also be minus a house.

In New Zealand's case, we can sell our SOEs to pay off debt, which means we'd pay less interest to overseas creditors. But if we sold the SOEs to foreigners, then we'd just end up paying dividends to foreign investors instead. This may actually be worse than paying interest on debt. Bernard Hickey looked at the SOEs being singled out and found they had an average dividend yield of 7.6% - considerably more than than the 5.5% interest the government is paying on new debt.

And if we sold it to New Zealand investors? Well, where would they get the money to buy it?

  • By investing less in other NZ companies (who'd buy up those companies then?).
  • By investing less in overseas companies (which would have brought dividends back to NZ).
  • By taking up debt (from overseas creditors).

The point is that you can't look at debt in isolation. Debt and assets all amount to money. Pushing stuff from one column to the other doesn't solve the underlying problem. I'm keeping an open mind about asset sales though, as there are a lot of indirect issues like efficiency gains and debt exposure that might come into play. But the onus is absolutely on the Government to prove why it makes sense to sell off a profitable asset.*

And while it might be the wrong solution, it's definitely the wrong problem. The concerns of the Standard & Poor's negative outlook had little to do with asset sales. It was about a) we're constantly sending money overseas because we (private individuals) borrow too much, and b) the government is on an unsustainable path. (And we're on an unsustainable path because instead of preparing for the aging population during the good times, we got stuck in a pissy (and in hindsight, delusional) debate about whether we should have more spending or less taxes (and we took both the money *and* the bag, even after things turned to shit).)

Asset sales does not address either of these problems. It's association with the S&P report, with our private debt problem, with our long-term fiscal problem is simply the product of a spin-doctor putting all these things in the same speech. This is a rhetorical trick. They are, at most, tenuously connected.

This rhetoric created the "changing our asset mix" euphemism. The idea is that we can't take on any more net debt, therefore we can't take on any more public debt, therefore if we want new assets we'll have to sell old ones. This logic tells us to sell assets to avoid debt, even when it's unprofitable. Come on, right-wingers. This is a slap in the face of capitalism itself. It is the very foundation of capitalism that we borrow money in order to do productive things and profit from it. To ignore the cost of borrowing or the potential gains, and to just assume that any activity that involves borrowing is bad... that's just bad capitalism.

(I am not accusing Key of being anti-capitalist, of course. He is just using anti-capitalist rhetoric to cover his ideological purist motives about the efficiency gains, etc.)

I still carry a substantial chip on my shoulder about the 2005-08 election cycle. Back then, everyone seemed to think that government surpluses were inherently bad. Debt was low, therefore the government MUST get rid of that money. Nobody was concerned with whether there were things *worth* spending money on, or what the long-term impact would be, they just wanted spending (or tax cuts) to take place. Now, the mob has turned on debt, and the new normal is that debt is inherently bad, and nobody seems concerned with whether the cost of reducing debt is worth it - or even what that cost is (hint: It could well be even *more* debt in the long-term).

Let's not do that again.

 

* On the other hand, if you're an editorial writer for the Herald, you might consider John Key's case for asset sales to be "powerful". Despite the fact that he HASN'T MADE A CASE YET. Key is saying that the Govt is considering it, and Treasury will be looking at whether it's viable. And the Herald considers that to be a powerful case. Seriously. WTF is wrong with you people?

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