A week can, in fact, be a short time in politics – and the beginning of Budget week was probably as good a time as any for the Greens to try and tackle head on the government’s credibility as a competent steward of the economy. Nominally, the BERL report released on Monday was about the (dubious) economic merits of the asset sales programme, but the target was far bigger. For the Greens, the report was aimed at puncturing the government’s current political message on the economy. Which is to try and depict a “no new spending” Zero Budget as a wise and cautious response in perilous times. Probably that kind of approach looks sensible to the possum too, given the oncoming headlights.
The rest of the world, however, is moving on from a fixation on the politics of austerity. Cutting public spending and public service jobs and selling off shares in your best earners was never going to be enough – especially in New Zealand where the real debt problem is private sector debt, not government debt. Only an investment in policies likely to promote export growth can address that issue. Under the gentle prodding of Barack Obama globally and Francois Hollande in Europe, the need for policies of growth (as well as austerity measures) is being grudgingly accepted by Angela Merkel in Germany and by John Key’s political mentor, David Cameron in Britain.
A single minded focus on an austerity diet – cutbacks and asset sales – is not enough, and does little more than inflict social and economic damage. Tomorrow, public attention on the Budget will be focussed not on the evidence of thrift, but on the (lack of) policy initiatives for growing the economy. Especially since the partial asset sales programme looks likely t accomplish little beyond a reduction in the government’s available revenue stream. Plenty of ammunition for that conclusion – and for justifiable concern about the current direction of economic policy is contained in the BERL report. The link to the report is here, and the BERL analysis is worth reading in full.
The report begins by evaluating whether there is any merit in the argument that the country’s financial position justifies the asset sales programme. It finds that that – instead – the selldown of these relatively high performing assets and subsequent loss of dividends is likely to make the position worse, not better – especially if and when foreign investors buy into the assets and remit the dividends off shore.
While the Government has stated that New Zealanders will be at the front of the queue to purchase the investment assets being sold, some assets may be sold to overseas investors. Consequently, the portion of company earnings (dividends and profits) that relate to overseas investors will be an outflow (or payment) on the external accounts. This would ultimately represent, and assuming all else unchanged, a permanent deterioration in the external deficit and the level of external debt.
Further, while the initial offering may be directed towards domestic purchasers, future private share transactions could increase the portion of shares (and earnings) in overseas investors hands. Such an outcome would lead to a further deterioration in the external deficit and external debt position.
So why are we selling down these assets? BERL cites the four stated reasons in the Budget Policy Statement 2012:
• Freeing up capital for the Government to invest in other public assets, without having to borrow to do so
• Improving the pool of investments available to New Zealand investors and deepening the capital markets.
• Allowing mixed ownership companies to access capital and grow without depending entirely on the Government.
• Allowing for greater external oversight, which places sharper discipline and more transparency on a company’s performance.
So, as the BERL report points out, the avowed purpose of the partial asset sales programme – even as stated by government – is not to reduce the current levels of external debt (which is just as well, because it will worsen that situation) but to reduce the need for further borrowing. (Even if, as it happens, such borrowing would make better economic sense, and would be repayable in the long run.) All the other advantages are supposed to accrue from the wider social and economic benefits the partial sales will make possible. That, as the BERL analysis shows, is highly debatable.
Supposedly for instance, the money from the partial asset sales programme will be used to invest in broadband, schools and roads – but as the report points out, the expected rate of returns on those new assets has not been revealed, and will take at least to five years to come on stream:
In particular, the long-term outcome in terms of the Government’s financial position remains inferior. This is because of the loss of income and subsequent lower surplus or higher deficit over the intervening period. We assume a 10-year horizon and that the new fixed assets return income at eight percent per annum (i.e. equivalent to the dividend yield on the formerly held investments). But, we further assume that the return on new assets does not commence until the fifth year after construction…
Pretty straightforward, really. Selling down state assets only makes sense if the rate of return from keeping them is lower than what you get from selling them. In other words, you should only sell under-performing assets, and not the blue chip investments that the government is hell-bent on unloading. But then, if the investments were dogs, the government’s friends in the corporate sector wouldn’t be interested in buying them, would they?
There is, in sum, no genuine economic case for the partial asset sales programme, only a political rationale. In similar fashion the “no new spending” Budget tomorrow is about political ideology, not economics. To be credible, the Budget will have to contain credible initiatives to promote growth, especially in exports – but don’t hold your breath on that score. Within a “no new spending” climate, all the Budget revelations will hinge on the switching of funds from one sector to another and thus, most of the Budget commentary will involve totting up of the list of winners and losers. Overall though, robbing Peter to pay Paul has never looked like a credible or sustainable economic strategy.