FRIDAY GRAPH: NEW ZEALAND UP THERE WITH GREECE?

This chart is enough to keep you awake at night.

Source: OECD, IMF, Statistics NZ, Savings Working Group 2011

The Y-axis shows government financial liabilities.  New Zealand is not badly placed, thanks to many years of fiscal surpluses which ran down government debt (before the return to large budget deficits which began under the last Labour government).

The X-axis shows net foreign assets (as a % of GDP).  At around -90%, we are in the same category as the PIGS (although more of our liabilities are in the form of equity, which is a positive factor, with foreign investors – including dreaded multinational companies – bearing some of the risk).

Behind this exposure are the large current account deficits of the Michael Cullen era.  He wrongly diagnosed them as a savings problem, rather than a problem of declining international competitiveness.

The CAD has subsequently narrowed but rebalancing of the economy has a long way to go, and the government is forecasting large deficits to re-emerge when the economy picks up.

All this matters because things could turn ugly for New Zealand in global financial markets, with access to credit being limited again (as it was during the GFC) and our credit rating cut.  Prime minister John Key is right to be clamping down on government spending to try to avert this outcome.

ECONOMIC JOURNALISM GETS A FAIL MARK

Some of what passes for economic journalism in New Zealand is not impressive.

A case in point is this article in yesterday’s New Zealand Herald by Brian Fallow. Headlined ‘Ideology and tribalism behind questionable policy’, it poured cold water on the government’s partial privatisation announcement.

‘Ideology’?  Around the world governments of all political persuasions have been getting out of running commercial businesses for over 25 years.  Labor governments at federal and state levels in Australia, for example, have been to the fore. The only ‘ideological’ underpinning of policies in the world today seems to be the socialist attachment to ‘public ownership of the means of production, distribution and exchange’ in a few countries like Cuba – although even Cuba is changing – and North Korea, and in the policies of the last New Zealand government.

“There isn’t all that much family silver left in the cabinet.” Well, just a mere $18 billion, according to the December Investment statement, all or most of which belongs in the private sector. ‘Family silver’: is this economic analysis or politicised rhetoric?

“It does nothing to deal with the … perilously high reliance on foreign capital and credit.” This is a reference to New Zealand’s large current account deficits and increases in external liabilities under the last Labour government. These were due in part to a loss of international competitiveness as the government turned its back on efficiency-improving reforms such as privatisation.

Then the inevitable foreign ownership bogey: “once sold, it would be difficult … to prevent the new owners from selling them to foreign investors”.  No explanation is given as to why foreign investment would be a bad thing. A large part of the shareholding of companies like Telecom is inevitably and desirably in foreign hands: it would be unwise for New Zealand institutions to hold large parcels in their portfolios.

Then a real howler: “To the extent that these shares end up in foreign hands, they would increase the country’s net foreign liabilities …”  But a foreigner buying shares has to purchase them in New Zealand dollars, and the seller than acquires the same amount of foreign currency assets. The country’s net liability position is unchanged.

Fortunately, the Herald did better in an editorial the same day which supported the privatisation initiative.

Myths about privatisation abound, even though they have been debunked many times. For a rebuttal of some of them, see this report by Phil Barry.

Let the foals thrive

Prime Minister John Key’s statement on an internet chat session that he has ‘ruled out the complete sale of any state-owned assets if National win a second term’ will be a major disappointment to many who had hoped a second term National led government would be bolder on this issue. That they will possibly look to move minority holdings will be a minor consolation.

Today’s Herald, a paper not exactly known as a bastion of free market reform, has an editorial titled Open the SOE stable and let the foals thrive. In a blog on that editorial David Farrar remonstrates that we may be alone in the developed world in having a bipartisan policy of no asset sales.

I suspect he is correct. In an article I wrote before the last election in 2008 titled ‘Privatisation: New Zealand Swimming Against the Tide’ I wrote:

With the National Party’s decision not to move any state-owned enterprises to the private sector in its first term if elected this year, we appear to have a new political consensus between the major parties in New Zealand: privatisation is bad.

This contrasts with the earlier consensus that privatisation is good. A few years ago the World Bank observed that “Privatisation is now so widespread that it is hard to find countries not using the approach: North Korea, Cuba and perhaps Myanmar make up the shrunken universe of the resistant.

Since then I have blogged that even Cuba is taking steps toward privatisation. We are in dubious company.

The common mantra in New Zealand that privatisation of state assets is somehow ‘right wing’ is simply not true. Indeed, in 2007 a British MP commenting on the significant privatisation achieved by Tony Blair’s Labour party wrote:

Now that Blair has been and gone, you would struggle to find a serious politician in any party who would advocate state ownership of any industry as a 21st-century model. Indeed the idea of the state running our utilities, airlines or railways now seems archaic and even faintly ridiculous.

It is an undisputed fact that over time and on average businesses do better in private rather than public ownership.  

John Key is rightly respected as a pragmatic and trusted leader with the common touch and plenty of common sense and business acumen.  He has the ability to raise public understanding of the economic gains that would ensue from privatising state assets – particularly lower prices and better services for the public. Privatisation should not be seen as ideological – it is a pragmatic course of action that the public should understand. Why not at least try?

Meanwhile privatisation continues at a steady pace in Australia, the most recent being the sale of Queensland Rail by the Queensland Labor government, the second largest Australian privatisation after Telstra.

To see the 2025 Taskforce’s recommendation on the issue click here (scroll down to government assets).