Asset sales: economic miracle or mirage?
The economy has been a key issue in this election. National have released relatively little in terms of radical policy, but have attempted to position Labour as over spending in a time where austerity is required. The rest of their policies amount to only slight changes that are consistent with their previous approach to governance - tougher on law and order, tougher on beneficiaries, particularly those on sickness benefits and solo mothers (the latter of which Paula Bennett admitted on Q+A on Sunday that the there were only 70 mothers in New Zealand with a child of 14 and having another baby - hardly the firecracker it was positioned as). On the other hand, Labour have positioned asset sales as a key issue that is designed to tap into voters' fears around foreign ownership.
National have attempted to step a fine line between saying that the public debt in New Zealand is such an issue that we need to look at cutting back and making the business environment easier for small businesses and flatten the tax system to stop our best and brightest from going to Australia. This is nothing new, and is really just a continuation of Ruth Richardson and Rogernomics from the 80s. Yet they have been trapped between having to position the debt as large to garner votes, and the debt as something that can be managed by selling assets. The problem, however, is that the argument is completely off the mark and shows little economic leadership.
Public versus private debt: it is the private debt that is the issue
John Key finally acknowledged a couple of days ago that the biggest threat to New Zealand is not public debt, but private debt, which sits at 150% of GDP (according to Standard and Poors) in comparison to our public debt at around 21% of GDP. Bollard is now warning that we need to pay attention to public debt, repeating the Treasury's earlier call that we need to pay more attention to the aging population and the effect they will have on our economy. Treasury now says that for every dollar earned, we each privately own around $1.60. The IMF Report on New Zealand echoes this, stating that one of our largest problems is the overinflation of the property market and New Zealanders' fervor to invest in this, generating a property bubble similar to the processes that contributed to the sub-prime crisis in the United States which marked the beginning of the downward spiral caused by overconsumption.
Will asset sales solve this?
It is extremely doubtful that asset sales are going to solve the issue of our growing public debt, particularly as Key has said that he would resign rather than broaching the superannuation issue. A quick look at other countries such as the US and the UK that are looking at asset sales shows that their governments have received similar criticisms in terms of overestimating the revenue that asset sales will bring in. Bill English admitted as much on Q+A just over a week ago, stating that the oft-cited figure of $5-7 billion in additional revenue is overly optimistic. Even if they do receive this much, there is little discussion over what they will do to create growth in the longterm, and to address the issues that will blow the public budget, which are found in our aging population rather than the 70 solo mothers with kids of age 14 having another one.
Russel Norman argues that the returns from state assets were 17.6%, and that extra state borrowing will cost 5-6% per annum, meaning that servicing the debt and holding onto the assets seems like a more prudent option. As Rod Oram highlights in his piece for The Sunday Star Times, even Treasury has argued that the impact of selling assets is much more fiscally neutral than it is being positioned by National, effectively swapping $400 million in interest for $300 million in dividends.
Call me a heathen, but the debate over whether private ownership leads to greater efficiency is overplayed. Having worked in both, and having known multiple people who have worked across both, this seems like a bit of a myth. Sure, the role of private enterprise in generating revenue for more development of infrastructure can offer a cash injection for when projects need a lot of investment might have held for Telecom many years ago, but you could hardly argue that our power companies and infrastructure are in the same position as developing nations now as the environment has changed. The debate over whether private companies have much more interest in increasing profits versus publicly owned companies having an interest in whether the public benefits holds far more weight here. In the UK, the privatization of power companies led to higher prices for consumers, even if it did benefit the infrastructure. Any drops in prices were ultimately subsidized by the tax payer.
The argument that asset sales will open up opportunities for 'Mum and Dad investors' is even more bizarre. English began in June by saying that the influx of foreign ownership would diversify the stock market and strengthen the economy, although he has now said that foreign ownership would be capped at around 15%. Even Treasury says that the gains would be modest, and the notion that asset sales might provide a more fully functioning stock market able to compete better with Australia seems delusional, particularly when even Key has abandoned hope of catching up with Australia.
It is questionable where this will leave us in the long term, with the potential for power companies to demand bailouts to ensure lower prices for consumers (49% is a lot of shares). Glancing to the UK again, they are now in the situation where having sold a lot of their assets off, the assets they are now attempting to privatize are becoming increasingly bizarre - such as the Tote, a state owned bookie.
In sum, it is highly debatable that asset sales constitute a long term, solid, economic plan. And given that National is already being profiled in foreign newspapers as the election being a mandate for these sales, and their track record for pushing legislation through under urgency in the last term, it is likely that if they get enough to govern on the night we will have little power over our assets.