Friday, 24 June 2011

We aint broke and we can fix it

When I talk to people in the Wairarapa electorate about, for instance, restoring the money that has been cut from early childhood education, I am asked “But how can we afford it? The country is deep in debt.”
The short answer to this question is “Wrong”. Read on and I’ll tell you why.

There is nothing complicated about issues related to the country’s debt; the principles are the same as managing your own household debt. If you owe $100,000 as a mortgage and your house is valued at $300,000, you’re secure, provided you can make regular repayments over time. If you owe $300,000 and your house is worth $100,000 you’re in trouble.
The government is in the “secure” bracket. In December 2010 the government held $2 billion more in overseas assets than debts. (So selling our assets to pay for government debt is false economy. All we would be doing is selling off what is now a major government income earner.)

Another aspect of government debt management can also be explained by looking at simple household economics. Apart from property value, how secure you are with your mortgage also depends upon your income. Even if your house is worth more than you owe, you still need to be earning enough to make the regular payments. The same applies to government. The productivity of the country is in a way the government’s pay packet. Even the tax income is dependent upon productivity because that is what pays the wages. When you compare our government debt with our productivity, ( that is our ability to cope with the debt) our debt is the same as Australia’s and tiny compared with that of the major European and North American countries other than Denmark, Sweden and Finland.
So can the country cope with our government debt?

The Christchurch earthquake was every sort of disaster, including an economic disaster. It will be a long term disaster for many Christchurch households but a short lived one for the larger economy. Re-building Christchurch, and all the production needed (from construction work right through to the manufacture of bathroom ware, curtains and carpets) will increase New Zealand’s productivity to near record levels. The Reserve Bank predicts that productivity will rise steeply in 2012. NZIER predicts a drop in unemployment in the same time scale but not such a marked change.
None of this means that nothing needs to be done. It would be great if we could be in Finland’s shoes – they have a massive credit. But it does mean that we do not have a crippled economy and there is room to re-prioritise spending, particularly in spending on those things that matter – health, education, family support, research and development, employment.

In spite of the fact that government debt is not at crisis level, we do have another debt problem. Private debt is getting out of control. This is the debt to overseas interests by big business and the banks. In some cases it is as simple as borrowing to finance people’s credit card debt or a loan from the bank being underwritten by overseas finance.
It is when government debt and corporate debt are lumped together that the outlook looks scary, but you can’t use corporate debt as a reason to sell government assets. That is as silly as my selling my house because the neighbour is in debt. It doesn’t improve my situation, and it certainly doesn’t help the neighbour.

Private debt is a serious problem – too big and too complex to go into here. It comes from the globalisation of finance, but nobody wants to wind back to the 60s when you needed a permit to take money out of the country or to import goods. But it must not be used as an excuse to slash government spending and to justify the National / ACT agenda of cutting social services, education and development.

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