Brian Fallow: Our theme - another day older and deeper in debt

Another day older and deeper in debt.

New Zealanders are net debtors to the rest of the world to the tune of $30,000 for every man, woman and child.

The continuing gap between what we spend internationally and what we earn increased the debt by just under $10 a day per capita over the second half of last year.

It means that more than three weeks' worth of all the goods and services we produce in a year does not belong to us. It is needed to service the $123 billion of foreign claims on the economy in terms of interest or a return on investments.

Our net debtor position of $123 billion equates to 84 per cent of the value of all the goods and services produced in a year. For the United States, the figure is about 25 per cent.

So you might say we are up to our necks in debt to the rest of the world while the US - whose greenback has tanked in part because of its external deficit - is only up to its knees.

The debt is the legacy of decades of running current account deficits.

The deficit in the December quarter was $3.1 billion, making $9.4 billion for the whole year.

The deficit has to be funded by attracting greenfields foreign investment, selling assets or increasing debt. Mostly we rely on increasing debt.

At the end of last year foreign investment into New Zealand stood at $217 billion of which 30 per cent was equity, the rest borrowing.

That was offset by $94 billion (38 per cent of it equity) which New Zealanders have invested overseas. Over the course of the year, New Zealand's international assets increased by $4.7 billion but foreign claims on the economy increased by $22.1 billion.

Only part of the net $17.4 billion deterioration in our net position last year is due to the $9.4 billion current account shortfall needing to be funded. It also reflects changes in asset valuations and the exchange rate.

The current account deficit can be seen as a measure of the extent to which domestic investment exceeds domestic savings. Reserve Bank Governor Alan Bollard told MPs last week it was the major imbalance in the economy. He said there was no sign of foreign investors becoming reluctant to fund the deficit.

It is mainly the household sector's willingness to spend more than its income which is driving the deficit.

We pay a price for this degree of indebtedness, however, in systematically higher interest rates, year in and year out, perhaps of the order of a full percentage point.

It is one of those free lunches that doesn't really exist.