Tim Hazledine: Keep the house - we'll still eat

Extending your mortgage to make ends meet is called eating the house. Photo / Supplied

Part-privatising SOEs would sell core assets for little gain, writes Tim Hazledine, professor of economics at the University of Auckland.

Suppose you and your family are failing to make ends meet. You are consistently spending more than your household income. But you have some equity in your house. Well, you could extend your mortgage and use the money to fund the shortfall.

This practice is called "eating the house", and, packaged up into millions of sub-prime home loans, it was the kicker for the global financial crisis that engulfed us after the bursting of the US house price bubble in 2006-07.

Of course, the global financial crisis has had its own consequences. Responsible governments around the world have run deficits on their own income/spending accounts to cushion the impact on profits and jobs and prevent a spiral into economic depression. This is absolutely the right thing to do, and it has been quite effective, but people worry about the need for an "exit strategy" - of having a plan to get those deficits down as economic conditions pick up.

In New Zealand, through a mixture of reasonable luck and prudent regulation of our financial sector, we've not suffered as badly as some from the global crisis, but the public sector deficit has gone up (as it should), and the Government has used this to justify a proposed programme of sales of shares in state-owned enterprises - up to 49 per cent of four big energy companies, and a reduction in its 75 per cent share of Air New Zealand.

So, is this just "eating the house" writ large? Not quite - it's different in two important respects. The first is that this particular "house" is a portfolio of income-earning assets - big companies returning solid dividends to their shareholders, being us, the general public.

These SOEs all compete in their markets with private sector companies, and they all do it very well. Air New Zealand has been a brave and brilliant performer in the difficult world airline industry; the energy companies at least hold their own or better with their privatised counterparts, here and abroad.

This means asset sales are unlikely to have any fundamental effect on the public sector's true financial position. We wouldn't be capturing a "privatisation premium", because it isn't there to capture. We would just be replacing one type of asset on the balance sheet (profitable companies) for another (cash).

The second difference is in the nature of these SOEs. The proposed asset sales are extraordinarily unpopular with the general public. People who would not dream of petitioning the Government to nationalise the production of cars, clothes, TVs, haircuts - just about anything we consume - are nevertheless determinedly opposed to even a partial sell-down of these particular enterprises.

So are we just stupid, or inconsistent, or do we know something the Government doesn't?

I'd say we do know something. The key difference between Air New Zealand and the energy companies on the one hand, and the folk who make our cornflakes on the other, is that the SOEs truly merit the designation of being "strategic" businesses for our country. The airline is our proud national carrier, and the single most important player in our largest export industry - tourism.

Would we want new private sector shareholders - possibly being other airlines - press to pull it back from its flagship long-haul routes or worse, expand with rash acquisitions of the sort that brought the airline to the point of bankruptcy under its private owners in 2001?

Electricity is an essential part of our economic and social infrastructure, depending still on very low-cost hydro power that is most vulnerable to "cash cow" plundering, as we have suffered before in New Zealand, in the privatised telecommunication and rail sectors.

Confronted with unpopularity, but unwilling to put privatisation in the too-hard basket, the Government has now tried to sweeten the political pill by "earmarking" asset sale revenues for more attractive-sounding projects, such as IT investments for schools, and more funding for the state-owned Kiwibank.

Economically, this is nonsense. The public sector receives vast sums of money every year, of which any asset sale revenue would be a very small part, and spends even greater sums in total, of which IT for schools would also be a very small part. It's all money. There is absolutely no linkage between these small parts. If the new projects are attractive in their own right - and they sound good to me - they should (and will) be financed and carried out, regardless of asset sales.

Treasury must be tearing its hair out with this contravention of the principles of sound public finance, as it did when the previous government tried to link its forced-savings "Cullen Fund" with the provision of pensions a generation hence.

There are other issues. One is where the households at which the asset sales are aimed will get the money to pay for their shares. Most of us don't have a box of money under the bed earmarked "for privatisation purchases only". We'd have to sell off existing shareholdings, or divert savings from other productive uses. Or, even, take out another mortgage on the house.