Government debt is not so huge as to warrant selling SOEs, says Geoff Simmons, an economist with Gareth Morgan Investments.
Like any frugal Kiwi weathering the recession, John Key has been squirrelling away his political capital, and now we have finally seen what he wants to spend it on.
Flogging the family silver is firmly back on the agenda. The reasoning behind this flashback to the garage sales we had under Rogernomics and Ruthenasia is that it will increase national savings, help us avoid an Irish-style collapse and refocus our economy on exports. Just how plausible are these claims?
Any householder knows that selling your assets doesn't necessarily lift your savings. Sure, debts cost us money, but assets usually earn us money too, so selling an asset to pay off debt means our income and our expenses both fall. Unless the asset is useless we would most likely be in the same situation afterwards.
It is the equivalent of selling the house in order to pay back the mortgage; unless the house is a poorly performing asset (too big for your needs) or the debt is crippling, then it is pointless. The bits of family silver on the block are clearly not poorly performing assets - electricity companies are getting good returns.
Perhaps asset sales will encourage average Kiwis to save more. Partial sales of assets could reawaken the interest of mum and dad investors in the faltering New Zealand sharemarket. This is the strongest reasoning for the move, but this policy alone is unlikely to increase national savings by much, if at all.
The real issue is that the Government is running a budget deficit - our income is lower than our spending by nearly $300 million a week. Asset sales will provide a quick cash injection, but then not having the income from those assets will make it harder to get back into surplus. This makes it crucial to see what the money will be spent on.
The money from asset sales will apparently be used to fund the rest of the Government's capital agenda (like broadband), reducing the need for new debt. Key has claimed this will save us from being dropped into the same pool as Greece, Portugal, Spain and Ireland when it comes to foreign debt. This is a highly simplistic claim.
Latest projections indicate that New Zealand's net public debt will peak at 30 per cent of national income by 2015. This is hardly crippling. Like any debt, the amount a bank will lend you depends on your ability to pay it back.
At no point do we expect the Government's net worth to become negative - the Government has far more assets than debt. So in the case of New Zealand Government debt, creditors have little to worry about.
The real concern is the level of private debt. It is private debt that has seen our total foreign debt near the levels of Greece. Again, whether you worry about this depends on whether you think Kiwis can pay these loans back. Either way, Government asset sales are not likely to make much difference. If the Government was really concerned with levels of foreign debt, then it would not have shunned a tax on capital so easily.
Finally, let's look at exports. Will the asset sales improve our current account deficit and allow us to pay back our overseas debt? Despite the promises of favouring Kiwi ownership, we would have to expect the past to repeat itself.
Foreign interests will likely buy up some of the assets, resulting in a one-off fillip to the national accounts, but result in a drain on our economy in the long term as profits disappear overseas.
In sum, asset sales will (at best) have a negligible impact on national savings, reducing our chances of economic meltdown, or exports. Even if Standard & Poor's arbitrarily ruled that Government debt was "too high", selling these assets is not necessarily the best option. The Cullen Fund has $17 billion of assets, some of which could be sold to pay down the same debt as these partial floats would yield.
The Cullen Fund is invested in relatively risky assets, as opposed to these stable and profitable SOEs. Selling up the Cullen Fund, or even directing it towards infrastructure work, would also bring to light the debate over superannuation. The current super system plainly cannot be afforded, but the Government doesn't want to have that conversation and risk raising the ire of the elderly.
Also, given the impending issues of climate change, energy security and rising energy prices, these electricity SOEs are strategic assets which could have a huge bearing on the future of our economy. We should only sell them if we can be certain they will be better at helping us reach our goals under partial private ownership.
Some are portraying the PM as being brave for prodding the sacred cow of asset sales. But the case has yet to be made, and regardless if there was one policy change that New Zealand really needed, few would point to this as the answer. Introducing a tax on capital or making superannuation sustainable would leave a legacy worth remembering.
