Wednesday, 3 June 2020

Free Press, 3 June 2020: We Are Not Invincible


New Zealand First Promotes Capital Gains Tax

We couldn’t believe it either, but it has set up a website to ask supporters if they want a capital gains tax or a wealth tax. There are two possibilities. One, New Zealand First has been set up, and someone is breaking the Electoral Act by putting Winston Peters' name on it. Two, New Zealand First is getting desperate and will do anything for votes.

How Desperate?

Roy Morgan has ACT ahead of New Zealand First in its May poll. ACT on 3.5 per cent would mean 4 or 5 ACT MPs. New Zealand First at 2.5 means it is goneburger in September. Best of all, we have not spent $3 billion of taxpayer money trying to get votes. But New Zealand has bigger problems.

We Are Not Invincible

If the world was a country, New Zealand would be the nice town where nothing really bad ever happens. Events that consume weeks with soul searching here are sadly commonplace elsewhere. The danger of having so little trouble is that we’re not used to recognising it, even when it’s right in front of us.

Here’s Trouble

Let’s count it up. As a country, we have a huge net external indebtedness. The Government is embarking on enormous deficit spending. The Reserve Bank Governor is getting a little entrepreneurial with the money supply. Combined, we risk paying debts with a deflated currency. Add in a worsening geopolitical situation and it is a recipe for servitude.

Net External Debt

How much do five million New Zealanders owe through government and private borrowing compared with how much they own? Depending on the statistics you use, New Zealanders collectively owe almost $200 billion more than they own. This net position means that we are among the most indebted developed countries. Only the PIGS (Portugal, Ireland, Greece, and Spain) are worse than New Zealand.

Government Deficits

The Government has embarked on deficit spending that will increase public debt by 34 percent of GDP, or about $140 billion dollars over the five years to 2024. Public debt will hit levels last seen in tumult of the early 1990s. This occurs in part because of the COVID-19 crisis, but also because the Government has no intention of reducing its business as usual spending.

Monetisation

Adding fuel to the fire, the Reserve Bank is happily offering to buy $90 billion of government bonds, effectively printing New Zealand dollars and handing them to the Government. One usually sober old Herald commentator describes this as making confetti out of our currency. The real question is will the government ever buy the bonds back? Once the Reserve Bank becomes a crutch for government spending, voter expectations get baked in and it’s very difficult for any government to stop.

Don’t Worry, Moody’s And S&P Say It’s Fine

Some people might think that all of the above would lead to a blow out. Investors lose faith in the currency when the Reserve Bank is just printing it for political reasons. We end up highly indebted and trying to pay it back with the new South Pacific peso. The Finance Minister points to rating agencies keeping the New Zealand Government at AAA, for now. These are the same rating agencies that thought subprime mortgages were a good idea and gave New Zealand top ratings right up to the 1984 currency crisis.

A Frontier Society

New Zealand is a frontier society of people who moved to the end of the earth for a better life. As such, the world doesn’t care about us nearly as much as we sometimes like to think, but we depend on them having confidence to invest in us. We have to live by our wits, and that means having top quality institutions. We need a central bank issuing currency independent of a government that is itself dedicated to fiscal prudence, or things can go pear shaped very quickly.

We Can Collectively Lose Our Minds

Unfortunately, there is no law saying New Zealand has to remain a first world country with a high standard of living. It’s possible for a small democracy to collectively lose its mind and go off the edge of a cliff. Lots of societies have done it before, and it looks like that’s exactly what we’re doing.

Demagoguery Has Many Faces

Jacinda Ardern at a personal level is warm and caring. That probably makes her more dangerous than the nastier characters in history who led their people to disaster. She’s easier to trust and harder to oppose. The cost of the current folly is no less for it though. Let’s call it kind danger.

We Need Critical Thinking

New Zealand needs a strategy that is not blind to the danger of overextending ourselves. We need a line in the sand about the Reserve Bank’s independence. It must not print money to finance government spending. We need a fiscal track that reduces our debt and gets us back to surplus by 2024 at the latest. We need widespread regulatory reform, starting with the RMA, to get private sector activity happening faster.

We Have Such A Plan

ACT’s six point plan for investment, jobs and growth is contained in our Alternative Budget. We have been amazed at its quiet, widespread readership. The most unexpected people have told Free Press, ‘your budget sounds great, how can we make it happen?’ Well, here’s the answer.

How You Can Help

The most powerful political advocacy is word of mouth. Believe us, your friends, family and colleagues trust you more than any politician. If you are worried this country is collectively losing its mind, and there is not enough discussion confronting the real issues, please forward this Free Press with its link to our Alternative Budget. The future is counting on your actions.