Matthew Hooton hits the mark in NBR today. Go buy a copy for the full column, but here are some extracts:
It’s embarrassing to even chronicle Labour’s descent into economic lunacy this week but it now seriously proposes that borrowing to invest in global sharemarkets is not only a good idea but a one-way bet.
Borrow no matter how gaping our fiscal hole, nor how long the books will remain in the red, Labour insists.
This and only this, it claims, will stop superannuation entitlements to those aged 44 or younger being butchered.
It’s sad seeing Phil Goff reduced to such nonsense. Clearly, he now has no expectation of ever becoming prime minister.
Basically Goff has said that no matter how fire the deficit or debt is, he supports borrowing to save.
Dr Cullen launched his fund when permanent surpluses were forecast. With zero gross debt being on the medium-term horizon, it made sense to establish a sovereign wealth fund.
Connecting it with superannuation, though, was entirely political. Even Dr Cullen made clear there was no link to future entitlements and future taxpayers were always going to have to meet 89% of costs.
Bill English’s decision not to borrow for the fund will increase that by just 3%.
Moreover, in national-income terms, Mr English’s decision relates to just 0.2% of GDP from 2030.
It is ridiculous to worry about such a number. The smallest economic shock over the next two decades – positive or negative – could double or eliminate it, as could small productivity changes.
The media hysteria over the suspension has been put into context by Matthew. 0.2% of GDP.
Failing that, maintaining current entitlements would simply require reducing our surplus or increasing our deficit by 0.2% of GDP, 20 years hence. That hardly justifies the preposterous notion that we should borrow more now to invest in stocks.
Yet that is what Labour is demanding we do.
In reply, Mr Goff says governments can’t lose. He bases this on the banal observation in a Treasury paper that long-term returns from a diversified portfolio are likely to match the market average which, most probably, will exceed the risk-free rate over time.
Armed with these Corporate Finance 101 assumptions – and apparently with certain knowledge that sharemarkets are about to bounce back – Mr Goff demands that Mr English borrow another $20 billion over the next decade, and calculates it will deliver a net return of $8 billion sometime in the future.
No other politician in the developed world would contemplate such lunacy. Take Mr Goff’s argument to its logical conclusion and why stop at $20 billion?
Why not $200 billion to get $80 billion profit, dead cert?
Make it $2 trillion or more and perhaps tax could be abolished altogether with all government services being funded through the sharemarket.
This isn’t Goffonomics. It’s Goofynomics.
A name is born.
Mr Goff should ask why no other political leader in the history of the world has proposed this before.
Perhaps it’s because they understand it’s not government’s role to borrow from taxpayers yet to be born to risk on Wall Street with the promise of free money in the future.
What amuses me most of all is how Phil Goff treats a 50 year Treasury prediction of returns on managed funds as the holy writ, when Treasury can’t even predict from month to month what the deficit will be.Tags: goofynomics, Matthew Hooton, NBR, NZ Super Fund, Phil Goff