Watkin says borrow more

March 19th, 2012 at 2:27 pm by David Farrar

blogs at Pundit:

it’s never been cheaper for the government to borrow money. Although we’ve come up from the all-time low of 3.75% in December, the government can borrow money – by issuing bonds – at  4%. That’s real cheap. Which is why it’s interesting to ask whether National’s missing a trick and its commitment to austerity isn’t coming at the cost of potential investment and growth.

Because really, government isn’t the problem; it may be an opportunity. You and I need to save more, that’s unquestioned. But what the country needs from the government and business is some demand side growth – creating value-added products, wagier jobs, and more exports.

Putting aside the quaint notion that the Government, rather than the private sector, creates products, jobs and exports, Tim overlooks what would happen if the Goverment said “Yes, we will be the only Government in the world that thinks it needs more debt, not less, and rather than aim to get back into surplus we will aim to grow debt faster. We are only paying 4% on out debt because of the commitment to get back into surplus. Throw that out the window and those interest rates will rise.

 You might have better ideas that me as to where money could be spent, but some joint venture building houses for first home buyers has been suggested (which could be a way of using the low government debt to help lower our high household debt that the credit ratings agencies are so anxious about)… there’s rail… R&D incentives and more money for the CRIs… export drives… things that will pay off in the long run.

Tim wants the Government to borrow more, to encourage more people to borrow money for homes. Have we learnt nothing from the global credit crisis? This must be the worst idea for sometime, I’m afraid. I’m amazed at how you can have such a relaxed approach to debt – a “Oh lets just borrow lots of money and spend it on nice things”. Would you run your own business like that? Fuck, no.

As for the other examples. The return on rail is basically negative – needs subsidies to be profitable. R&D incentives generally lead to legions of tax accountants reclassifying expenditure as R&D, and more money for CRIs has actually been happening anyway – science and innovation is one of the few areas not frozen for funding.

The reality is that every dollar we borrow means we have to spend more tax revenue on interest on that debt, rather than on stuff like schools and hospitals. Debt is a valid way of funding capital expenditure, but debt should not be used to fund operational expenditure – that is exactly how you end up in trouble.  Even when we back in surplus, the Government will still be borrowing for some capital requirements. But this notion of borrowing billions cheaply to encourage people into property ownership is exactly what caused the problem in the first place.

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42 Responses to “Watkin says borrow more”

  1. alex Masterley (1,517 comments) says:

    Greekonimics rears it’s head.
    Haven’t people learnt?

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  2. RandySavage (222 comments) says:

    Alex…no
    Goldfis are smarter

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  3. Danyl Mclauchlan (1,069 comments) says:

    Would you run your own business like that? Fuck, no.

    You know, our entire financial system IS premised on the basis that businesses borrow money to make investments that return more than servicing the cost of the debt.

    [DPF: And Governments are not businesses. Most businesses succeed because it is crucial to them they get a return higher than debt servicing. It is not crucial to Government. WHat is crucial to Govt is being popular and getting re-elected so they borrow money to be popular, not to grow the economy]

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  4. calendar girl (1,232 comments) says:

    This notion of “borrow more cheap money” was the main thrust of an exciteable youg fellow interviewing Bill English yesterday on Q+A. I was impressed with the patience and control displayed by English, but at times he was grinning with seeming incredulity at what was being proposed to him by the financially illiterate interviewer.

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  5. Regan Cunliffe (21 comments) says:

    Where do foreign currency exchange rates fit into this equation?

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  6. YesWeDid (1,048 comments) says:

    ‘Finance Minister Bill English confirmed some borrowing had been brought forward because of ‘favourable’ conditions, with interest rates dropping from just under 6 per cent to just over 5 per cent. English said the deficit would fall back to below $10b next year and then ‘be virtually eliminated’ in 2013/14. The Government would then start running surpluses and repaying debt.’

    July 2011

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  7. Psycho Milt (2,412 comments) says:

    Putting aside the quaint notion that the Government, rather than the private sector, creates products, jobs and exports…

    Driven along a road or used some electricity lately?

    You know, our entire financial system IS premised on the basis that businesses borrow money to make investments that return more than servicing the cost of the debt.

    I thought it was premised on pumping investors’ money into related-party deals and ensuring a significant proportion of their money goes into a trust fund so the courts can’t get it back after the jig’s up?

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  8. Adolf Fiinkensein (2,903 comments) says:

    And remember, this fool is ‘managing’ a major part of your tax funded current affairs television coverage.

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  9. Nostalgia-NZ (5,198 comments) says:

    Borrow more and sink deeper.

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  10. PaulL (5,981 comments) says:

    In one sense, Tim is right – now is a great time to borrow. Maybe Chch bonds for rebuilding, or build some more power stations, maybe roads and the like.

    But Tim is also a poster child for why I couldn’t support it. Once you agree that it’s OK to borrow to fund some things (things that have an income stream that pays the interest, for example), you get people suggesting stupid stuff like funding first home buyers and the like. Whilst I could happily run a process where only things with a financial return got funded (better still, I’d make it a private sector problem by going with toll roads, for example), a bunch of other people would start arguing that art is an investment in the future, and that we should be borrowing money to invest in “social capital”.

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  11. Danyl Mclauchlan (1,069 comments) says:

    Once you agree that it’s OK to borrow to fund some things (things that have an income stream that pays the interest, for example), you get people suggesting stupid stuff like funding first home buyers and the like.

    What is wrong with funding first home buyers? You build the homes at low cost because of economies of scale that private developers won’t/can’t match. Then you borrow the money at cheaper than the banks and lend it out. Bang – you have a revenue stream, and you’ve solved a social problem, and reduced our scary levels of private debt.

    [DPF: Why stop there. The Government can do everything cheaper according to your economy of scale. It can provide food cheaper, it can build cars cheaper. It can do everything cheaper as it doesn't seek to make a profit.]

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  12. Grendel (1,002 comments) says:

    ah the old leftist strawman from psycho. just because the state does something (roads and electricity) does not mean it should do those things, or that it can do them as efficiently as the private sector.

    and once again the leftist forgets that to ‘create’ those jobs, the state has had to take money from tax payers, money that could have been used to create actual jobs, not just move them around.

    with your low attitude towards business i wonder how you managed to stomach buying a computer or signing an internet contract milt, shouldn;t you be out hunting your own food and living off the land so you can avoid these nasty businesses? or are you just being a bitter twisted old has been of a socialist again?

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  13. Grendel (1,002 comments) says:

    Danyl why should the govt put builders out of business just becuase it can, by force make things cheaper by using other peoples money to subsidise this building.

    Why should the govt be a bank? we have banks.

    What is it with lefties and thinking that there are no consequences of all this ‘free and/or cheap money’ they think they can throw around?

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  14. ross69 (3,652 comments) says:

    It’s even cheaper to print money and many of our trading partners – including the US, UK, China, etc – are doing just that. Many of our trading partners also have a capital gains tax.

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  15. Danyl Mclauchlan (1,069 comments) says:

    Why stop there. The Government can do everything cheaper according to your economy of scale. It can provide food cheaper, it can build cars cheaper. It can do everything cheaper as it doesn’t seek to make a profit.

    I would approve of a government that set up a rival supermarket chain to compete against the current duopoly and lower food prices. But most of the time the free market works pretty well, so the government doesn’t need to intervene. However, there’s a pretty obvious market failure with low cost housing, and it doesn’t seem to be solving itself . . .

    [DPF: Where there is market failure, the correct role of Govt (in my opinion) is to make legal, regulatory or policy changes to address that market failure. Sometimes that may even include some sort of investment. But actually entering the market itself and using it size, power and ability to borrow cheaply to compete against the private sector should be a last resort]

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  16. Danyl Mclauchlan (1,069 comments) says:

    Danyl why should the govt put builders out of business just becuase it can, by force make things cheaper by using other peoples money to subsidise this building.

    Why would any builders go out of business? And property developers – and every other type of business, ever – use ‘other peoples money’, why can’t the state? What’s the logic here?

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  17. odysseus (26 comments) says:

    “Putting aside the quaint notion that the Government, rather than the private sector, creates products, jobs and exports…”
    Sorry, DPF, its not “quaint”, its called living in a Keynsian world. You obviously need to brush up on it.

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  18. ross69 (3,652 comments) says:

    > The Government can do everything cheaper according to your economy of scale. It can provide food cheaper, it can build cars cheaper…

    So the Government should be selling state assets? Hmmm I seem to recall you opposing such a policy but now you seem to favour it.

    Meanwhile, in the US, GM has reported a record profit. It must be extremely thankful for government assistance. Socialists are terrible people until you need their money. LMAO

    http://money.cnn.com/2012/02/16/news/companies/gm_bailout/index.htm

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  19. unaha-closp (1,164 comments) says:

    And property developers – and every other type of business, ever – use ‘other peoples money’, why can’t the state? What’s the logic here?

    Because of the risk, property developers and lenders to property developers do so at the risk that they might not see any of their money come back. They might make a profit or they might go bust. NZ as a country when it borrows does the same. There are substantial risks to borrowing a lot of money at the moment because the global economy is very fragile.

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  20. Danyl Mclauchlan (1,069 comments) says:

    There are substantial risks to borrowing a lot of money at the moment because the global economy is very fragile.

    Interesting. So you’d object to the government borrowing to fund, say, $59 billion dollars to build and upgrade roads?

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  21. flipper (4,056 comments) says:

    So, DPF…

    This is the same Watkin who drives TV One’s Q+A, is it not ? Lordy, when did the conductors get to speak ?

    This economic fool produces a major NZ TV poilitical show each week, yet he espouses the most idiotic economic theories known to man. He may have those views, and is entitled to hold them to himself. I think he is stupid. But that is his problem.

    Whatever, Watkin is not entitled to thrust his idioicy upon the populace,

    Portugal, Ireland, Greece, Spain et al + NZ (According to Watkin, Hickey and other stupid Keynesian addicts)…. here we come.

    Reality would help.

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  22. tom hunter (4,826 comments) says:

    Meanwhile, in the US, GM has reported a record profit. It must be extremely thankful for government assistance. Socialists are terrible people until you need their money. LMAO

    Who could not make a record profit when you’ve had your debts wiped or offloaded courtesy of Sugardaddy Government? And for Chrysler this was the second time. I’ve lost count of how often Citibank has been bailed out in the last 40 years. The bastards aren’t grateful enough I think, especially the UAW, which I’m sure will be undertaking the usual partisan screaming about the GOP in the upcoming election.

    And what’s with this ‘Socialists” and “their” money. It was borrowing backed by taxpayer money and the screams from the GOP (and some Democrats) were long and loud in objecting to that bailout (and others) until the old emotive blackmail card was played, with visions of beggared UAW union members and their families going down the road in the tens of thousands.

    Of course the whole thing was a pay-off from the Democrats to the UAW, since GM could have (and should have) been put into Chapter 11. Many other large corporations have gone through that process and survived: it’s precisely what it was designed for. But of course everybody gets their wings clipped in those situations and the UAW was not going to have that.

    Moreover, you’d be hard-put to find many GOP voters in the US who did not think GM and others should have been allowed to go to the wall, and yet their principles get slimed by left-wingers like you for the gutless, unprincipled behaviour of their representatives. Nice.

    Thankfully, any number (but not enough) of the GOP numbnuts involved were sent packing in 2010 precisely because of that and other similar decisions which ignored capitalist voters.

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  23. ross69 (3,652 comments) says:

    > There are substantial risks to borrowing a lot of money at the moment because the global economy is very fragile.

    But surely if we can afford to give the wealthy tax cuts, the economy must be in pretty good shape. :)

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  24. unaha-closp (1,164 comments) says:

    Interesting. So you’d object to the government borrowing to fund, say, $59 billion dollars to build and upgrade roads?

    Yes I’d object. However the chance to object is denied to NZers in that the opposition want to borrow more to finance even more “stimulus”and the Actiods would borrow even more again to finance massive tax cuts. The Nats have been the least stimulating (and hence best) choice.

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  25. Psycho Milt (2,412 comments) says:

    with your low attitude towards business i wonder how you managed to stomach buying a computer or signing an internet contract milt, shouldn;t you be out hunting your own food and living off the land so you can avoid these nasty businesses? or are you just being a bitter twisted old has been of a socialist again?

    Uh, duh-uh. DPF made the obviously wrong claim that the govt doesn’t/can’t “create products, jobs and exports.” I pointed out the error. This translates into a “low attitude towards business” only in incoherent minds such as yours.

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  26. Bevan (3,924 comments) says:

    I would approve of a government that set up a rival supermarket chain to compete against the current duopoly and lower food prices. .

    You mean like they did with Kiwibank? So remind me again, how much cheaper are their home loans?

    No wait, you must mean like they did with the electricity companies – how much profit were they making again?

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  27. ross69 (3,652 comments) says:

    Tom @ 4.28pm,

    Your diatribe takes no account of the fact that the big auto companies who were bailed out have re-paid half of their loans.

    http://www.factcheck.org/2011/06/romney-wrong-on-deficits-auto-bailout/

    It also neglects the tax that workers and companies have paid since the bail out and will continue to pay, revenue which the government would have otherwise foregone.

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  28. unaha-closp (1,164 comments) says:

    It also neglects the tax that workers and companies have paid since the bail out and will continue to pay, revenue which the government would have otherwise foregone

    GM got a $45billion tax credit in addition to the bailout.

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  29. The Scorned (719 comments) says:

    Markets don’t fail…they react exactly as they should to the incentives and disincentives within them…that law of cause and effect. Danyl is an A grade economic illiterate and a joke….move on people.

    And Government doesn’t make any products….it dictates that these products “somehow” be made without consideration of market signals and demands and robs the private sector of capital to do so. No road has been made by Government in NZ…they are made by private sector people who’s efforts have been misdirected into making these roads by pollies using stolen money that cannot be otherwise spent by the people who generated its value.

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  30. wat dabney (3,756 comments) says:

    Apart from everything else, I don’t think Watkin understands that government debt is auctioned: the yield is whatever bidders are prepared to pay. So you can’t talk about “issuing bonds at 4%.”

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  31. BlairM (2,339 comments) says:

    I would approve of a government that set up a rival supermarket chain to compete against the current duopoly and lower food prices. But most of the time the free market works pretty well, so the government doesn’t need to intervene. However, there’s a pretty obvious market failure with low cost housing, and it doesn’t seem to be solving itself . . .

    [DPF: Where there is market failure, the correct role of Govt (in my opinion) is to make legal, regulatory or policy changes to address that market failure. Sometimes that may even include some sort of investment. But actually entering the market itself and using it size, power and ability to borrow cheaply to compete against the private sector should be a last resort

    LOL seriously?! both of you?! When Len Brown and Mike Lee won’t let people build houses on the Bombay Hills, is that a “market failure”?! I don’t think so, comrade! Government-run supermarkets?! Well we only have one supermarket chain here in Texas (not counting Walmart of course, which does sell groceries, but at higher prices), and it is a fuckload cheaper than anything in New Zealand, so maybe the market isn’t quite the problem there either?

    There is no such thing as “market failure”. There are high prices for scarce things and low prices for plentiful things, and there are governments which get in the way and make plentiful things scarce, usually in a foolish attempt to make scarce things plentiful by making “legal, regulatory or policy changes to address that market failure”. If we had a bit less addressing market failure, we might have cheaper, more available stuff, and better jobs as well.

    Honestly, nobody can call this a right wing blog any more with a straight face.

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  32. The Scorned (719 comments) says:

    Well said Blair…bang on.

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  33. wat dabney (3,756 comments) says:

    I would approve of a government that set up a rival supermarket chain to compete against the current duopoly and lower food prices…

    Why would anyone start a business in NZ if they thought the State might set up a competing operation? One that doesn’t care about risks because it’s spending other people’s (taxpayers) money? One that would be willing to abuse its monopoly even to the extent of printing money to keep its operation going? One that has control of the laws which influence the whole industry sector? etc etc.

    I venture that a significant reason for the weakness of the recovery in the States is that companies would sooner sit on their huge cash piles rather than invest it, because they have seen how the State is willing to spend hundreds of billions bailing-out favoured players for political gain. How can you possibly plan in such an environment, where regime uncertainty is rampant?

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  34. big bruv (13,886 comments) says:

    Has anybody asked these socialist fuck wits who is going to pay the money back?

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  35. tom hunter (4,826 comments) says:

    Your diatribe takes no account of the fact that the big auto companies who were bailed out have re-paid half of their loans.

    It pays to fact check FactCheck. The “repayment” consisted of the government exchanging $22 billion of it’s debt for GM stock. If that’s how repayment is going to be managed then the government’s remaining stock would have to rise massively in value for taxpayers to get all their money back. If the stock were sold at some recent values, taxpayers would still be out more than $10 billion – and that’s a big “if”.

    It’s also not the first time that GM and the government have tried to pull the wool over people’s eyes. Back in 2010 the CEO even ran TV advertisements claiming that they’d paid it back “in full, with interest, years ahead of schedule.” He had the cheek to make that last claim in WSJ editorial. Unfortunately for the idiot/bullshit artist the truth came out very quickly:

    Because a loan of such a huge amount would have been politically controversial, the Obama administration handed GM only $6.7 billion as a pure loan. (It asked for only a 7 percent interest rate—a very sweet deal considering that GM bonds at that time were trading below junk level.)

    But when Whitacre says GM has paid back the bailout money in full, he means not the entire $49.5 billion—the loan and the equity. In fact, he avoids all mention of that figure in his column. He means only the $6.7 billion loan amount.

    But then the fun really starts:

    So how is it paying it?

    As it turns out, the Obama administration put $13.4 billion of the aid money as “working capital” in an escrow account when the company was in bankruptcy. The company is using this escrow money—government money—to pay back the government loan.

    Brilliant. You should run for that guys job: you believe the same things and you’d be no more beholden to Obama.

    It also neglects the tax that workers and companies have paid since the bail out and will continue to pay, revenue which the government would have otherwise foregone.

    In that case perhaps I should get the government to wipe my debt. They’d get $40,000 per annum immediately since my interest costs would no longer be available to be deducted from revenue. And I’m sure you think the government would spend that money better than my bankers or I do.

    In other words, that argument only makes sense if those tax revenues, plus interest on the “re-paid” loans, actually amounts to more than the cost of the bailout – which takes us right back to the whole theme of this thread that governments can borrow money more cheaply than private creditors can.

    But even then, one would have to ask what the unseen costs were?. The left would be more than happy to talk about downstream effects in the case of a corporate failure, costs that could be argued into the equation. But the same thing applies to the other side of the coin. What are the costs of not re-allocating factories, equipment and people to other companies to make other things?

    That’s a mis-allocation of resources, a malinvestment, probably the number 1 sin in a capitalist or semi-capitalist economy. Especially when the fact that a company can pile up so much debt over a couple of decades tells you that it’s processes are fundamentally stuffed – which was something well known about GM two decades ago: Marketing, Design, Build, Production costs …. you name the problem and GM had it. And as a result of this cheap money bailout process they almost certainly still have them, which means they’ll be back in ten to twenty years for another bailout, just like Chrysler was. A Chapter 11 proceeding would have fixed a lot of that crap.

    And cheap money actually creates more malinvestments because its screws up the price of money. It makes things worse and even governments have limits for writeoffs, as we discovered in the 1980’s with Think Big and the Greeks and other Europeans are discovering now.

    What I appreciate is the irony of people arguing to subsidise and save bankrupt old companies like GM vs. helping smaller, but possibly more successful companies – the very opposite of the argument used in the case of alternative energy companies on another thread. Down with subsidies to sunset industries – as long as they’re the “correct” industries.

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  36. flipper (4,056 comments) says:

    Bruv..
    Ask Greece et al.

    These f***wits do not realise that for every dollar taken (stolen) in taxation only 75-78 cents is actually available for redistribution.

    Moreover, if it comes to State investment, the loading is almost 50%. In other words a $100 million project actually costs taxpayers (the “Government” has no money) some $200 million. Source: For the doubters, please refer to the NZ Treasury.l

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  37. kiwi in america (2,449 comments) says:

    ross69
    You’re using a partisan source for your so called fact check – factcheck.org is funded by the Annenberg Foundation a left leaning funding mechanism that funded the equally left leaning Foundation that Obama sat on the Board with domestic terrorist Bill Ayers for 10 years – hardly independent. GM used TARP money to make the bulk of the repayment it made off the government bailout funds it received. Thats like you getting a cash advance on your Visa to pay down you Mastercard – all GM did was shuffle its debt to the taxpayer from the cash it got from ARRA (the stimulus legislation) from funds legitimately paid back by the big banks to the TARP. Its very clever but dishonest and disengenuous for Obama, the Democrats, GM and apologists like you to trumpet the debt as being paid back.

    The taxpayer is still owed over $60 billion and the current profits that GM is making come courtesy of them being able to wipe off their books previous debt and the enormous contingent liability of its retired workers pensions and generous health care plans. What you also never mention was the WAY GM was able to do this – by screwing the bondholders whose debt was forced into a subordinate position while the UAW union were not required to make any substantive give ups in the way of pensions and benefits – the very things that were making GM (and Chrysler) unprofitable compared to the foreign auto makers manufacturing in the US. The deal was nothing more than a shabby payback for the unions’ massive political donations ($100 million in 2008 and $80 million in 2010) to Obama and Democrat Party candidates.

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  38. cows4me (248 comments) says:

    big bruv, that’s an easy one. The socialist fuck wits expect you, your children, your grand children, your great grand children, your great great grand children, you get the pictrue, to pay the money back.

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  39. wreck1080 (3,906 comments) says:

    My smallish council already ran up 500 million in debt. Yet, we don’t have anything to show for it .. It is like the money evaporated.

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  40. Gosman (324 comments) says:

    Market failure is an interesting concept. When it comes down to it it really means that the market is not producing outcomes that people deem beneficial to them in the short to medium term. Hence the situation in Christchurch with lack of affordable short term renatal accomodation is actually only because people are currently paying more than the think they should pay not because the market is not doing what it does. Real market failure would be if the higher prices don’t encourage more accomodation to be built.

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  41. Mark (496 comments) says:

    Govt borrowing is not the issue around new electricity generation in this country and lower power prices, it’s the left stop any new electricity generation to be developed in this country.

    Ever time a new scheme is proposed the left come out and say you cant do that, you cant do this. If we allowed power companies to build more base load generation, i.e. dam rivers and nuclear power I rekon NZders power prices would drop by half.

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  42. Paulus (2,626 comments) says:

    The only business that Government should be in is the employment of core Public Servants.

    Governments then create an economic environment for business and infrastructure to set up and employ staff.

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