Armstrong on Greens housing policy

February 7th, 2013 at 2:00 pm by David Farrar

John Armstrong writes in the NZ Herald:

It is much easier to pass a verdict on the Greens’ new “rent-to-buy” housing package. It is really a huge state house building programme in drag.

Under the policy, low-income families would occupy new, government-built $300,000 homes without having to stump up a deposit or take out a mortgage. The families would instead be required to make a $200 weekly payment to the Government to cover the interest cost on the Crown capital used to build the house. The occupiers would have the option of making additional payments to buy equity in their home.

The Greens won’t say how many such houses they want to build. They say the scheme would complement Labour’s plan, and the Greens’ share of those 100,000 homes would be decided during coalition negotiations.

The policy is easy to comprehend. Its generosity makes it extremely attractive. It seems to make sense.

Wrong. It is a dog of a policy. It should be put out of its misery.

The slow repayment of capital by occupiers under the Greens’ scheme would require the Government to go on a continual borrowing binge. There would be huge problems of fairness in terms of cut-off points for eligibility.

There is no incentive or requirement to pay off capital. Occupiers would have the house for life and enjoy cheap rent at $200 a week. It is not clear whether that payment would increase and by how much when interest rates increased – as they inevitably will. It is not clear who would pay the rates and the general maintenance costs.

Labour’s scheme at least imposes discipline on buyers to maintain the value of their properties by requiring them to take out a mortgage.

The Greens’ policy should carry a health warning. It flashes “unintended consequences” in neon – consequences that would probably have to be picked up by the taxpayer.

Labour has officially welcomed the Greens’ contribution to the affordable housing debate. Instead, it should quarantine this Nightmare on Struggle Street before it taints its own policy by association.

Labour and Greens seem to be competing with who can come up with the biggest bribe, and hope no one notices that the massive borrowing needed by the taxpayer will plunge our credit rating down the gurgler.

Surely what we need is less borrowing, at a time when Governments around the world are crumbling under the burden of their debt.

Watkin says borrow more

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

Tim Watkin 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 debt 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.

Debt under a Labour-led Government

November 21st, 2011 at 1:00 pm by David Farrar

As readers will know there has been a lot of scrutiny about how much extra debt there would be under a Labour Goverment over the next four years. Labour says it would be around $4b, National says around $16b and my calculation has it at around $12b (of which half is the Goofynomics borrow to save strategy for the Super Fund).

Let’s go with my figure of $12b for now (which is in fact only $2b different from Labour’s $4b as they acknowledge that excludes borrowing for the Super Fund). Now that is what the extra debt would be for a Labour majority Government. If Labour got 50%, then they could implement their policies without compromise.

But if Labour does manage to put together a government, they will comprise (based on current polls) only around 55% of the Government. On the Roy Morgan poll they would in fact be just 50%.

This means that the parties they need to negotiate with to form a Government will have massive power, much more power than any other minority partner under MMP. Because the larger your proportion of the votes the Government needs, the more say you get. This is an issue that as far as I know, no media has seriously looked at – what would be the policy mix of a Government that had Labour on 25%, Greens on 15%, NZ First on 5% and the Maori and Mana parties on say 5% between them.

That $12b of debt would be just a start. Let us look at the policies NZ First will want included in a budget:

  • universal student allowances
  • match student loan repayments $1 for $1
  • Cut tax rate for new exporters to 20%
  • lower company tax rate to 27%
  • lower GST to 12.5%
  • tax free threshold of $100/week
  • turn TV One non-commercial
  • Increase Govt R&D spending from 0.3% of GDP to 2% – a 600% increase
  • Accelerated depreciation for specified industries
  • 10% off power prices for pensioners
  • Increased funding to decile 3- 10 schools
  • reduce class sizes for lower decile schools
  • increase health expenditure to 10% of GDP
  • Increase defence spending to 2% of GDP
  • abolish GST on rates
  • abolish income tax on secondary jobs
  • abolish tax on savings
  • cap tuition fees, eventually reducing them to zero

There’s probably even more than this but I can spend only so long reading their manifesto. I can’t even begin to add them up but I’d say we are talking ten billions dollars a year in lost revenue and extra spending. Now let’s say he even gets 20% of his wishlist, and that is probably an extra $8 of borrowing over four years.

And bear in mind also that Winston is saying he would refuse any agreement in advance for how much extra spending will be needed to have him vote for the Government for three years. So every year Labour would have to feed him as much money as he can get, to keep their Government in office. This is not scare-mongering – this is exactly what Winston is promising to do, and there is no way Labour could govern without him.

But Winston is only the entree. Let us look at what the Greens want. At 15% they would have over half of Labour’s support, and be around one third of the Government. So they may get up to one third of their wishlist. That includes:

  • tax-free income threshold of $10,000/year
  • Write off all student debt, even for those not in paid employment
  • tax-deductible study costs for those with no allowance
  • A full universal student allowance for those aged 16+
  • Increased accommodation allowance for students
  • Reduce then abolish tertiary fees
  • Increase school operations grant by 10%
  • Maximum class size of 20 for schools
  • Increase benefit levels to “sufficient for all basic needs”
  • Increase public health spending to 10% of total health budget

There are again many more beyond that. And again the bill will run into the billions, and even the Greens can only come up with so many extra eco-taxes to plug the hole.

The two major parties are normally the ones who get the most intense scrutiny over the costings of their policies, and that is because they form the bulk of the Government. For example even if National reaches out again to ACT, United Future and Maori parties, National will be probably 90% of the Government. Hence, highly likely their debt track will hold up (especially as ACT ask for less spending not more).

But Labour is looking to be 50% to 55% of a Labour-led Government. This is vastly different to when they were last in power and they were over 80% of the Government. At 50% to 55% they will be comparatively weak, and the parties they will need to vote for their budget will have much more power and say than in the past – hence why it is important to also scrutinise their tax and spending plans.

I haven’t even looked at what spending one might have to agree to for the Mana and Maori parties, but it will not be nothing, and a Labour-led Government is only possible if Labour, Greens, Maori NZ First and Mana parties all vote for their budget.

So forget about $12b of extra debt. That is just the starting position. It is inevitable it would be significantly more than that.

Borrowing to save

November 7th, 2011 at 9:00 am by David Farrar

Radio NZ reports:

ACT Party leader Don Brash is dismayed that Labour wants to borrow a lot more than National, saying it’s imprudent.

“This makes no sense at all. Why would any householder with a large debt borrow more money to invest in shares? No prudent householder would do that – the Government shouldn’t be doing that either.

“Personally, I think the Government should be selling the assets in the Super Fund and using it to pay off debt. Why the Government should borrow money to invest in shares is simply beyond me.”

The Green Party is also critical of Labour’s plans to borrow to feed the Super Fund, also known as the Cullen Fund. Co-leader Russel Norman believes such a move is economically irrational.

“The Cullen Fund is a repository for surpluses, so when the Government’s running surpluses it makes sense to stash money away for the future and we really applauded Labour for that.

“Whereas, when you’re running a deficit, the logic of borrowing to put into your savings doesn’t make so much sense to us.”

I’m pleased to see some economic sanity from Russel Norman on the issue of Labour’s plans to borrow to save. Norman is correct to call it irrational.

Readers should be aware that Labour’s promise to borrow for the fund perverts its original intentions, as set up by Michael Cullen. I blogged what Cullen said when it was launched:

How will the government pre-fund future New Zealand Superannuation costs if there are insufficient surpluses?

The government will make contributions to the Fund from available surpluses. Where these are insufficient for making the required contribution a reduced contribution would be made.

So what Labour are proposing with their goofynomics is not what Cullen said would happen. He never proposed borrowing money to stick into the Cullen Fund. It was explicitly a fund whose contributions would come out of surpluses.

Now Labour are proposing to borrow an additional $6.1b off China over the next three or four years and to give it to the NZ Super Fund, who will promptly invest it mainly in international sharemarkets (that is where 58% of the Fund is).

Now Europe remains on the brink of a debt crisis. If Greece goes under, this will snowball. French banks especially will be massively hit and may go under. That in term will push some US banks under, and what happened in 2008 could look mild. If this happens, expect global sharemarkets to plummet.

And the economic geniuses in Labour say this is the perfect time to borrow $6.1b and invest it mainly in international equities!!!

As Russel Norman, said it is irrational.

Yes, in theory sharemarket investments will get you a higher return than sticking money in the bank. But do you know why that is? Because they are riskier. And as individuals we may choose to take those risks, but it is not the role of the Government to borrow money on our behalf and risk it on overseas (or domestic) investments. The world’s financial markets are fragile, and there is no guarantee that the returns of the past will ever be achieved again.

The fund has now been going for eight years. That is more than a quarter of the time set aside for it to gain so much money, that it can start to subsidise superannuation from 2031. It has lost a whopping $2.8b in just five months. Over the entire eight years, it’s return has been just 0.5% higher than the average Treasury bill rate (the cost of borrowing). It’s not quite as simple as this calculation, but this means that the actual extra money available for superannuation in 2031 onwards is $2b (annual cont approx) x 0.5% = $10m/year or $80/m over 8 years. Allow some compounding and let us round that up to $100m.

Yes $100m is what eight years of the Cullen Fund has achieved, compared to the alternative of just paying off debt. Not going to make a fuck of a lot of difference to the sustainability of superannuation in 2031, will it?

National, the Greens and ACT all agree. Say no to borrowing to save under Goofynomics. We need less debt, not more.

UPDATE: The NZ Super Fund has e-mailed me to comment:

It is correct that the return on the Fund is 0.50% above Treasury Bills since inception to 30 September 2011 (or as you say about eight years).

But you have confused two calculations to arrive at your $100 million figure. The 0.50% p.a relates to the Fund’s return relative to Treasury Bills (which you do say), not to the contributions made by the Government and so should not be used to calculate the return on the Government’s contributions (which ceased in July 2009 and so did not cover the whole eight-year period in any event).

Yes the Super Fund overall has increased its contributions by more than $100m. But the point I was making was a comparison to if the contributions had been used to pay off debt.

Total contributions since inception are 14.88 billion. Our return since inception is actually 3.92 billion. Both of those figures are on our website. The 3.92 billion includes just over $2 billion in NZ tax (again, as on our website), which the Governments that received it over the life of the Fund (the bulk of which was in the last two financial years) would not have gotten otherwise. Clearly, we don’t know what the return on that $2 billion might have been had we invested it instead. The point though is that it’s a bit more than $100 million.

There is a debate about whether you include the tax returns, as the argument is that if the money was (for example) used to subsidise KiwiSaver more, then those funds would also have generated more tax.

Additionally, we believe that in taking a strongly commercial approach to investing locally we produce social and economic returns for NZ over and above the financial returns on those investments (e.g. the 50% investment in Shell, the 40% investment in Kaingaroa Forest, the millions committed to locallthy-managed funds providing growth capital to small and medium size NZ businesses, the investments in high-quality dairy land etc etc.) Now of course that’s not directly relevant to meeting the future cost of NZ Superannuation – but hopefully you agree it’s more broadly positive for NZ.

I should point out that in no way am I critical of the job the Guardians have done. My own superannuation funds have taken a beating also – every month I stick $1,000 in and they lose more than that, so my fund is dropping. My argument is around whether it is sensible to borrow to invest in the Fund.

Finally, a big part of the value of the Fund is that it exists at all. It is a part of the Crown balance sheet that has one specified purpose and one only – assisting future Governments to meet the rising cost of New Zealand Superannuation. We believe that does make a difference to the sustainability of superannuation from 2031 onward.

It does, but so does paying off debt. As I said in my original post, it is a balancing of returns vs risk. The events of the last three years have reminded us that the risk is real.

Who owes what to whom

October 30th, 2011 at 9:00 am by David Farrar

This diagram is from the New York Times. This shows how France is in danger, if the PIGS crash, and that may then flow on to the US.

Now $16b and growing

October 28th, 2011 at 4:00 pm by David Farrar

National have updated their figure for the extra net debt under Labour’s policies and it is now up to $16b over the next four years. They have also launched the website so people can keep track of the growing debt from their promises.

Labour’s $9 billion hole

October 27th, 2011 at 1:23 pm by David Farrar

National has released the total extra borrowing that will be needed under Labour’s policies, just in the next four years. It’s an extra $9 billion of debt. And these are generally conservative costings. The document doesn’t include the cost of their compulsory superannuation policy which will be released later today. I have no doubt it will be updated regularly.

Costs of Labour’s Promises

A path out of debt

October 25th, 2011 at 5:01 pm by David Farrar

Over at Stuff I blog on how the PREFU released today does show a path out of debt. An extract:

Today the Government opened the books. It is required to do this by law. The law was introduced in the early 1990s after the outgoing Labour government hid the true state of the crown accounts, and the fact that the then government-owned Bank of New Zealand needed a bailout. The incoming government received a shock when it realised the true state of the books.

This law showed its worth in 2008. The Budget in June 2008 painted a rosy picture of economic growth and ongoing surpluses.  However, by October it was a different picture. We learned in the 2008 Pre-Election Fiscal and Update (Prefu) that in fact the economy had been in recession all year, and that the ongoing surpluses had been replaced with a decade of deficits.

The news got even worse two months later when Treasury did its December Economic Forecast Update (Defu). The decade of deficits had become a structural deficit that would have seen New Zealand ending up in a similar situation to Greece if no changes were made. Gross crown debt as a percentage of the economy was forecast to hit 57 per cent in 2023, or if the global economy continued to worsen, possibly as high as 76 per cent. At that stage you are like Greece, and the interest on the debt is so high that massive cuts in spending on welfare, health and education are necessary to be able to make the interest payments. …

 If there is no change of fiscal policies, then the Government is still forecast to achieve a surplus again in the 2014-15 fiscal year, which should also be the year when net debt peaks at 29 per cent of GDP. It’s a much better outlook than three years ago.

There’s also some interesting stuff on how our trade with the US and China has changed over the last decade.

Quake costs double

August 30th, 2011 at 10:18 am by David Farrar

Andrea Vance at Stuff reports:

The cost of the Canterbury earthquakes to the Government has more than doubled to $7.1 billion.

Finance Minister Bill English this morning said the Earthquake Commission has increased its liability by about $4 billion to $7.1 billion.

He said the announcement would not affect homeowners claims.

The cost blowout includes an increase of $2.17 billion from the 22 February earthquake and $1.42 billion from the 13 June earthquakes and other aftershocks, which were not previously included.

At a press conference, English said the new estimate follows a risk assessment, based on analysis of damage claims.

He said the extra costs can be met through the Natural Disaster Fund which held about $6 billion before the first earthquake. The government will meet the shortfall. EQC also has reinsurance in place to help meet the cost of any future events.

“Today’s announcement will not affect homeowners’ claims, which EQC will continue to pay in full. And it will not delay rebuilding in Christchurch,“ English said.

Basically this means an extra $3b to $4b of borrowing. There is no choice about this – it is just what the costs are.

But it is worth reflecting that even by their own calculations, Labour’s tax plans require greater Government borrowing for at least the next seven years. And that is before we even get to their spending plans. Will these extra costs make Labour reconsider their policy of tax cuts and boosting benefits?

Debt deal done

August 1st, 2011 at 3:00 pm by David Farrar

A deal has been done on the US debt ceiling, with agreement on around US$1,000,000,000,000 of spending cuts over the next decade. That is not enough to get back into surplus, but is a promising start. And no tax increases.

The Washington Post looks at the winners and losers:


  • Senate minority leader Mitch McConnell
  • Tea party
  • President Obama
  • Congressional Budget Office
  • Grover Norquist, President of Americans for Tax reform
  • David Wu (as the crisis overshadowed his sex scandal)


  • Congress
  • Gang of Six
  • Commissions
  • Liberals

Americans for Tax Reform played a big role in keeping the Republicans from agreeing to tax increases as many Republican representatives and senators had signed pledges to never vote for a tax increase. If they broke that pledge, they knew they would face a primary challenge.

I quite like how they have made sure of a second round of spending cuts:

The first step would take place immediately, raising the debt limit by nearly $1 trillion and cutting spending by a slightly larger amount over a decade.

That would be followed by creation of a new congressional committee that would have until the end of November to recommend $1.8 trillion or more in deficit cuts, targeting benefit programs such as Medicare, Medicaid and Social Security, or overhauling the tax code. Those deficit cuts would allow a second increase in the debt limit, which would be needed by early next year.

If the committee failed to reach its $1.8 trillion target, or Congress failed to approve its recommendations by the end of 2011, lawmakers would then have to vote on a proposed balanced-budget constitutional amendment.

If that failed to pass, automatic spending cuts totaling $1.2 trillion would automatically take effect, and the debt limit would rise by an identical amount.

So if they can not agree on the next $1.8 of deficit trimming, then they vote on a balanced budget constitutional amendment (a good idea), and if that does not pass then $1.2 trillion of extra spending cuts takes place across the board – including defence spending, but excluding welfare entitlements.

US debt visualisation

July 29th, 2011 at 4:04 pm by David Farrar

Check this site out.

They’re $100 bills representing what the US national debt will be by the end of the year.