Kiwiblog

Roar Prawn blogs:

The money markets are chattering over the Mexican stand off with the Big Banks who have, in an unprecedented move joined forces to talk turkey with Treasury, over the deposit guarantee scheme. The Banks want some changes. Treasury is staring them down. The banks are staying firm – they want changes to clauses they think could give non banking institutions an advantage.

Could get interesting.

The PREFU is far worse than anyone could imagine. Thank God St Ruth and National changed the law in 1994 to force the Government to open the books up before an election – otherwise it would be a repeat of the last time a Labour Government left office – a fiscal mess for the incoming Government.

The Secretary of the Treasury, John Whitehead, did a presentation before we got the books. The room was silent as he wound out the bad news. The problem isn’t our financial markets – they are much better structured than in the US. It is the flow on effects of lower GDP growth and increased spending. So we don’t have a crisis, but we do have a very bleak fiscal situation.

The Crown accounts are going into deficit, and will remain in deficit until 2018 – yes – a decade of deficits on the medium term projections. The deficit is forecast to be $31 million this year and up to $3.2 billion in 2012/13 – returning to surplus only in 2017/18. This is the OBEGAL excluding Super Fund Revenue.

Dr Cullen and Helen Clark are going to be very red faced over debt. Do you recall how they attacked National’s plan to borrow 2% more of GDP for infrastructure as an economic calamity and reckless as it would push debt up to 22% of GDP – 2% in excess of Dr Cullen’s ceiling of 20%

Debt is forecast to peak at 30.1%!!! It will be 24.3% by 2012/13 and 30.1% by 2018/19. After wailing about how the world would end if debt went to 22% of GDP, Dr Cullen is leaving NZ with a forecast rise to 30%.

The cash deficit next year is now forecast to be $6 billion and over five years a cash deficit of 31.7 billion.

Incidentally PREFU was done around five weeks ago so doesn’t take account of the very latest in the US such as the bailout. They do not expect this to change PREFU significantly but it does increase the risk of a sharp slowdown.

Treasury are forecasting close to 0% annual GDP growth until June 2009.

Some changes to the annual predictions are

• KiwiSaver costs up $280m by 2012
• Tax take down 900m
• Benefit costs 500m up
• Early Childhood Education Costs up 200m
• Debt servicing up 500m

The annual contingency for extra spending is $1.75 b per annum plus 2% inflation. But most of this is already allocated and for the next four years only $500 to $600 million a year is available for genuine new spending.

So what to do? Well the Treasury Secretary says if one can manage an average real GDP growth of 3%, then the long-term debt (2022/23) will reduce by 10%.

This for me is what the election must now be about. The status quo in terms of economic growth is not acceptable – a decade of deficits must not happen. So voters should ask which party will have the best policies and best people to boost economic growth.

I have previously given Dr Cullen pretty high marks for his fiscal management. Those marks were seriously downgraded today as he leaves us with ten years of deficits forecast and a 50% forecast increase in debt as a percentage of GDP.

There will be some focus on National’s response and their tax plans and infrastructure plans. The tax plans will be credible if they are largely fiscally neutral with reductions elsewhere in expenditure. And a lower tax economy will lead to higher economic growth – which is what it is all about.

The infrastructure plans will add 2% of GDP to gross debt – a small amount now compared to the 10% extra on these projections. The rationale is unchanged for them though – if they will add to economic growth by increasing productivity, then that is a good return on investment. Not all infrastructure investments will lead to higher economic growth, so the focus should be on the quality of the investment.

Bill English is about to inherit what may be the toughest job in New Zealand – turning around a projected ten years of deficits and 50% increase in gross debt as a percentage of GDP.

Hidden in the depths of detail in the budget documents are the true costs of the train set Dr Cullen purchased. It is projected to be $1.47 billion by 2012.

So how did Toll get the deal of a lifetime?

Simple. Dr Cullen got Mike Williams to buy it, rather than the Treasury!

Treasury you see were too tough in negotiating rail access prices with Toll, so OnTrack were given the job to negotiate the purchase of the trains. Yes, he deliberately sent in the “weaker” team. Toll must regard their $25,000 donation to Labour last year as their best ever investment.

Now who is a Director of On Track? Labour Party President Mike Williams. So what role did Mike “confused” Williams have in buying the trains? Is there not a conflict of interest in being Labour’s chief fundraiser who accepted a donation from Toll and also being on the board buying the trains off Toll?

NZPA reports on advice from Treasury released under the OIA, which confirm the decision to sabotage the Canadian bid by way of retrospective regulation was economic sabotage, and worse of all breached our legal obligations under international agreements.

The Government’s moves to block Auckland International Airport (AIA) were strongly opposed by Treasury who said it would breach international agreements, scare foreign investors and damage the economy.

Treasury wrote a scathing paper on the suggestions, saying the benefits of the Government’s proposed policy were “likely to be small relative to the detriments”.

It advised against any intervention in the share bid on three main grounds:

* Legal — “It is almost certainly a breach of our international obligations under various multilateral agreements”.

* Commercial — “Such an intervention would create considerable disruption and uncertainty. By affecting investors’ property rights and reducing value it may cause investors to be sceptical … and more wary of investing”.

* Economic — “It is likely negatively impact on international investors perceptions … increase the risk premium for investment in New Zealand with potential to raise the cost of funds for all New Zealand companies”.

It is a pity the Canadian pension fund is not going to court over this. I think they would have a field day. This now puts on the record that he Government ignored the advice of both the Overseas Investment Office and Treasury on this retrospective intervention. Funny how Helen says we couldn’t have tax cuts earlier because of Treasury advice – they do pick and choose.

Some will argue decisions on investment should be at political whim, and not have any consistent rules or laws around them. You can do that, but we will find there is a lot less investment if people can’t trust the law to be applied fairly.