Net Debt

One of the more ridicolous arguments against reducing the level of over-taxation is that NZ needs to fund all of its capital expenditure out of operating income, and if we do not we will have a debt problem.  Let’s look at a history of debt in NZ.

netdebt.JPG

Okay, now this shows net core crown debt over the last 35 years.  First thing to note is that the debt has never been lower – even lower than early 70s.

We see the damage Muldoon did with his deficits, with net debt increasing to 30% of GDP.  So we owed one third the annual production of the entire economy. Then we had Labour, and they may have done some things right, but a balanced budget wasn’t one of them.  Net debt rose to around 50% of GDP.  Now that is a damn scary level.  If interest rates are 10%, then 5% of GDP goes just on interest.  And you don’t even want to think about what net debt as a proportion of Govt expenditure was.

Then we had National and National led Governments.  A failure to reduce the debt would have been a disaster, but they took the hard calls, and and in nine years achieved what once would have been thought impossible and cut net debt from 50% to 20% of GDP.

Now in eight years of Dr Cullen, debt has fallen further, though not as fast as under National. Now it is a lot easier to continue a trend already there, than reverse a trend, but Dr Cullen has certainly not let the side down. And today we basically are debt free.  As at 30 June a miniscule 2.1% of GDP, and if you take the money in the NZS Fund into account, we actually have negative debt of 5.9% of GDP.  We can all agree that NZ (Govt) does in no way at all have a debt problem.

Now this is not a licence to start running huge operating deficits and having debt blow up again.  But, if one has a large (in fact gigantic) operating surplus, basically zero debt, and a capital works programme that gets funded over time out of depreciation and interest, there is no sensible argument that one can not afford to reduce taxation.

Of course one will get many unsensible arguments.  I am sure someone could argue that we should actually build up a $500 billion cash stockpile in case we ever all get sick, or need to invade Australia, or want to pre-fund the next three generation’s worth of health care.  You can always, always find a reason not to give people their money back.

But arguing that NZ Govt has a debt problem is not one of them.

I would also remind people that National managed to reduce debt as a % of GDP by 30%, and reduce taxes.

Oh and before the usual suspects jump in and warn of the disasters that will occur if tax rates are reduced,  make sure you leave wriggle room to argue that tax cuts are in fact a good thing when Dr Cullen announces some next year.  Also be prepared to denounce tax cuts again if Labour wins in 2008 and then cancels the promised tax cuts in 2009.

In fact it would just be easier if you took the approach of arguing that whatever Dr Cullen says is the right level of taxation, is ipso facto, automatically the right level of taxation. Nice and simple that way.

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