Key signals less debt while Goff promises more debt

Over two days we’ve seen two dramatically different paths outlines for the Government. Yesterday Phil Goff promised more borrowing and more debt. Today announced the opposite – that would reduce future spending to reduce debt – and also flagged allowing the private sector to invest in four current SOEs (which will also reduce debt).

This is excellent – both the reduced spending cap, and the flagging of an election policy to allow minority shareholdings in some energy companies.

Some extracts from Key’s speech:

Growth over the last decade was built on all the wrong things – debt, consumption, and .

People borrowed heavily to buy houses and farms, property prices soared and New Zealanders felt wealthier as a result. They spent a lot on consumer goods, which led to a bubble of economic activity.

 The Labour Government thought this bubble, and the tax revenue it generated, would go on forever and spent up large on permanent new spending programmes. The Government’s spending increased by more than 50 per cent in just six years.

Labour literally had to keep thinking up new ways to spend money, as their refusal to drop tax rates led to fiscal drag and large surpluses. Rather than have modest spending growth, and lower taxes, they did nothing except huge spending increases.

The internationally-competitive sectors of the economy actually went into recession in 2004, and experienced a 10 per cent drop in output over the next five years.

A five year recession for the competitive sector of the economy.

By the time the National-led Government came into office at the end of 2008 the economy was deep in recession, and inflation was the highest it had been in 18 years.

The Government’s books had been left in a mess, with Treasury projecting no end to budget deficits and spiralling out of control.

This is worth remembering – the official forecasts were for deficits and debt to be so big, that we would never ever return to surplus.

As an incoming government, we moved quickly to steady the ship, help the economy through the recession and set a credible path back to surplus.

 Even so, when we tally up everything the Government is spending this year, we still need to borrow $300 million a week on average to pay the bills.

 In the worst of the recession, running a budget deficit was the right thing to do, as it gave much-needed support to the economy.

 Now, as the economy recovers, borrowing $300 million a week is unaffordable and is holding the economy back.

 It is crowding out our internationally-competitive sectors of the economy, keeping the exchange rate high, and tying up resources that could be better used elsewhere in the economy.

And this borrowing will, of course, have to be repaid in future years, with interest.

Annual interest payments on our debt will, in four years time, cost more than spending on the Police, defence and early childhood education combined.

Which is why we need policies to reduce the growth in debt and lead us back to surplus.

When we are borrowing $300 million a week, have an overvalued exchange rate, and face the prospect of a credit rating downgrade, the Government believes it should be spending less and therefore borrowing less.

I have therefore challenged my Ministers to balance the books more quickly.

Government spending will continue to increase each year in dollar terms, but at a slower pace than the rest of the economy.

As the first step in reducing spending growth, we will run a tighter Budget this year than was indicated in the Budget Policy Statement in December.

Currently we have a new spending allowance of $1.1 billion each year, compared to Labour’s average of $2.8 billion a year over its last five budgets.

Our plan is to reduce that new spending allowance in Budget 2011 even further, to around $800 to $900 million.

Nonetheless, this year’s Budget will continue to prioritise new spending to health and education in particular, and to initiatives that promote economic growth.

 This would be a good time for the PPTA to reconsider the wisdom of ongoing strike action for their 4% pay claim.

Key says that Treasury project this reduction in future spending will see NZ get back into surplus in 2014/15 instead of 2015/16. This of course will only occur if the 2011 – 2014 Government has tight fiscal discipline.

Now onto the capital side:

The Investment Statement shows that the government, on behalf of taxpayers, owns $220 billion of assets across a whole range of social, financial and commercial investments – everything from hospitals, roads, prisons, schools and Police stations to the Super Fund, electricity companies and coal mining operations.

We also expect to acquire $33 billion of net new assets over the next five years, including new schools, operating theatres, ultra-fast broadband and major investments in our state highways and other transport infrastructure. That is a considerable spend by any reckoning.

At the margin there are two ways we can acquire new assets – either we can borrow more or we can change the mix of assets we own.

Indeed, and it is stupidity to insist that our current mix of assets is perfect, and in no way can any existing asset be sold or even sold down.

The greatest scope to change the mix of assets lies with the government’s portfolio of commercial assets.

In particular, the sort of mixed-ownership model under which Air New Zealand operates – where the government owns most of the company but there is a minority of outside equity – gives the best of both worlds.

Under this model, the government has a controlling stake in what is a crucial piece of transport infrastructure and guarantees that it will be majority New Zealand owned. But by not owning 100 percent of the airline, the government also has capital free to invest in other assets.

This model could be extended to more of the government’s commercial assets.

As well as freeing up capital, there are three other potential benefits of a mixed ownership model.

The first is that it broadens the pool of investments for New Zealand savers, either directly themselves, or through investment funds such as KiwiSaver.

New, quality listings on the stock exchange would give “mum and dad” investors the option of putting their savings into large and proven companies, rather than relying, as is so often the case, on property investments.

The second is that the company reaps the benefits of sharper commercial disciplines, more transparency and greater external oversight.

Under the mixed ownership model Air New Zealand has been a creative and innovative company and a model corporate citizen. It has also offered some very competitive prices for air travel.

I am convinced that Air New Zealand would not be run as well, nor provide as good a service to customers, if it was owned 100 percent by the government.

And the third potential benefit is the opportunity for the companies involved to obtain more capital to grow further, without depending entirely on a cash-strapped government to support them.

Having some SOEs able to access capital, without the taxpayers having to borrow more will be good for them, and allow them to grow.

And NZ investors would love having some solid companies to be able to invest in – which will help boost savings.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

Yay. We are currently the only country in the OECD that has a policy based on pure ideology of banning any private sector investment in current state assets. This probable policy is a step in the right direction.

It is subject to finalisation and approval from voters at the 2011 election. It will maintain Government control of the five companies, but allow for Kiwi mums and dads to invest in those companies, providing the companies with capital, and the investors with good returns.

Kiwis will have some clear choices for the 2011 election – policies which boost savings, reduce future spending and reduce debt vs policies to tax rich pricks more and borrow more.

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