Economic Debate

Over the weekend there were a growing number of policy debates around the impacts and implications of proposed changes to government investment strategy.

At Public Address Russell Brown writes

“Labour’s guarantee scheme was excoriated along with National’s risky new plan for the Super Fund in a not-online NBR lead story on Friday, under Rob Hosking’s byline. Unfortunately, the latter can’t be so easily fixed.

The story pointed out that by 2025 the 40% of the fund that National wants to force into local investment will by be $43.6 billion: bigger than the entire market cap of the NZX-50 plus the expected value of Fonterra were it to be floated and quotes a string of specialists pouring scorn on the policy. Ben Thomas thrashes the policy in his column, which concludes with an unnamed economist declaring “this is becoming a scary election.”

Ben proposes that Labour should respond by running ads featuring Dancing Cossacks. That would be kind of meta, wouldn’t it?”

In my view assaulting the policy misses the more significant point- which is that debating these ideas is the really important thing.

The actual mechanics of implementation and the policy issues are important but so is the wider context.

The relative size of the current equity markets and the impact that more local investment might have is also not rocket science. It seems plain silly to argue that if more investment funding was available locally that the equity markets would stay the same because they would also grow considerably as well.

There are of course alternative investments a fund can make. In Australia the Future Fund kept a very high percentage of cash in the local banking system. I’m not sure how 45% can be described as more than half so that part must be a typo.

(That must also indirectly have benefited NZ where 4 of the 5 big banks are Australian owned.)

“While the Future Fund, a government vehicle established to pay public servant retirement liabilities, has only invested 10 per cent in Australian shares, about 55 per cent of all superannuation funds are in the sharemarket, according to Rainmaker Information.

More than half of the Future Fund’s $63 billion is sitting in cash with Australia’s banks, and domestic subsidiaries of foreign banks. The Commonwealth Bank holds the most, with $7.8 billion, followed by Westpac, National Australia Bank, and ANZ.

The fund gave them a welcome and relatively cheap source of money as the cost of borrowing overseas has soared.”

Here is a much broader assessment of the current political and economic context in NZ – from Vincent Heeringa

“Picture this: an election is upon us. We’ve just completed two quarters of negative growth, the government is a patchwork of parties built upon a bizarre deal with Winston Peters, the Prime Minister finds herself less popular than her opponent, and it feels like the whole country has run dry on ideas, and out of patience. Oh, and we’ve just bombed out of the World Cup at the hands of the French.”

The twist here is that described 1999. If we are revisiting the past what else has happened in the meantime.

Read the full feature over here. The list is not comfortable reading but we do need to think about scoring the present government on their progress or lack of it and what that might mean going forward.

On a more positive note:

“The New Zealand Institute, in some excellent research on savings, listed the benefits of increased household savings: a larger pool of domestic capital will help companies grow, lift productivity and reduce the cost of capital; moderate exchange rate fluctuations; create a more supportive home base; and help New Zealand retain ownership of its companies.

If KiwiSaver can make inroads into this extensive list—and I think it will—the scheme could be the single most positive policy Labour introduced in the past nine years.”

There is a treasury estimate of Government spending For the year ending July showing a range from 36-41% of GDP.

Depending upon one’s personal viewpoint you might say those levels are too high but in view of an uncertain outlook for the global economy it could also be argued that the government should use its spending power in a smart way.

Regardless of the ideologies being wheeled out, it is still of value to see some of the policy ideas being debated more fully.

And those thinking that PPP are the way to go might want to view this assessment by RiskMetrics on the Australian experience in that area.  Beware of overly complex fee models and double dipping.

Thanks to Paul Williams for spotting the article.