New Zealand’s net foreign liabilities are $162.5billion or $36,948 for every man woman and child in the country. That is equivalent to 85% of GDP, a similar level to the troubled economies of Portugal, Greece and Spain. Clearly such debt levels make us vulnerable to international shocks. An oil price rise coming out of instability in the Middle East, a bursting of the Chinese housing bubble, or a downgrade of the Spanish debt grading (Spain’s profile is very similar to New Zealand’s) would all have very negative effects on our economy. That would mean business bankruptcies, rising unemployment and increased foreign control as our creditors and overseas lenders sought to recover their investments in New Zealand.
It may not be very sexy and it is not great TV but our level of indebtedness is now our number one economic problem. The problem is deepset and structural. The solution will involve long term, proactive measures by whichever government holds office. Increasing the level of national savings by households and businesses – as well as government is key. Compulsory membership of Kiwisaver (with or without an opt out clause) would be a positive step in the right direction. Reviewing the interest rate subsidy on student loans, comprehensive welfare reform and reviewing the age eligibility for National Superannuation are three overdue reforms which the government continues to shy away from.
Selling 49% of shares in competitive State Owned Enterprises would deliver substantial sums for debt reduction as well as the disciplines of market monitoring that public listing brings. Few families hand down the same car from generation to generation. State ownership of assets is no different. Modern education and healthcare demand modern assets and infrastructure. Saying we should never sell state assets just because we currently own them is like a family saying we should never trade in a vehicle because we own it. Sometimes a government needs to sell assets that are not strategic or non-performing in order to buy new assets (or use the capital in another way) more in keeping with the strategic goals of the country in the new millenium. Provided New Zealand retains a controlling stake of any strategic assets then selling down a minority stake would free up capital for new investment, reduce debt servicing costs and improve market performance. Those who worry about foreign control and loss of national sovereignty need to grasp the realities of a small 4million person country owing $162.5billion in foreign liabilities.
Finally, we need to build a solid platform for large scale growth in exports and in tourism. The sooner we get started the better. We have a lot of ground to make up.