The Current Account measures how NZ Inc is trading from year to year. A Treasury (PREFU) report in 2011 recorded New Zealand running a current account deficit of$7.2 billion for the year ended 31 March 2011. This was equal to 3.6% of GDP. That was the amount we fell short of between what we earned overseas and what we owed. We met the deficit by borrowing overseas and adding to our overseas debt.
The same Treasury report forecast that within six years NZ would have a Current Account deficit of $15.6 billion or 6.9% of GDP. Some economists argue that it doesn’t matter. Most of the debt is owed by households and companies – rather than the government or taxpayers. However, with the Global Financial Crisis overseas investors are increasingly looking at the total debt position of the countries they lend to. In the case of New Zealand our total debt (called the Net International Investment Position) stood at 68.7% of GDP in 2011 and is forecast to blow out to 77.6% of GDP in 2016.
Borrowing capital for investment makes sense if what you invest in has good growth prospects and will earn a return greater than the cost of capital. So what we invest borrowed capital into is important. From a NZ Inc perspective it makes more sense to invest in making and exporting products that are in high demand and command high prices overseas than to invest in housing for capital gain.
Its also important to reduce our dependence on the savings of overseas residents. We need to boost our own level of savings if we are to reduce the level of overseas indebtedness.
There are a few sensible things we could do:
- make Kiwisaver opt out – rather than opt in – so that kiwi’s are auto-enrolled in the scheme – so that kiwis collectively save more in other than housing and so that we are less reliant on the savings of overseas savers.
- develop a strategy that puts real focus on quadrupling the value of our exports over the next 7 years. This means supporting innovative, export-oriented, New Zealand companies that want to expand into overseas markets.
- place a much greater emphasis on public and private investment in NZ Research, Science and Technology with a commercial application and the protection of NZ intellectual property.
These three reforms won’t be enough on their own but they will help move the economy in the right direction.
- Current account deficit widens (radionz.co.nz)