A Feudal Future?

The country is weighed down by a mountain of foreign debt and ownership.

Listener: 16 October, 2010.

Keywords: Macroeconomics & Money;

In the decade to March 2009, about $340 billion was invested in New Zealand. Of that, about $205 billion was spent on replacing old assets, leaving $135 billion for new ones. Whether this was sufficient for our growth aspirations belongs to another column. This one is about how the investment was financed.

Extraordinarily little was financed from New Zealand savings: in total about $42 billion in the 10 years (about $1000 per New Zealander each year). The remaining $93 billion, more that twice as much, was financed offshore, so about two-thirds of the new assets were financed by foreigners.

Some of that foreign finance would have been lent, so a New Zealander remains the owner of the assets with (probably) an increasingly heavy debt to offset it. However, it would be imprudent for the foreigners to advance only loans. Some of their investment will be equity in new businesses being set up in New Zealand, but some will also have gone on buying up New Zealand businesses and other assets such as land.

Of course, land is not a new asset but – in effect – New Zealand owners sell it to finance their new business investment or their consumption. If they are not saving, where else are they are going to get the money? In the 10 years, households’ net “dissavings” were $73 billion; that is, they consumed that much more than they earned. While some households saved – reducing their mortgage debt, or investing in retirement schemes or in new businesses – most spent more than their income, financed by credit cards, loans and running down their assets and finances. At an average rate of about $33 a week, it soon mounts up.

The obvious outcome is that the country is weighed down by a mountain of debt, not only loans owned overseas, but also widespread and growing foreign ownership of New Zealand businesses and resources. I estimate that more than a quarter of our assets are, in effect, owned offshore. That proportion is growing. Since the foreigners own the sharp end of the economy, their share of business ownership must be much higher.

If households dissaved $73 billion while New Zealanders saved (an inadequate) $42 billion, who were the savers? New Zealand-owned businesses saved $50 billion, so in total the private sector was still a net dissaver. The gap was made up by the public sector. Some $3 billion was saved by the local government sector, which would have used it to help finance the $12 billion of new local authority investment; the rest it borrowed. Meanwhile, the central government saved a whopping $63 billion. Given that its new fixed investment amounted to only $15 billion, the surplus went to reducing outstanding government debt, and into various crown investment funds (including the Cullen Fund).

Much of the public surplus was invested offshore; the convention is that investing too much in New Zealand business is wicked “socialism”, investing it offshore is good “capitalism” – again another column.

The end result of reducing the assets we own by borrowing heavily for consumption is to make us debt-slaves in our own land. But that’s what happens if you don’t save. We have been fortunate that the Government has been saving on our behalf, although evidently not enough. Recall the nonsensical calls of those who wanted to reduce government savings by tax cuts. Short term heroes; long-term tenants.

What is to be done? One approach is more tax cuts and a good party, leaving the feudal outcome to be cleaned up by future generations – the smarter will leave. Or we can start saving now.

The ideal would be to voluntarily reduce our spending below our income. If not, we are going to have to do it compulsorily if we want to avoid a feudal future. That could be by the Government increasing its savings, running a larger public surplus – and resisting the siren call of tax cuts. Or it could be by a compulsory occupational savings scheme. Or both.