Copeland warns of looming massive debt problem
Copeland warns of looming massive debt problem
United Future finance spokesperson Gordon Copeland is warning that New Zealand is digging itself into an ever-deepening pit of debt and dramatic action is required to reverse the trend.
"Last week's announcement by Statistics New Zealand that the estimated merchandise balance of payments deficit is almost $2 billion for the year ended April 2003 should be of concern to all New Zealanders," he says.
"When we add to that the much larger deficit which arises on investment and transfer outflows from New Zealand, i.e. interest and dividend payments and the like, the recent Budget forecasts a current account deficit of over $5 billion for the year to 30 June 2003.
"This is almost double the comparable figure for last year."
Mr Copeland says the red ink does not end there.
"The Budget forecasts that the current account deficit over the next four years to 30 June 2007 will total a whopping $26 billion and one is left with the impression that this trend will just continue on into the future.
"There are worrying signs in these forecasts. New Zealand is already the most indebted country in the OECD. Our net external debt, most of it in the private sector, is already over $80 billion, so just on the current account deficit figures alone, that amount will swell to about $106 billion by 2007.
"These figures are before taking into account New Zealand's net equity indebtedness (the difference between equity investments by overseas shareholders in New Zealand companies and equity investment by New Zealanders in overseas companies).
"At $106 billion, net interest-bearing indebtedness to the rest of the world will be 68% of GDP by 2007. If we assume an interest rate of 7%, the interest burden on New Zealand will be around $7.5 billion per annum at that time.
"Should these realities be of concern to New Zealanders? Economists would answer by saying "well, it all depends on what we've borrowed the money for and whether or not it has been invested wisely".
"In other words, debt is fine if, for example, it is invested in income earning activities which will yield a return over and above the interest cost involved. So to the extent that these funds are borrowed by businesses or Government for strategic gearing to generate wealth, we need not be concerned.
"However the fact is that some $25 billion worth of the current private sector borrowing from overseas has gone into non-revenue producing assets such as cars and houses. The servicing of that debt - about $1.75 billion per annum at 7% - is of very real concern.
"It means that an increasing proportion of the country's wealth is being sent overseas both to service and repay private debt on non-income producing assets. This in turn places strain on the current account and creates a vicious cycle to the detriment of New Zealand," says Mr Copeland.
"We need to address, and address quickly some serious underlying issues including:
A. The need for New Zealanders to consume less and save more. Savings, particularly if they are invested in New Zealand, will reduce our dependence on overseas debt.
B. A reduction in the company tax rate to 30% to encourage investment, job creation and reduce the incentive for business to relocate to Australia.
C. The $1 billion a year we could earn through a free trade deal with the USA would be fantastically helpful!
D. Similar aims for New Zealand under the Doha round of WTO negotiations would likewise greatly assist.
E. We need to upgrade and add value to exports to the rest of the world with wood products rather than logs. Woollen products rather than wool bales. Meat products rather than meat slabs.
F. Continued low priced electricity to give New Zealand business an edge compared to its international competition. That means more hydro and more wind in preference to expensive fossil fuels.
G. Smaller Government and a search for greater efficiency by a mix of public and private providers in education, health and prisons.
H. Greater efficiency in land transport. The end of the $1 billion per annum congestion cost in Auckland would help.
I. A careful, dispassionate, well-researched examination of whether and to what extent we should grow New Zealand's total population by way of skilled immigrants. At the moment we are flying blind.
J. Productivity growth from our workforce. There needs to be a definite link between wage growth and productivity growth.
"There may be no silver bullet, but that reality should not mean that we bury our heads in the sand and just cruise along in the pious hope that somehow or other we will muddle our way through.
"We need firm
goals and firm strategies to eliminate some of the red ink
if we are both to survive long term and have a bright
economic future," concluded Mr Copeland.