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Infrastructure Spending Won't Solve Recession

Infrastructure Spending Won't Solve Recession

he Hon Sir Roger Douglas Tuesday, December 2 2008

Although New Zealand clearly has an infrastructure deficit that must be rectified, spending on infrastructure is not the solution to the recession that some people think it is - helping the real economy to come to terms with the current credit crisis is much more important, ACT New Zealand Finance Spokesman the Hon Sir Roger Douglas said today.

"The Government's planned infrastructure spend-up won't help jobs. Major infrastructure projects take time to implement, and this spending will have to be financed by either debt or taxes," Sir Roger said.

"Financing the expenditure through taxation will reduce consumer spending and private savings - destroying as many jobs as government spending will create. Meanwhile, borrowing will lead to higher interest rates and an ultimate decline in private sector investment and consumption expenditure.

"The Government's current focus on infrastructure is hard to understand. The number of extra jobs created by spending, say, $5-$6 billion on infrastructure projects will be zero once secondary effects are taken into account. But solving exporters' funding issues will create additional jobs and trigger the shift we need to export and import substitution industries.

"The dramatic drop in the New Zealand dollar's value compared to the US dollar has opened up exciting opportunities for Kiwi exporters - even allowing for the worldwide drop in demand. But cash-flow problems stand in the way of many exporters taking advantage of this.

"For example: the order-to-cash cycle - in channels like retail - is long. This type of business has become profitable as a result of the lower dollar, but cash is slow to materialise.

"As such, exporters use bank trade-financing facilities to access ‘bridge funding' for extended supply chains. Banks' reduced appetite for risk, however, makes them less inclined to supply the necessary funds - including low-risk working capital.

"Further, trade financing generally requires customers to be insured - but insurance companies have made broad sweeping reductions in exposure and, in some cases, entire industries have virtually been black-listed.

"One South Auckland company with a five-year plus trading relationship with a major US chain - that has an annual turnover of $US7 billion - is now uninsurable, despite over five years with no payment problems. Companies like this are at risk.

"Unless things change, the only alternative for these companies is to forego such business and return to the uncertain - and less profitable - world of commodity trading. The new National Government must look at this situation - and other issues connected to credit risks - with unprecedented urgency," Sir Roger said.


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