"Bill English? Mate, I'll Bill Anyone!"

In a recent speech to the Auckland Chamber of Commerce, Bill English laid down the gauntlet.

"Our political opponents need to honestly explain ... why it would be better to borrow this five to seven billion from overseas lenders at a time when the world is awash with debt and consequent risks. [rather than sell assets]."

I'm no Finance Minister (yet), but I think I'll have a crack at it.

What English is stating is that he'd prefer to sell $5-7 billion of assets rather than borrow $5-7 billion.

Leave aside the ever-changing numbers and estimates for a moment (and $2billion is a not inconsiderable variance), or the question as to what the money is actually going to go into (Key says hospitals and schools; we say it's paying in part for tax cuts), or the desirability of having core elements of important national infrastructure retained by New Zealand ... at its core, he's effectively saying it makes more financial sense to sell assets than to borrow.

So, let's do some number-crunching, shall we?

Treasury reportedly states that our assets on the chopping block have returned an average dividend of 14.5% over the last five years. 

Or, in plain terms, after a bit more than five years, we make more than we put into them.

So far, the only advantage of selling them now rather than waiting for them to deliver a steady and lucrative dividend is that we get a quick injection of cash now (or rather, over the next three years as we gradually privatize 'em) rather than having to wait half a decade for roughly the same value to accrue.

Leave aside for a moment that if we don't sell these assets we'll keep earning the dividend every year and thus stand to gain far more than the $5-7billion English is promising.

Instead, let's look at a direct comparison of how much it costs us to get this $5-7billion.

I've not been able to find direct information on the cost of crown borrowing (obviously my google-fu is weak), so I can't place the 14.5% p.a profit of retaining our assets next to a very low interest rate and say with mathematical certainty that "we're offsetting this borrowing cost completely and making a tidy profit"; but what I can do is point to another Bill English figure of a $100million p.a gap between the dividend we're going to make on these assets and the cost of borrowing the $5-7billion.

Let me rephrase that. By keeping these assets and by borrowing the $5-7billion, we're better off by $100million a year than we would be by selling the assets for a quick buck. And that's not even taking into account the longer term returns above and beyond the $5-7billion which we'd continue to reap if we kept 'em Kiwi.

Given his penchant for making up numbers favourable to whatever policy he's trying to push at the time, the actual amount could well be higher.

English had requested that his political opponents (of which I am a proud example) "honestly explain" why we should borrow rather than sell assets. Who'd have thought he'd be able to do it all by himself.


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Oh, p.s/addendum ... with what has to be a seriously unique talent for political doublethink, English also happened to say the following while trying to defend the $100million we'd be worse off by. "Would you be willing to increase the mortgage on your house to go and borrow the money to buy shares on mighty river power?" I'm assuming, given the context he raised it in, that the answer he expected was "No". 
Correct me if I'm wrong, but isn't this EXACTLY what Key expected all those "Mum & Dad" investors to do rather than putting money into proven revenue returners like property..?

A Man Whose Economic Forecasting Makes Astrology Look Respectable

I see Bill English has just admitted he made up some of the figures on asset sales.

He's also said that the fiscal impact of the sales will be "roughly neutral" and will leave us with "less debt".

Well that sounds familiar. Where have we heard Bill English talking about "fiscally neutral" "debt-reducing" economic programs before.

Oh that's right, it was those "fiscally neutral tax cuts" that put a $1.1billion hole in the books.

Surely that's a one-off. Highly trained economics professionals and an experienced finance minister aren't in the business of putting out fallacious figures and then sheepishly revising them when they're caught out ... are they?

Unfortunately, yes they are.

Note what happened there. Before the election, our competent economic managers were talking about 3.4% growth for the next year. Post-election, it's 2.8%. That might not sound like much, but by my amateur calculations, that indicates Treasury was out by something like 17%. Hardly reassuring.

But don't despair! We may have screwed up and over-estimated how well the recovery'd be going by now by nearly a fifth ... but there is good news! We're actually going to grow by 3.8% the year after that! Not 3.3% like we previously claimed!

Again, these are figures out by an amount of less than twenty per cent, although this time in the government's favour. This might ordinarily sound plausible, but consider why Treasury revised its figures for growth till March '13 downward. It reckoned it had overestimated the economic benefits of the Christchurch rebuild and underestimated the severity of the ongoing Eurozone crisis.

This would be the already-much-vaunted Christchurch rebuild that's apparently going to account for 1.25% of GDP growth over the next five years, and the Eurozone crisis every man and his dog (although apparently not every minister and his lapdogs) has been witnessing deteriorate for months now.

But wait ... it gets worse. 

Pandering to National's base, pre-election English's ministry was claiming it'd be able to deliver a $1.45 billion surplus for 2014-15. Post-election it's claiming it will be able to deliver a $370 million surplus.

Wow. The Nats have somehow managed to lose more than a billion imaginary dollars out of their "Brighter Future." Presumably that's even after the well-above-valuation revenue they're expecting to reap from those well-mandated asset sales we keep hearing about.

Anyway, my point is simple. Governor Mario Cuomo pithily stated that "you campaign in poetry; you govern in prose". Or, put another way, from the perspective of a Minister of Finance wishing to maintain his ministerial salary, it's fiscally prudent to over-state how well he's doing before the election ... but the closer one's forecasts come to fruition, the more prudent it becomes to revise them downward toward reality.
Not that GDP growth forecasts from the boy who cried fiscal stimulus package actually have much worth anyway.

Of course, it's one thing to fudge one's economic forecasting; in that case Treasury's economic sooth-sayers can, as they have done, plead ignorance of changing circumstances in a "dynamic environment" as explanation (even though this looks these days more like a case of the Austrian economists burying their collective head in the sand).

It's quite another thing to simply make up numbers.

Or, being charitable to English, merely repeat made-up numbers from the year before in the hope nobody's noticed the continuing falsehood.

However, in fairness, these numbers tend to come from Treasury - a department which, as Harold Wilson observed "could not, with any marked success, run a fish and chip shop." We have thus come to expect a certain level of incompetence in the numbers department from the people we presumably pay to be reasonably accurate about the economy. With this in mind, the standard gNat line of defence when called on the frequently wild inaccuracy of a Treasury entrail reading is to pass the buck and point out that the Minister did not come up with the projection and that it's therefore someone else's fault.

Witness English's response above. When Guyon Espiner calls him on the credibility of the 170,000 jobs figure, English retreats and insists Treasury forecasting is "done independent of the government"; despite the fact he shares a "sense of confidence" in those forecasts.

With respect, the Minister should not be able to have it both ways. He can't put forward a made-up number as evidence the economic policy contained in his Budget is working (and, presumably, has been working for some years given the figure's repetition), then when called on the question as to whether it's predicting job growth for this or some other, more successful economy state that Treasury, not him, did the portent-reading. He especially can't do it when it turns out that his own government is patently unaware of any hard evidence for the number in question. Either he has confidence in his forecasting or he doesn't, and taking the above statements at face value, he patently does.

Thus, whichever way you look at it, this is a government whose economic forecasting makes astrology look respectable, which leads me to the unfortunate conclusion that a Maori economic axiom from the 1860s still holds true today. Namely, NEVER TRUST THE ENGLISH.