09 Mar

Deceptive Debt

Published by MacDoctor on March 9th, 2011
18 Comments »

At Red Alert, David Cunliffe blogs that he thinks that National is being deceptive about New Zealand’s international debt problem. It is slightly worrying that Mr Cunliffe (who is Labour’s financial spokesperson and is therefore supposed to be financially literate) thinks this, because there is no doubt that Standard and Poor is very concerned about it, even if he is not. Apparently, his argument is that most of the debt load is private, rather than public:

“Before the quake, National would have you believe that New Zealand had a huge international debt problem, and that the solution to that was for the Government to compress spending and services to pay down this debt.

“It was always a half truth: 90% of that debt is private debt and only 10% of it is public (government) debt.”

Unfortunately, Mr. Cunliffe fails to understand that a decade of profligate government spending driven by Labour has caused the private debt blow-out.

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Spending creates debt.

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Governments often forget that they are not earning money, but taking it from taxpayers. As government tax-take increases, so the amount of discretionary cash in the private system drops. I emphasise the discretionary part, because it is sometimes overlooked that a relatively small increase in overall taxation can be a substantial drain on the amount of money left over from day-to-day running. This pool of money is relatively small compared to overall turnover and a small increase in taxation (as in fiscal drag) can be very significant. This is the pool of money we use to buy non-essentials. It is also the pool of money used for savings and, often, through savings, to pay for larger purchases.

Thus when a government over-taxes people (the true meaning of the word surplus), people turn to debt to finance their holidays and new cars more often than before. Overdrafts are created for temporary needs and never closed. Credit card debt mushrooms. All because we try to maintain our lifestyles on less discretionary income. Businesses finance new capital expenditure instead of paying for it out of profits – or they finance it over longer periods at less favorable rates. Private debt balloons.

If this overtaxation is used simply to pay down governments debt – the usual justification from Labour – then the overall financial position of the country changes little. Debt moves from government to private industry and the consumer. This is what Labour usually means by leaving the “books in strong shape”, to use Cunliffe’s words – Government debt is low. Unfortunately, this is a piece of nonsense. The “books” were in appalling shape because the government was spending more than it was receiving in tax, despite the overtaxation continuing. This is the inevitable result of government overspending – it grows like a bacterial culture, drinking up all surpluses. Government overspending always makes a nation’s debt situation deteriorate – both public and private debt.

The story from Labour is that the $300 million a week that is currently being borrowed is something to do with tax cuts. This is clearly drivel. The government was borrowing this amount before the tax cuts and did not increase borrowing on their account. The tax cuts were not cuts at all but “rebalancing” – whatever that means. The GST increase supposedly paid for them. Government tax inputs were essentially unchanged.

The real reason why the government continues to borrow at an alarming rate is that government expenditure exceeds the total tax take. There are only two ways to deal with that. Increase the tax take or decrease government expenditure. Labour would do the first, ensuring that the mushrooming of private debt continues unabated. National talk about the latter (but have done precious little to date). This is a much better solution but actually requires action.

Sadly, it appears unlikely that Labour’s finance spokesperson has any grasp of this at all. Witness the idiocy of his rhetorical question:

“Why then was the international debt pile so huge that reducing it by slashing Government spending and prolonging the recession was necessary a month ago, but borrowing the lot is no problem now?”

Apart from the silly suggestion that reducing government spending prolongs a recession (when it is clear that excessive government spending put us into a recession six months before the debt crisis sealed it), it seems that Mr. Cunliffe does not understand the difference between capital expenditure (as in rebuilding Christchurch) and operational expenditure (as in Working for Families and interest-free student loans). Capital expenditure on expensive projects is always financed by debt. Only a moron would attempt to pay for it directly out of taxes. That is why National are comfortable borrowing this money and very uncomfortable introducing a new tax for it. Increased taxation for such a capital project is a very inefficient way of doing things and is much more likely to prolong the recession than is slashing government expenditure. Cunliffe should know that, but he is too ideologically bound to socialist ideals.

Spending creates debt. The only way one can spend without creating debt is to use savings. Frankly, the only way the government can finance the rebuild of Christchurch without creating debt is to liquidate the $12.5 billion in the Cullen fund. And the sooner, the better.

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