31 May 2009

Engkeylish Economics

I make no apologies in republishing this piece critiquing the budget stupidity of the Engkeylish policies as it demonstrates the inadequacy of the present finance minister and his money speculator boss.

The $8 billion robbery

On Q+A this morning Guyon Espiner interviewed Bill English. Guyon had received papers from a treasury official that apparently show the cost of cancelling the government’s contributions to the Cullen Fund for 10 years will be $8 billion over and above the cost of borrowing to fund the contributions. $3.5 billion from lower value of the Fund and $4.5 billion from lower tax take. The Cullen Fund is one of the largest tax-payers.

Which makes a lot of sense. The long-run cost of borrowing government is 6% a year according to Treasury. That’s lower than the long-run return on the Cullen Fund of 6.57%, after tax (and on top of that there’s the tax that flows to the government). Even if the exact numbers are different in the end, the long-run return for a managed fund like the Cullen Fund is going to be higher than the interest rate on essentially risk-free debt issued by a government.

Put on the spot English couldn’t just say ‘Treasury’s wrong’ so his response was ‘well, the Cullen Fund lost money last year and was making 14% a year when it started’. Yeah, as Guyon pointed out, that’s why it’s called a long-run average. Some years are good, some are awful. The long-run is going to be better than the cost of government borrowing.

So, English had to try another angle. ‘If you have a mortgage and hire purchase and credit card debt , and you go to your bank manager and say ‘I want a hundred grand to play on the stockmarket’, see what kind of answer you get’.

Firstly, the government is not heavily indebted like English describes it. Our debt is actually very low by international standards (Ireland’s is over 45% of GDP, UK and US even higher, many OECD countries have more than 100% of GDP debt).

Secondly, the argument is basically that you shouldn’t have savings on borrowed money (as English said in his speech on Friday). Well, that’s plainly dumb. Anyone who has a mortgage and savings effectively has savings funded by borrowing. What’s more, if you extend English’s argument we should liquidate the Cullen Fund altogether, along with the ACC Fund, the EQC Fund, and any other financial assets we have to pay down our debt. Sometimes having an asset while also having debt makes sense. Especially when, like the government with the Cullen Fund, your expected return is greater than your cost of borrowing.

English is going to need to come up with a better excuse for starving the Cullen Fund to death and quick. Because right now it looks like he’s ripping off our country to the tune of $8 billion because of an ideological opposition to ensuring the future of superannuation.

29 May 2009

The Herald turns on its masters.

The Herald turns on its masters
These stories may be the beginning of the recognition by the Herald that the party it supportshas traditionally been the most politically and economically irresponsible political party in NZ history ever since it was created.
John Rougham's article certainly demonstrates the con job the Standard & Poor's scare tactic was by Key and his rumour mill money speculator cronies who form NACT was. I wonder how many of his mates were speculating on the knowledge that S&P wouldn't down grade as others less well briefed sold the currency short?

Budget 09: Super burden shifts to next generation

4:00AM Saturday May 30, 2009
By Simon Collins

Taxpayers will pay more than $1 billion a year more for pensions from 2020 into the indefinite future as a result of the Government's decision to stop paying into the NZ Superannuation Fund for the next 11 years.

Background papers published by the Treasury yesterday show that if payments to the fund resume in 2020-21, the payment in that year will have to be $2.8 billion, compared with only $1.6 billion payable if there had not been a break in payments.

The 11-year break means net payments into the fund will then have to continue until 2030, compared with 2027 under the pre-Budget scheme.

Labour leader Phil Goff said yesterday that the Government had chosen to fix a short-term deficit problem at the expense of a much bigger long-term problem paying for the ageing population.

"Effectively what they will be doing is killing the Superannuation Fund," he said.

But Prime Minister John Key reiterated at a business lunch in Manukau that he was committed to keeping the pension for everyone from age 65 at a married rate of 66 per cent of the net average wage.

"I have made a commitment that if we raise the age or lower the pension payment, I would personally resign as Prime Minister," he said. (Key must be held to this promise. He's lied so many times to the public over his financial expertise he needs to be held accountable. Watch out for attempts to cut pension payments in the face of further bungles by Key & English over the term of this NACT government.)

The Super Fund, or "Cullen Fund", was set up by law in 2001 to lower the future cost of pensions for the growing number of old people by putting money aside in each year up to about 2027 - effectively smoothing out the rising cost of the elderly.

Without the fund, the cost of Super would have risen from 3.62 per cent of gross domestic product (GDP) at present to 4.49 per cent in 2020 and 6.50 per cent in 2050. Because of the fund, we actually paid 4.68 per cent of GDP for super in the past year, including just over 1 per cent of GDP salted away in the Cullen Fund.

Under the original Cullen scheme, we got the payoff for that investment from 2027 onwards until by 2050 we would have only had to pay in 5.73 per cent of GDP - almost 1 per cent of GDP less than what we will then pay to the elderly. The law requires the Treasury to recalculate the required contributions each year to achieve smooth contributions for 40 years ahead.

This year, because of the 11-year break in contributions, it says payments in 2050 will have to be 5.99 per cent of GDP, wiping out about a third of the benefit that the fund could have given us.

28 May 2009

Political Chicanery

The sort of political spin we can expect from the Beehive under the present Government. After all their PR machine has had experience in the USA political campaigning so a lesson learnt there will be used in New Zealand.
Judy Wallman, a professional genealogy researcher in southern California,
was doing some personal work on her own family tree. She discovered that
Congressman Harry Reid's great-great uncle, Remus Reid, was hanged for
horse stealing and train robbery in Montana in 1889. Both Judy and Harry
Reid share this common ancestor. The only known photograph of Remus
shows him standing on the gallows in Montana territory. On the back of the
picture Judy obtained during her research is this inscription: 'Remus Reid,
horse thief, sent to Montana Territorial Prison 1885, escaped 1887, robbed
the Montana Flyer six times. Caught by Pinkerton detectives, convicted and
hanged in 1889.' So Judy recently e-mailed Congressman Harry Reid for
information about their great-great uncle.
Believe it or not, Harry Reid's staff sent back the following biographical sketch
for her genealogy research:

"Remus Reid was a famous cowboy in the Montana Territory. His business empire grew to
include acquisition of valuable equestrian assets and intimate dealings with the Montana railroad.
Beginning in 1883, he devoted several years of his life to government service, finally taking leave
to resume his dealings with the railroad. In 1887, he was a key player in a vital investigation run
by the renowned Pinkerton Detective Agency. In 1889, Remus passed away during an important
civic function held in his honour when the platform upon which he was standing collapsed."


THAT's how it's done, Folks!