New Zealand: #1 in Open Budget Index

From The Economist. New Zealand rates as having the highest level of budget transparency. The Open Budget Index measures the amount, level of detail, and timeliness of budget information that is publicly available in 102 countries. Only 24 countries have acceptable levels of budget transparency whilst the remaining 78 provide “insufficient” information; 17 of these provided scant or no budget information. Although transparency has improved since the last survey in 2012, thanks largely to improvements made by countries at the bottom of the index, the average score is still only 45 out of a maximum of 100. New Zealand = 88, South Africa = 87, USA = 81, China = 14

open budget index

Merle Hazard and “The Fiscal Cliff”

Here is another classic from Merle Hazard – the Nashville country artist who sings about the world of finance. Here he sings about the Fiscal Cliff.

by Merle Hazard

It was a sunny day down in Washington. I took my Chevy out for a spin.
While I was stopped at a light, I saw some cars to my right, and then what happened
nearly did me in. 
House Speaker Boehner pulled his wheels next to Senator Reid’s, and then they got into an awful tiff.
So Boehner said “Let’s fight,” and Reid said “Yeah, you’re right.”
”Let’s have a drag race to the fiscal cliff!”

Fiscal cliff
The fiscal cliff is a danger zone.
It’s where grown men go when budgets are blown.
If our Senators cannot agree, they make
Massive cuts automatically.
When the budget talks have come to a halt,
People go there and they threaten default.
What will happen if we hit the fiscal cliff?

It was a game of chicken; I was really scared. I didn’t want anyone to die. 
But Boehner revved it up, and said “Keep taxes low,” and Reid said
”No, we must keep spending high.” 
And then it finally happened, what I always feared. And, yeah, 
it looked as bad as you would think. 
Our elected reps skidded out of control 
And drove their cars right over the brink.

Fiscal cliff
The fiscal cliff is a danger zone.
It’s where grown men go when budgets are blown.
When our Congressmen cannot agree,
Taxes go up automatically.
When the budget talks have come to a halt,
People go there and they threaten default.
What will happen if we hit the fiscal cliff?

Well, officer, my memory of that day has never gone away. I often find myself thinking, “What if?” And what I’ve realized is that if they’d only been wise enough to compromise, well…
They could have saved us from the fiscal cliff!

Fiscal cliff
Wah wah wah, wah wah wah wah wah…

Why does the US have so much debt?

Another really good video from Paul Solman of PBS, this time he talks with Wall Street Journal journalist David Wessel about America’s debt. Some noteworthy facts include:

* 63 percent the government spent went out the door without a vote of Congress
* 20 percent of the federal budget is spent on defense – $700 billion last year, more than the combined defense budgets of the next 17 largest defense budgets of other countries
* Each aircraft carrier is $11 billion. This is enough to replace 750,000 shoulder, knee, and hip joints for people on Medicare.
* In 2011 the government took in $1.3 trillion in tax revenue, but the Treasury adds up the value of all the loopholes, deductions and credits, and they amounted to $1.1 trillion.

Steve Keen – “non-orthodox” economist with the “loudest mouth”

Here is an interview with Australian economist Steve Keen from the BBC’s HARDtalk programme. Keen predicted the financial crisis and is concerned that we are entering into another Great Depression. He also informs us that he is a non-orthodox economist with the loudest mouth.

Keen talks of the positive side of banking behaviour when loans are used for investment purposes and working capital in corporations. However the negative side of banking is basically the funding of ponzi schemes in which money is lent out to gamble on asset prices rather than investing in productive sectors of the economy. It is this behaviour that has taken over the financial sector over the last 30 years. Basically what he is proposing is:
1. Write off the debt
2. Bankrupt the banks
3. Nationalise the financial system

Consequences for US economy if there is no debt-ceiling deal.

The 2nd August is a significant day for the US Congress as the United States needs to take action to lift its debt-ceiling so that it fulfills its obligations and pays its debts. If they don’t reach an agreement by the 2nd August deadline the consequences of not being able increase its debt are as follows:

* Federal spending would immediately be cut by 44 percent.
* The spending cut would be equivalent to 10% GDP
* The Treasury Department would be forced to roll over $500 billion in debt.
* The U.S. credit rating could very well be downgraded.
* Higher interest rates as the US attempt to sell $500 billion in new debt so that they can pay off their old debt.
* By paying social security the US have nothing left for: defence; FBI; law enforcement; student grants etc.

Below is an interview from PBS Newshour with Jay Powell, who served as undersecretary of treasury under President George Bush.

Downgrade avoided but NZ needs to earn more.

The Government has achieved its immediate aim for the Budget, of avoiding a credit rating downgrade that could have pushed up borrowing costs.
Fitch and Standard & Poors have reaffirmed their ratings, but kept New Zealand on notice of a downgrade.
Standard & Poor’s says the Government’s targets for debt reduction, if met, will boost the country’s creditworthiness.

But according to some economists on Radio NZ Morning Report programme, the 4% growth forecast in 2014 is business as usual and not a growth forecast. There is no mention of an export recovery as the economy seems to be relying more on higher export prices and not an expansion in the volume of exports. Furthermore there is also a dependency on the injection of money into the economy for the rebuilding of Christchurch. No doubt the $10bn into the circular flow will have a positive impact but long term the government focus is still debt and savings. However it is the private debt which seems to be of greater concern at this stage.

Ultimately New Zealand faces a fiscal timebomb – NZ superannuation and health currently take up 11% of GDP and is expected to rise to 19% by 2050. The government has three choices:
1. Tax hikes but this will slow growth
2. Spending cuts – again less aggregate demand
3. Earn more – there must be greater policy focus on promotion of our exports.

NZ needs to use its comparative advantage in the primary sector and encourage more export growth

“Interesting that in the budget speech debt was mentioned 19 times whilst exports were mentioned twice.” Dr Ganesh Nana – Berl Chief Economist

NZ Budget 2011

WORD CLOUD: The words which went towards making up Bill English’s first Budget speech.
The main points from the Budget yesterday.

* The New Zealand Government reports a record high operating deficit of 8.4% of GDP.

* Nonetheless, a return to surplus is expected in the year ended June 2015. The core deficit is forecast to fall to 4.7% of GDP next year and 1.8% the year after.

* Deficit reduction will be heavily dependent on the Government meeting an aggressive attempt at expenditure control.

* The Government intends to maintain its target of net debt below 20% of GDP but it will peak at 29.6% of GDP in June 2015. Currently it sits at an estimated 20.8% of GDP.

* GDP is forecast to increase 1.8% on an annual average basis for the year ended March 2012. Growth is then expected to pick up to 4.0% in 2013 and 3.0% in 2014.

* The Government will issue $13.5 billion bonds in 2011/12 and $12.0 billion in 2012/13. This compares with $20.0 billion in the year to June 2011.

From the Bank of New Zealand publication “Economy Watch”

Keynes hovers over the Institute for New Economic Thinking

Two recent articles on the second meeting of the Institute for New Economic Thinking had connotations of John Maynard Keynes – Niall Ferguson in Newsweek and Will Hutton in the Observer.

The economic conference, to debate the current crisis, has been likened to Keynes’ farewell speech at the Bretton Woods conference back in 1944. He wanted an end to balanced budgets, public austerity, national sovereignty and freedoms for finance at home and abraod. His desire was regulations that would acknowledge countries’ interdependence and create global institutions and a global currency to give governments room for manoeuvre to act intelligently and creatively to stimulate jobs, trade and growth. For the IMF to now be used as a bailout facility for speculators and overextended banks at the same time that governments introduce draconian budget cuts is exactly was Keynes was NOT in favour of. He was a believer in short-term government deficits to combat depressions and would regard the current state of the US fiscal position as disastrous. The federal debt could hit 344% of GDP by 2050. Interest payments would absorb nearly all federal tax revenues. Furthermore the USA’s reliance on foreigners to finance its borrowing habit is against what Keynes believed in.

The US could keep borrowing US$1 trillion a year but there are two possibilities to try and reduce their dependency on overseas borrowing:

1. Eliminate the deficit largely through deep spending cuts and Medicare reform.
2. Modest tax cuts and tax hikes on millionaires and billionaires.

According to Will Hutton – the good news is that there are a lot of a very good and iconoclastic economists from many countries who want to take up the fight again. It’s a race against conventional thinking – and time.

New Zealand’s Credit Rating – downgrade?

I did an earlier posting on Credit Rating Agencies explaining who they are and how they work. The table right (from the Parliamentary Monthly Economic Review) shows the three credit rating agencies and the current rating that New Zealand has as an economy.

It wasn’t until 1977 the New Zealand was actually rated by S&P and Moddy’s – Fitch came into the picture in 2002. You can see from the table that S&P reviewed New Zealand in November 2010 and while maintaining its rating at AA+, they changed the outlook from stale to negative. Fitch also gave NZ the same rating. This means that there is a higher chance of a downgrading which would mean higher interest costs to the government.

Standard and Poor’s raised concerns around the level of New Zealand’s external imbalances, and the weakening of fiscal flexibility for their change in outlook. The
negative outlook on Fitch Ratings’ credit rating for New Zealand is also based on the economy’s imbalances, with the level of the country’s current account deficit and international debt being mentioned.

Following the Christchurch earthquake in February 2011, Moody’s Investor Services made an announcement that they saw no reason to reconsider their Aaa credit rating for New Zealand, although they noted that it would likely “result in another one-time rise in government debt”. The credit rating agency noted that New Zealand government debt levels were below the median for other Aaa-rated governments globally. The Agency stated that it would wait for a fuller assessment of the impact on government debt, when the 2011 Budget is presented.

What does this mean for New Zealand?
The 2011 budget will no doubt assure credit rating agencies that a downgrade is unnecessary and therefore Bill English will provide little fiscal stimulus. In a pre-budget presentation English hinted at $1 billion of new spending mainly in health and education, but this will be “substantially offset” by cuts in other, lower priority, areas.