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Wednesday's Chorus: A lazy balance sheet
Briefly in the news in Aotearoa’s political economy around housing, poverty and climate on Wednesday, November 12:
* A fresh debate has blown up around whether the Government should sell state assets to fund investment in hospitals, roads and schools. Proponents describe this as ‘asset recycling’ and frame it as simply making the most efficient use of the Government’s balance sheet.
* PM Christopher Luxon even went as far as to say on Monday evening that the Government had a “lazy balance sheet,” which is a corporate term to describe a company that isn’t using its balance sheet, both its assets and debt, as aggressively as it should to maximise shareholder equity. Interest
* Luxon was referring to the asset side of the balance sheet, as the Treasury was last Friday in its once-every-four-years Investment Statement. But both he and the Treasury are ignoring the other side of the balance sheet, debt, which is something corporate investors don’t do.
* In my view, Luxon and the Treasury are right to view the Government’s balance sheet as lazy, but for debt, not assets. New Zealand’s Government has a positive net worth after including assets and the NZ Super Fund of 43.6% of GDP, largely because the Government hasn’t used debt to invest to keep up with population growth and maintain existing infrastructure.
* The Government and Aotearoa would get a much better ‘return on equity’ by using leverage to build up its assets and the wellbeing of its people.
Join us as a paying subscriber to get more analysis and detail in the podcast above and below the paywall fold, and be able to comment below and join The Kākā community in webinars and our chat room. Paying subscribers also enable me to do this journalism.
Yes, PM, NZ does have a lazy balance sheet
The debate about asset sales has broken out again after Treasury suggested ‘asset recycling’ in its once-every-four-years investment statement last Friday. PM Christopher Luxon was asked on Monday and again yesterday if a second-term National Government would ‘recycle assets’ to ‘optimise the Government’s asset mix.’ He agreed, but wasn’t specific about what could be sold or how the money could be reinvested.
Luxon said he wanted to optimise the Crown’s balance sheet and overall fiscal performance, as Interest’s Dan Brunskill reported late on Monday. He said that didn’t necessarily mean selling assets to reduce debt, it could also mean encouraging commercial entities to deliver stronger returns.
“As a former business guy, you just don’t want lazy balance sheets.
“You want to optimize your profit and loss statement, that’s strongly connected to your balance sheet, and you want to be … actually maximising your balance sheet really effectively.” Luxon quoted by Dan Brunskill via Interest.
In my view, New Zealand’s Government has a balance sheet that it should use to invest in infrastructure and people to improve productivity and wellbeing. That’s because over the last 20 to 30 years, we haven’t done that in a way that keeps up with population growth.
However, the political debate is very much focused on the idea that we can’t borrow to do that and that if the government needs to invest in things, it needs to sell things first. This is the idea described as asset recycling. It’s a framing and a phrase that’s used by those who are keen on asset sales and want to present it as a simple swap, ie ‘we sell this asset that we no longer need and then we invest it in hospitals or roads or schools.’
But this framing does ignores the other side of the balance sheet: debt.
The Prime Minister, a former CEO of Air New Zealand, likes to present or frame his job and the government as similar to a business, often using business language to describe it. However, one of the ways that businesses and investors often talk about balance sheets of companies when there is an opportunity to improve its performance is to talk about the company having a ‘lazy balance sheet.’
When businesses talk about lazy balance sheets, they often talk about a business which doesn’t have enough debt, which has not geared up its balance sheet to increase return on equity. If you have borrowed money to invest in an asset and your equity rises in value, then you get a much faster rise in equity if you have used it to buy or create that asset.
So fund managers in businesses that have very solid cash flows will often suggest management borrow to either buy assets or return capital to shareholders. The risks are that a company borrows too much and goes bankrupt if its cash flow dries up. That’s less of an issue for a government, as it has the power to tax. Also, the size of the Crown’s balance sheet is so large, that it can absorb shocks.
NZ’s balance sheet is very lazy, but on the debt side, not on the asset side
New Zealand’s net debt is in fact not only low, it’s non-existent. That’s because New Zealand has a lot of assets on the other side of the balance sheet, in particular New Zealand Superfund, but also enormous amounts of land and other buildings and various businesses that mean New Zealand is actually in a net equity position with net worth of 43.6% of GDP. But that’s not how it’s usually described.
You will have heard the government and the Treasury talk about New Zealand’s net core Crown debt being in a dangerously high position and that we need to stop spending and try to repay debt. But that’s actually not true, as the chart below shows.
The New Zealand Government’s debt is actually incredibly low, relative to other countries and relative to the Government’s assets. Also, net interest costs are around 1% of Government’s income. If you were a homeowner and you went to your bank and said you were worried about high debt because your interest costs were 1% of your disposable income, the bank would say not to worry too much and that you should borrow to ensure you have a warm, dry home and that your kids are growing up safely. And that’s the case where we are with the government’s balance sheet.
So in my view, the government is right to think about the government having a lazy balance sheet, but not in an asset sense, in a debt sense.
Chart of the day: New Zealand’s lazy balance sheet
My short Pick n’ Mix of links elsewhere
Politics and the Economy
* Thomas Coughlan & Jamie Ensor for NZ Herald: Ex-Police Commissioner Coster on leave from new job after damning report
* Giles Dexter for RNZ: Congestion charging legislation passes third reading
* Craig McCulloch for RNZ: ‘He’s been here 50 years’: Luxon brushes off Peters’ asset sales attack
* Ric Stevens for Open Justice via RNZ: Hawke’s Bay director jailed 14 years for exploiting, raping workers
* Russell Palmer for RNZ: Labour ‘absolutely’ comfortable if Te Pāti Māori does not return to Parliament
* RNZ Morning Report: ‘Tawdry, silly argument’: Peters lays into asset sales
Housing, Climate & Poverty
* Laura Walters for Newsroom Pro-$: Survivors say Crown apology proves ‘hollow’ 12 months on ‘A year on from the PM’s apology to those abused in state care, survivors say they are still waiting for proper redress, accountability and closure.’
* Greg Ninness for Interest: Housing values flat overall but notable declines in Auckland, Whangarei and Tauranga, QV says ‘QV says Auckland housing values have posted some significant declines with the biggest falls in the city’s central and southern districts’
* David Hargreaves for Interest: Some soothing news for the RBNZ ahead of OCR decision - inflation expectations muted ‘RBNZ survey shows expectations of the future level of inflation have barely changed and remain ‘anchored’ near 2% despite the rise in actual annual inflation to 3%’
* Greg Ninness for Interest: Rental figures are good news for tenants but landlords won’t be happy ‘Latest rental data suggests strong supply of rental housing is pushing down rents’
* Column by Joel MacManus for The Spinoff: The government’s homelessness ‘ban’ may not be as ridiculous as it sounds. ‘The only cure for homelessness is homes, but responsible policing plays an important role in manage the symptoms.’
* Pokere Paewai for RNZ: Human rights complaint filed over treatment of Māori
Cartoon: The past and the future
Timeline-cleansing nature pic: Cirque de Tui
Ka kite ano
Bernard
This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe
View all episodes
By Bernard HickeyBriefly in the news in Aotearoa’s political economy around housing, poverty and climate on Wednesday, November 12:
* A fresh debate has blown up around whether the Government should sell state assets to fund investment in hospitals, roads and schools. Proponents describe this as ‘asset recycling’ and frame it as simply making the most efficient use of the Government’s balance sheet.
* PM Christopher Luxon even went as far as to say on Monday evening that the Government had a “lazy balance sheet,” which is a corporate term to describe a company that isn’t using its balance sheet, both its assets and debt, as aggressively as it should to maximise shareholder equity. Interest
* Luxon was referring to the asset side of the balance sheet, as the Treasury was last Friday in its once-every-four-years Investment Statement. But both he and the Treasury are ignoring the other side of the balance sheet, debt, which is something corporate investors don’t do.
* In my view, Luxon and the Treasury are right to view the Government’s balance sheet as lazy, but for debt, not assets. New Zealand’s Government has a positive net worth after including assets and the NZ Super Fund of 43.6% of GDP, largely because the Government hasn’t used debt to invest to keep up with population growth and maintain existing infrastructure.
* The Government and Aotearoa would get a much better ‘return on equity’ by using leverage to build up its assets and the wellbeing of its people.
Join us as a paying subscriber to get more analysis and detail in the podcast above and below the paywall fold, and be able to comment below and join The Kākā community in webinars and our chat room. Paying subscribers also enable me to do this journalism.
Yes, PM, NZ does have a lazy balance sheet
The debate about asset sales has broken out again after Treasury suggested ‘asset recycling’ in its once-every-four-years investment statement last Friday. PM Christopher Luxon was asked on Monday and again yesterday if a second-term National Government would ‘recycle assets’ to ‘optimise the Government’s asset mix.’ He agreed, but wasn’t specific about what could be sold or how the money could be reinvested.
Luxon said he wanted to optimise the Crown’s balance sheet and overall fiscal performance, as Interest’s Dan Brunskill reported late on Monday. He said that didn’t necessarily mean selling assets to reduce debt, it could also mean encouraging commercial entities to deliver stronger returns.
“As a former business guy, you just don’t want lazy balance sheets.
“You want to optimize your profit and loss statement, that’s strongly connected to your balance sheet, and you want to be … actually maximising your balance sheet really effectively.” Luxon quoted by Dan Brunskill via Interest.
In my view, New Zealand’s Government has a balance sheet that it should use to invest in infrastructure and people to improve productivity and wellbeing. That’s because over the last 20 to 30 years, we haven’t done that in a way that keeps up with population growth.
However, the political debate is very much focused on the idea that we can’t borrow to do that and that if the government needs to invest in things, it needs to sell things first. This is the idea described as asset recycling. It’s a framing and a phrase that’s used by those who are keen on asset sales and want to present it as a simple swap, ie ‘we sell this asset that we no longer need and then we invest it in hospitals or roads or schools.’
But this framing does ignores the other side of the balance sheet: debt.
The Prime Minister, a former CEO of Air New Zealand, likes to present or frame his job and the government as similar to a business, often using business language to describe it. However, one of the ways that businesses and investors often talk about balance sheets of companies when there is an opportunity to improve its performance is to talk about the company having a ‘lazy balance sheet.’
When businesses talk about lazy balance sheets, they often talk about a business which doesn’t have enough debt, which has not geared up its balance sheet to increase return on equity. If you have borrowed money to invest in an asset and your equity rises in value, then you get a much faster rise in equity if you have used it to buy or create that asset.
So fund managers in businesses that have very solid cash flows will often suggest management borrow to either buy assets or return capital to shareholders. The risks are that a company borrows too much and goes bankrupt if its cash flow dries up. That’s less of an issue for a government, as it has the power to tax. Also, the size of the Crown’s balance sheet is so large, that it can absorb shocks.
NZ’s balance sheet is very lazy, but on the debt side, not on the asset side
New Zealand’s net debt is in fact not only low, it’s non-existent. That’s because New Zealand has a lot of assets on the other side of the balance sheet, in particular New Zealand Superfund, but also enormous amounts of land and other buildings and various businesses that mean New Zealand is actually in a net equity position with net worth of 43.6% of GDP. But that’s not how it’s usually described.
You will have heard the government and the Treasury talk about New Zealand’s net core Crown debt being in a dangerously high position and that we need to stop spending and try to repay debt. But that’s actually not true, as the chart below shows.
The New Zealand Government’s debt is actually incredibly low, relative to other countries and relative to the Government’s assets. Also, net interest costs are around 1% of Government’s income. If you were a homeowner and you went to your bank and said you were worried about high debt because your interest costs were 1% of your disposable income, the bank would say not to worry too much and that you should borrow to ensure you have a warm, dry home and that your kids are growing up safely. And that’s the case where we are with the government’s balance sheet.
So in my view, the government is right to think about the government having a lazy balance sheet, but not in an asset sense, in a debt sense.
Chart of the day: New Zealand’s lazy balance sheet
My short Pick n’ Mix of links elsewhere
Politics and the Economy
* Thomas Coughlan & Jamie Ensor for NZ Herald: Ex-Police Commissioner Coster on leave from new job after damning report
* Giles Dexter for RNZ: Congestion charging legislation passes third reading
* Craig McCulloch for RNZ: ‘He’s been here 50 years’: Luxon brushes off Peters’ asset sales attack
* Ric Stevens for Open Justice via RNZ: Hawke’s Bay director jailed 14 years for exploiting, raping workers
* Russell Palmer for RNZ: Labour ‘absolutely’ comfortable if Te Pāti Māori does not return to Parliament
* RNZ Morning Report: ‘Tawdry, silly argument’: Peters lays into asset sales
Housing, Climate & Poverty
* Laura Walters for Newsroom Pro-$: Survivors say Crown apology proves ‘hollow’ 12 months on ‘A year on from the PM’s apology to those abused in state care, survivors say they are still waiting for proper redress, accountability and closure.’
* Greg Ninness for Interest: Housing values flat overall but notable declines in Auckland, Whangarei and Tauranga, QV says ‘QV says Auckland housing values have posted some significant declines with the biggest falls in the city’s central and southern districts’
* David Hargreaves for Interest: Some soothing news for the RBNZ ahead of OCR decision - inflation expectations muted ‘RBNZ survey shows expectations of the future level of inflation have barely changed and remain ‘anchored’ near 2% despite the rise in actual annual inflation to 3%’
* Greg Ninness for Interest: Rental figures are good news for tenants but landlords won’t be happy ‘Latest rental data suggests strong supply of rental housing is pushing down rents’
* Column by Joel MacManus for The Spinoff: The government’s homelessness ‘ban’ may not be as ridiculous as it sounds. ‘The only cure for homelessness is homes, but responsible policing plays an important role in manage the symptoms.’
* Pokere Paewai for RNZ: Human rights complaint filed over treatment of Māori
Cartoon: The past and the future
Timeline-cleansing nature pic: Cirque de Tui
Ka kite ano
Bernard
This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe