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I am very happy to have people comment on these entries and you don't need to write an essay, happy to get "liked it" or "don't agree with this one" although if you hate it some hint as to why would be helpful.

Wednesday, July 11, 2012

And all the boards did shrink…


So now Maori own all the water in NZ or at least that is what they are trying to assert in the face of the government trying to privatise state owned electricity companies.

So in truth this is the nub of the problem, “they” don’t like the sale of these state assets. Who “they” are is a point likely open to debate, but what we do know is that by and large Maori (as a group) have been left voting for many decades (although there appears to be a shift in this) and the “left” (another handy generalisation) in the form of the Labour and Green parties don’t like the sale of these assets either.

The National party (slightly right wing) claims it has a mandate to sell these assets because it told everyone at the last election that it was going to do it. Likewise Labour campaigned hard on this matter as an evil idea that would ruin the country. National won in an MMP landslide (more like a small trickle of pebbles but that is what you get in MMP) and Labour suffered its worst defeat ever (I think, certainly in the running for the ever award) This does rather seem to support Nationals position.

But enough with the politics, is it a rational idea? Tough to know from where I sit because I don’t have all the information that Treasury does, however what I do know is how this would work for me as an individual.

Assume my income had declined by a good chunk for some reason (say 20%) but instead of stopping spending I decided to borrow some money and truck on with my current lifestyle. I am hoping to get a pay rise sometime soon so I can fix this problem. After a while the debt starts to mount up and the interest costs are getting pretty big. Now I am worried that the pay rise might be a while coming and I might not be able to pay off the debt.

Good news I have some investments (in a power company) that produces a good steady dividend, problem solved all I need to do is……..

Well that’s the point isn’t it, what do you do? In a normal rational household you would look at your dividend and see that it is say $1200 per annum and the shares are worth $27,000. You have now racked up $50,000 of debt at 7% (personal loans are really expensive) A quick calculation shows that reducing your debt by 27,000 saves you $1,890 per year in interest. You would be better off selling the shares than continuing to borrow to invest. Simple right?

Same answer for the government even though the sums are a bit more complicated as we would in truth be comparing the expected present value of the future stream of dividends versus the expected present value of the expected borrowing costs. (I think) And with the scale of government this can get complicated.

But actually this is not really a guessing game, roughly speaking Treasury knows the answer to this problem and I am assuming the advice they are giving is to sell.

Now in the face of presumably logical advice from Treasury and an election mandate a group of unelected (potentially unrepresentative) people are trying to use the Treaty to prevent government policy. Is that right?

7 comments:

  1. liberalism is problem of all country...

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  2. I am not sure how you are defining liberalism as the insistance that the state retain ownership of the assets would be an anti liberalism stance.

    You may indeed think the rise of libertarian politics which champions the individual over the state is a bad idea, many people do. However the alternative ideal, socialisim, doesn't have such a great track record either.

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  3. Must confess I have never once tried to digest a government budget document, even though the press invariably reduce summaries to a what's in it for me question. Well, even accounting standards are riddled with loopholes so what would be the point anyway? e.g. switching from exit value to replacement value for assets and similar tricks to fiddle with annual results presented to shareholders.

    With a household budget I would be inclined to scrimp and save to pay off the debt on an income producing asset and hang on to it rather than sell the asset to reduce debt on other, less productive expenditure.

    As for Maoris and rights to the ocean my understanding of the treaty of Waitangi ? is also rather limited, but had thought the underlying principle was consultation with indigenous peoples and a guarantee of their equality with colonial invaders rather than the subjugation of invaders. Why would a white empire based on 'church and trade' sign a disadvantageous document?
    Seriously... aren't western economies in danger of collapsing because they can't compete with cheap labour overseas? Whereas fisheries are more stock intensive than labour intensive? I now feel so much better about what is happening in 'Oz'.

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  4. If you sell your $27,000 worth of investments you have paid off some of your debt but you also no longer get the $1200 per annum in dividends. This is what I believe most anti asset sales folk are protesting about. Once you have sold off all the silverware where do you get the income from.

    I know it's complicated but the present dividends from state owned assets are used by governments to provide services to taxpayers.

    To continue your household analogy the house has had a significant event that it can't afford to pay for through regular income streams. What to do? Sell the boat, the house in Clyde, cut back on the overseas holidays.

    The government is just behaving as any seemingly responsible budgeter would do to ensure it can pay bills.

    If people don't agree with selling these assets and don't want them ending in foreign ownership then they should put their money where there mouth is and buy them.

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  5. Yes they keep saying you won't have the $1,200 what they don't say is you won't have the cost of the debt either.
    The anti sales team also say I shouldn't have to buy them as I already own them, which is true. So selling them is really an additional tax on those that can afford to buy them but at least they feel good about being taxed as it is the first tax payment which comes with a dividend stream.

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  6. I always find this issue of ownership as amusing. Have people not understood what the 'crown' means in 'crown owned entities' or how it came about. I could be wrong but I think you might find that 'ownership' of these assets will somehow trace it's way back to some lass called Elizabeth who lives in London although she may not derive any financial benefit from the 'ownership'.

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