Russel Norman

Creating debt to justify privatisation

by Russel Norman

The National Government has consistently used the argument of government debt and the budget deficit as the primary reason for partially privatising our state-owned energy companies: Genesis, Mighty River Power, Meridian, and Solid Energy.

Yet the debt and deficit have been made much worse as a result of the decisions of this Government.

Our debt situation has worsened considerably since National became Government. Partly this was due to factors beyond the Government’s control: the global financial crisis and the Canterbury earthquakes reduced revenue and increased costs.

But the Government’s own policies have made the deficit worse.

On the revenue side, as the Inland Revenue Department (IRD) recently pointed out, Government tax policy measures have accounted for a much greater proportion of falling tax revenues than the global financial crisis.

As part of its Briefing to the Incoming Minister, IRD disclosed that tax revenue as a percentage of GDP has fallen significantly – from 35 to 31 percent of GDP – and is now below the OECD average. Of this 4 percent decline, 2.5 percent is “attributable to the cumulative effect of tax policy measures undertaken by successive Governments since 2008”. Part of this was Labour’s expensive tax cuts and part of it was Nationals’.

IRD get even more specific in their recent financial review when they state: “In the short term, particularly 2010–11, the [Budget 2010 tax] package is revenue-negative because some of the revenue-positive aspects of the package take time to transition in.” The Government said its so-called ‘tax switch’ was ‘broadly fiscally neutral’, but it was no such thing; it was a tax switcheroo that threw the Government books into a further $2 billion deficit.

Beyond the revenue-negative actions of the Government, there were the revenue-positive things they failed to do. The Government decided to turn down the Green Party’s proposed temporary levy to help pay for the rebuilding of Christchurch. That’s an additional $1 billion of lost income per year.

A comprehensive tax on capital gains (excluding the family home) would also have helped raise additional revenues while helping to shift the economy onto a more productive footing. A CGT would take maybe a decade to come fully on stream, but the Tax Working Group estimated that once it did, it would raise $4.5 billion per year. A charge on commercial water use would raise $500m per year.

All these elements make the one-off gain of $5 billion from privatising state-owned assets look like pretty small bikkies.

Then on the expenditure side, the Government is spending like a drunken sailor on new motorways (without positive economic benefits) to the order of $2 billion per year, and on-going subsidies of carbon polluters of around $1.2 billion this year.

On both the revenue side and the expenditure side National has created their own deficit and debt problem. And then they are using the deficit and the debt that they created in order to justify privatisation.

P.S. To make your own submission on the Government’s legislation to partially privatise the last of our best state-owned assets, click here.