Simon Orme writes from Sydney
The falling Kiwi dollar and dancing Cossacks
This week’s falling Kiwi dollar indicates fundamental structural weaknesses in the New Zealand economy compared with
Australia. Let me speculate. This structural weakness can be traced back to the 1976 Muldoon government decision to can
the Kirk-Rowling Government’s funded superannuation scheme.
In the 1975 election, Muldoon characterised Labour’s super scheme as a communist takeover of NZ in the infamous dancing
Cossacks cartoon.
The scheme may have been imperfect, but the replacement was worse – a very generous super scheme funded from current
Government expenditure, not savings.
The result is that, compared with Australia, NZ’s national savings are pitiful. Recent data indicates that Australia’s
assets under funds management dwarf those of NZ, on a per capita basis. A related point is the continuing high debt
levels of the NZ government compared with its Australian counterparts.
As a result, NZ is far more dependent upon foreign investment – NZ assets are more likely to be owned by foreigners.
Against this background, the flight of capital from NZ following this week’s US rates rise should not come as any
surprise. The whole point of the move was to rein in the US equities markets.
The fact the NZ Reserve Bank matched the US rise would have done nothing to make Kiwi denominated investments less
unattractive.
What’s interesting is that over the two day fall this week, while the Kiwi dollar lost around 4.2% against the $US, this
was nearly matched with a loss of 3.7% against the $Australian (1).
This is against a background where Australia is far from popular with overseas investors.
Australian interest rates remain lower than those in the US and NZ. The Australian Reserve Bank has been reluctant to
raise rates as far or as fast, against the background of a slowing Australian economy.
The Australian Federal Budget earlier in the month was widely seen as fiscally incontinent.
The headline Budget surplus did not survive closer scrutiny. The bulk of the surplus was based on revenue from the sale
of third generation mobile telephone spectrum – a windfall gain from an asset sale.
Worse, a big chunk of the Budget balance was the result of a shonky transaction that wouldn’t look out of place if it
turned up in a wine box.
Income from the new GST will be passed on to the States as grants. But in the Budget, part of these grants were
classified as loans to the States. This means the sum appears as an asset on the balance sheet instead of an operating
expense reducing the Budget balance.
But it was later revealed the loans would be translated into grants to the States in a classic 24 hour money-go-around
bogus transaction.
The Budget revealed the fact the Federal government had committed a lot of lolly to compensate for the bitter taste of
the new GST, and to shore up waning support in the bush. As a result, the cupboard was pretty much bare.
Returning to the Trans-Tasman comparison, it is difficult to attribute the relatively rough ride of the Kiwi dollar
against the Australian to the fact the NZ Government is loosening up the purse strings.
Compared with some extra money for the West Coast and the NZ Symphony Orchestra, Australia’s Budget was a veritable
lolly scramble.
Also, structural reform of the economy is pretty much at a stand still or even going backwards because of concerns over
“reform fatigue” after Jeff Kennett’s Victorian election loss.
The contrast with Australia highlights the central issue for a centre left NZ Government – how to acquire economic and
fiscal sovereignty when foreigners have a lien on your economy (as demonstrated by this week’s dollar fall).
The solution will not be found overnight. It is likely to involve putting in place a proper national superannuation
system to get the national savings rate up and Government expenditure on super down.
© Copyright: Simon Orme 2000
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