Getting the Politics Right

Struggling out of the Great Grimpen Mire

Regular readers of this blog will know where we stand on the matter of national debt. We have argued repeatedly that New Zealand is at serious risk. We have argued that we must cut government spending and we must pay down debt through asset sales. If we do not do this now, it will be forced upon us later by the international capital markets to whom we are deeply in hock. If we refuse to face up to it and put it off, it will be far more painful and destructive when our back is against the wall and we are forced to it.

In the light of this we welcome the Prime Minister's announcement that the government is looking to reduce spending by $300 million per annum, and conduct a partial sell down of four state owned companies: three electricity companies and a coal company. Now, we are not that excited about the spending cuts--because it is only pegging back planned new spending. It is not a real cut in spending--which would require us to address our woefully bloated entitlement payments which extend government largesse to the majority of the population. But it is a start. It is a step in the right direction. As our mother used to say, we must be thankful for small mercies.

But we wish to make three more general observations. The first is a rarely seen conviction in the Prime Minister's words and tone. He actually is conveying conviction! This has been one of the biggest disappointments in John Key. The dominant narrative about the Prime Minister in the public square is that Key just smiles and waves at everything. He is a welter-weight. "To get along you have to go along" seems to have been his mantra. But maybe things are changing just a little. Maybe Key has the foresight to see how soon our backs will be against the wall. He is now speaking clearly and emphatically. Here are some speech extracts:

Growth over the last decade was built on all the wrong things – debt, consumption, and government spending. People borrowed heavily to buy houses and farms, property prices soared and New Zealanders felt wealthier as a result. They spent a lot on consumer goods, which led to a bubble of economic activity.

The Labour Government thought this bubble, and the tax revenue it generated, would go on forever and spent up large on permanent new spending programmes. The Government’s spending increased by more than 50 per cent in just six years. . . .

When we are borrowing $300 million a week, have an overvalued exchange rate, and face the prospect of a credit rating downgrade, the Government believes it should be spending less and therefore borrowing less. I have therefore challenged my Ministers to balance the books more quickly.

Government spending will continue to increase each year in dollar terms, but at a slower pace than the rest of the economy. Hat Tip: Kiwiblog

But, wait, there's more! Being interviewed, he was asked about the political risks of introducing the toxic asset-sales bogey. Key said that if his new strategy cost him the election, so be it. He was resolved to do what was for the good of the nation, not further his own interests. Now that is more like it. That is what we must have in a Prime Minister if he is to be worthy of the office.

The second observation is how Key and his advisers have thought long and hard about getting the politics right. You not only have to be doing the right thing, you have to take the majority of the nation with you, so that at the very least they are willing to suspend critical judgment and let you have a go. (That's about as sophisticated as most voters get. They have a sense of fair play. They think political leaders need a fair shot--just as long as what is being proposed is not pilloried from the get-go as monstrous.) So, the crafting of his proposals has been particularly skilful, it seems to us. Things like, the partial sell down of blue chip companies, with government retaining the majority stake--and the comparison with Air New Zealand as the successful model--effectively neuters most of the knee-jerk criticism from the outset.

Also, stating that the sell-down will release around $9 billion which would then be spent on roads, hospitals, and schools puts the opposition in a vice. As they criticise the proposals they can innocently be asked, "What, you don't believe in more schools and hospitals?" If they retort that they certainly do, they can then be asked how they propose to pay for them, because there is certainly no money in the kitty--which would further drive home the recklessness of the Left's "borrow and spend" mantra.

And Key's team clearly have thought about objections and have some "take that" one-liners already thought out. For instance, immediately the critics insisted that as a result of partial privatisation, power prices would rise, Key was prepared. State ownership had not kept power prices down: under the previous administration whilst the big power companies were fully owned by the state, electricity prices rose 70 percent, he pointed out. Even Sue Chetwin of Consumer agreed Key had a valid point.

The crafting of the policy, then, appears politically astute and clever. Already the media, which previously have vented eruptions of populist nonsense over asset sales, are divided. Whilst some are trotting out, "Oooooh, the people won't like this" others are strongly supportive--as witnessed by this NZ Herald editorial, entitled "Key Presents Powerful Case for Asset Sales".

A third general observation is this: the level of ignorance in the Commentariate over economic matters and how economies actually work never ceases to surprise. It does not seem to grasp the basics of company law, such as what a 51 percent shareholding actually means in terms of control. It does not seem to grasp that State Owned Enterprises have had to make a profit from the outset. Further, members of the Commentariate have lamely argued that partial privatisation will lead to higher electricity prices, due to the rigours of profit making obligations. They appear to have zero understanding of the efficiencies wrought by a regime of competitive profit making. They appear to think that socially owned monopolies are more efficient. There is an abundance of analysis to prove beyond reasonable doubt that this is not the case--but still, they persist in wanting to flounder in the Great Grimpen Mire.

We realise that in the grand scheme of things the intent announced by the Prime Minister is a baby step. But it is a step, and it is in the right direction. We beggars will take any crumbs we can get.