Monday 14 November 2011

Those Asset Sales

Borrow and Spend

There is a good deal of rubbish being generated in the debate over the Government's proposal partially to sell down some assets to raise cash for spending elsewhere.  Some of the rubbish is coming from people who should know better. 

Take Brent Sheather, an investment adviser,  for example.
  In a column in the NZ Herald he questions the economics of the proposed transactions.  The Government wants to spend on infrastructure assets.  It can raise money in three ways (Sheather mentions just two): it can increase taxes, sell assets or borrow.  Higher taxes amidst a recession would be a disaster.   Only fools and horses are proposing that. 

But Sheather argues that "economics" would support borrowing, rather than selling assets.  His reason:  currently the government can borrow at around 4 percent while the assets it proposes selling are producing around 6 or 7 percent after tax.  So, he reasons, it would be far better economics for the government to borrow more and retain the assets. 

Can he be serious?  Unfortunately for Sheather, his argument proves a bit too much.  On this basis, a "sound" economic case could be made for the government to borrow to purchase just about every listed company in New Zealand.  On Sheather's reckoning, we would all be better off. 

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