Thursday, August 20, 2015

Government Up Shit Creek Without A Paddle

Bill English is not a stupid man and his lack of performance as a Finance Minister is not because he lacks ability but due to his ideology and that of his Government. National's economic philosophy is to reduce taxes and regulation and take a back seat as regards driving the economy and allow market forces to rule. The National Government has had seven years to prove that their philosophy will deliver prosperity to all New Zealanders and at least four of them have been on the other side of Great Financial Crisis. It seems that the ideology has failed and the OECD has noted that our country has lost 15.5 percentage points of growth through inequality, the highest in the OECD.

One of the first things the Government did was reduce taxes to upper income earners and rather than being fiscally neutral it cost them over a billion a year in lost income. Although the rich in New Zealand have enjoyed increases in their wealth of around 10-20% a year since 2011, English has steadfastly refused to look at a capital gains tax or seriously manage the billions lost in tax fraud every year (around $7 billion estimated in 2011). To maintain government services National has had to borrow to make up the difference and the $10 billion of Government debt that existed when they first took office in 2008 has leapt to over $60 billion.

Despite a period of booming commodity prices and New Zealand being referred to as a 'rock star' economy the Government coffers have benefitted little. In five years under a Labour Government (2003 to 2008) revenue from direct taxation increased from $26.8 billion to $41.3 billion, an increase of $14.5 billion in income. Under National, income from direct taxation plummeted to $33.9 in the 2010-11 financial year and only last year did we almost return to the 2008 level, with $41.2 billion collected. Even accounting for the Great Financial Crisis and the Christchurch Earthquake, National's determination to tax the rich less than Australia's top rate has lost them at least $12 billion of potential revenue. Despite dragging in extra income through GST and SOE dividends etc, direct taxation still provides over half of Government revenue, no wonder English has struggled to balance the books and reduce Government borrowing.

National's attempts at reducing expenditure in the state sector has had unintended consequences. By sacking over 3,000 state servants it has removed institutional and local knowledge and, rather than becoming more efficient, it has caused costly mistakes. The most obvious failure was when it cut the Ministry of Education's budget by $25 million and employed someone to lead the Ministry from overseas with a background in Charter Schools. The result was the Novopay debacle that has cost taxpayers over $110 million and several million more has been needed to prop up failing Charter Schools. Similar scenarios have occurred across the state sector where funding cuts and lack of Ministerial oversight has seen expensive failures that have negated any intended savings. The cost of redundancies and rehiring people as consultants has also cost hundreds of millions.

In an effort to balance the books and maintain the budgets for core services like health and education, without further increasing borrowing, the Government tried to sell off state assets. After spending $120 million on promoting the sales $4.7 billion was eventually raised and few 'mum & dad investors' were represented in the share purchases. The long term effects of the sales is reduced dividends from the SOEs and many overseas shareholders reaping the benefits instead. Attempts to increase dividends from the SOEs also resulted in disaster when the Government's encouragement for Solid Energy to borrow money and invest in new projects saw it collapse owing over $600 million. The Government has been spending millions to prop it up ever since.

The Government's laissez faire approach to property speculation has seen money shift from productive and taxable activities to investment involving untaxed capital gain. Allowing unrestricted foreign speculation and investment has also seen domestic houses and farmland being priced well beyond most New Zealanders as more and more overseas buyers take an interest in our property. The drop in commodity prices for dairy will see many farmers go to the wall and be forced to sell up and it is likely that many farms will be sold to foreign interests. Already Chinese corporates have bought farmland and built dairy factories, with the profits generated from our resources largely being sent off shore. Over the past five years over 640,000 hectares of New Zealand property was sold to foreign investors, much of it in forestry. Given the downturn in dairy it is is very likely that a similar amount of productive farmland will be sold over the next five years and, when one realizes that the total area currently devoted to dairying in New Zealand is 1.7 million hectares, it won't take long for overseas owners to control a large percentage of our farms.

Despite promising that there will be no more state asset sales, given the huge public opposition recorded in the referendum, Bill English is embarking on more. His attempts at selling off state houses has proved problematic as there is little interest in taking on social housing in New Zealand and it appears he is now having secret talks with potential buyers who are likely to be foreign. English is also desperately asking Ministries and SOEs to hock off any unused assets (including Landcorp farms) to generate some quick cash.

Much of our debt is also managed by Australian banks that are reaping huge profits every year. It is clear that some of their profits ($4.1 billion in 2014) are bordering on fraudulent as the IRD had to take legal action to reclaim $1.5 billion of avoided tax and a class action is being taken to challenge unnecessary charges.

To try and generate more income the National Government has thrown itself into negotiating free trade agreements, but it looks like these are also failing. The $11.5 million spent to bribe a Saudi businessman to help pave the way to an agreement with his Government was not successful and the hopes that we could get our dairy exports into new markets with the TPPA appears to be doomed as well.

At the same time that our rock star economy is losing its edge the lack of capital expenditure and maintenance of our transport networks, state houses, schools and general infrastructure has been highlighted and $110 billion will be needed to address them over the next ten years.

The National Government is paying large sums to a mass of spin doctors to ensure the reality of its economic mismanagement is not widely understood. The drop in dairy prices is being downplayed and English and Key are very good at presenting relaxed faces to what must be causing them sleepless nights. If only they had spent more on R & D, less on spin and listened to advice outside of their cabinet clubs, the country may be in a stronger position. There is only so long that heavily redacted documents and the flag debate can cover the facts and provide distractions.

The Government has found itself up a creek full of cow shit of their own making and, thanks to their rigid ideology, no effective paddle to lever themselves out.

Friday, August 14, 2015

National's Spindoctors Preparing For Meltdown

The National Party is fortunate that ethics play little part in their governance style. Why tell the truth and be upfront when you can remain in power through misinformation (lies), withholding OIA responses and well prepared spin?

The Prime Minister now has several press secretaries (when previous Prime Ministers just used one) and more is being spent on PR advice or spin doctors under this Government than policy analysis.

Things have not gone well over the past week, the $11.5 million non-compensation payment to Mr Al Khalaf has continued to cause problems and Solid Energy's collapse under National's watch is also embarrassing. However, as this Government knows anything can be solved with good spin.

There is absolutely no evidence in the documentation that the actions of the previous Labour Government forced National's hand to payout the Saudi businessman, however, repeating it often enough soon has the idea imbedded. After every question relating to the deal, Key responds with the claim that they were only fixing Labour's mess. Poor Minister McCully had little choice but ignore the advice from Treasury and the Auditor General to placate the angry Arab.

Bill English may have encouraged Solid Energy to borrow heavily so that they could pay a higher dividend to the Government but according to him and Key it was an unexpected drop in coal prices, "the perfect storm", that brought the SOE down. They ignore the fact that for a company operating in fluctuating commodity markets, carrying a high level of debt is very unwise when prices could easily drop.

I have heard that the humming and heat emanating from the Beehive recently is at a much higher level than normal as the PMs spin doctors are working long spinning hours preparing him for the meltdown ahead. Some extraordinary responses will be needed as the global dairy collapse deepens, the Christchurch rebuild slows and the housing bubble inflates to gigantic proportions.

Based on the successful spin of the past I can predict what we will hearing from the Government as its revenue drops, farmer suicides increase and child poverty and homelessness grows:

"We are still trying to fix the problems created by Labour."

"It's the doomsayers from the Greens and Labour who are talking the economy down!"

"Dairy prices will improve again, our farmers are the best in the world and are very resilient."

"We dispute the statistics on child poverty, we have also increased benefits more than any previous Government."

"We were close to getting a balanced budget, but who would have predicted the dairy downturn?"

"Ministry and department CEOs deserve their pay rises because they are having to make tough decisions to manage within their reduced budgets."

"We are have decided to replace all DHB boards with commissioners because they have failed to work within the new budgets and properly prioritise services."

"The TPPA will deliver much greater trade opportunities and the 10% increase in prescription costs is a small price to pay."

"New Zealand Post is reducing mail deliveries to one day a week because there has been a 2% drop in mail volumes, this is just a reflection of the reality of changing communications."

"The fact that the median house price in Auckland is now over $1 million is no cause for concern, it just confirms Auckland's place as one of the most popular cities in the world to live."

"Central Auckland businesses should not have to deal with the daily mess left by the increasing numbers of homeless so we are passing a bill under urgency to deal with these people who choose to live this way."

"It is just racism when people complain about the Chinese buying up our dairy farms, they bring useful investment and providing jobs in a struggling industry."

"Experts support that it is the teacher, not the class size, that makes the biggest difference to children's learning and by increasing the class sizes to forty we do not need to build more classrooms in Auckland. This will actually raise attainment despite a reduction in the education budget."

"We are increasing funding to private schools and allowing 50 more Charter Schools as they are now delivering much better results than public schools."

"We need to arm our police as we need to ensure the safety of both police and the public because of a small section of society that is becoming increasingly violent." 

"Thanks to the National Government the New Zealand economy is in better shape than,, Greece?"

Postscript: this appeared in today's Sunday Times, "With more than one third of the Beehive support staff earning more than $100,000 it appears being a spindoctor or political advisor is a surefire way to the big bucks without being responsible for the decisions." 

Thursday, August 13, 2015

Social democrats gaining support in the US & UK

Bernie Sanders and Jeremy Corbyn are frightening the hell out of capitalists and mainstream politicians from the left and the right. Corbyn and Sanders were both thought to be too far to the left to ever be considered as potential or popular leaders, but their very similar messages have resonated within their parties to the extent both are leading polls with considerable margins.

Neoliberalism and Laissez-faire economics has ruled the world for so long that even parties of the left in OECD countries have felt obliged to adopt and maintain policies that should be outside their philosophies. It is ironic that the phrase "it's the economy, stupid" actually came from a Clinton campaign as it became ingrained within mainstream parties of the left and the right that people served the economy rather than the other way around.

ThatcherReagan and New Zealand's Douglas and Richardson shifted their countries into economies that were tax and regulation light to support the already rich and the trickle down economic theory. The Labour and Democrat governments that followed were reluctant to reverse the neoliberal policies, especially when it would mean challenging the increasing wealth and power of the private sector and major campaign funders.

Prior to 80s and 90s social democracies had proliferated since the Great Depression and had lifted the pay and conditions of working people. The two decades after WW2  were possibly the most equitable ever. The resilience of social democracies was shown by the fact that Sweden was the least affected by the the 30s depression. The Scandinavian country maintained a stable economy by achieving a careful balance of private and public interests that included the following policies:

  • a large privately owned industrial sector,
  • a large public sector financed by taxes,
  • a large trade union movement,
  • the state plays an active role in labour market policies,
  • the ambition to achieve an even distribution of income and wealth.
The Great Financial Crisis (GFC) is considered to be the worst financial collapse since the Great Depression and again it was a country with strong social democratic policies that came out best. Norway has not fallen into the trap of allowing wealth to be concentrated in a few private interests or allowing boom and bust economic activity. Through nationalising its main industry Norway has ensured that the income generated has been spent and invested in the best interests of all its people. Using ethical investments Norway has ensured that even when oil is no longer profitable (nor environmentally viable) that having financial interests in sustainable industries around the world will ensure ongoing prosperity. 

Corbyn and Sanders have surprisingly similar resumes and policies:
  • both were born in the 1940s,
  • they have long histories human rights activism,
  • neither support military aggression and have been peace activists in the past,
  • they both want to eliminate poverty and introduce greater income equality,
  • both want to challenge corporate greed and increase taxes, 
  • they want greater spending on national infrastructure,
  • both want to see social security spending increased,
  • they both want to see the minimum wage increased and a strengthening of workers rights. 
Despite being around for a while neither Corbyn or Sanders have been household names and you could hardly call them charismatic, but they both come across as sincere and principled. It seems that their respective parties have finally had enough of austerity and policies that only serve a privileged few. There is a growing support for real socialist principles again and an abandonment of the Republican lite and Tory lite leadership of recent years. This phenomena isn't just occurring in the UK and US, as Canada has lead the way with a socialist party winning an outright majority in Alberta, ending a four decade conservative dynasty. 

Monday, August 10, 2015

Coal Powered Dairy Monolith Falters

The plummeting milk price and the failure of the Fonterra juggernaut has resulted in a nationwide intake of breath followed by a great grumbling "bugger" emanating from our rural heartland. The word was also heard from the depths of Bill English's office as he saw his balanced budget slipping through his fingers.

The National Government had begun their first term dreaming of 'sexy coal' and the riches Australia had achieved by digging up their farmland for the fossil fuel that was powering China's industrial revolution. The black gold rush ended before it began, resulting in the $600 million collapse of Solid Energy and a $30 million dollar lignite briquetting plant mothballed.

Luckily for the Government a white gold rush overtook what had become a lignitemare and China's thirst for milk seemed unquenchable. The growth in dairy was intense and the investment in dairy conversions and processing capacity grew so fast that regional councils struggled to manage the environmental effects.

Since 1980 we have increased the number of dairy cows in New Zealand by 4 million and as each cow excretes around thirty times the amount of waste as one human, it has had an impact similar to having 120 million immigrants with no increase in sewerage treatment. The money flowed, but so did the runoff into our water systems. When alarm bells were rung by scientists like Mike Joy, he was accused of being a traitor and $400 million was provided to help double production.

Fonterra developed a culture little different from the financial sector before the GFC: top heavy management and high salaries proliferated. Theo Spierings had a pay increase of $660,000 thousand the previous year, bringing his annual salary up to $4.18 million and 17 of his management team were earning over a million. It appears that none of these highly paid managers predicted how the investment in dairy production in other countries and a rapid increased in supply would affect prices. Sheer greed blinded both the industry and the Government and made them forget the importance of future planning and building sustainability.

It turns out that Fonterra has no brand presence for global dairy consumers as it has concentrated on being a raw commodity supplier to the likes of Nestle and Beingmate. Our coal powered dairy factories produce millions of tons of dried milk and few value added products other than basic cheddar. When we have people from Europe staying with us, they embarrassingly make disparaging comments about our low quality cheese.

It is going to be a rough time for our dairy farmers and supporting industries as the price for milk solids heads towards $3.50 per kg and we are looking at a $10 billion income loss from the 2013/14 high of $8.40. No matter what occurs from now on, a good deal of pain is unavoidable.

When alcoholics reach rockbottom it often results in some intense self-evaluation and an incentive for making some lifestyle changes to ensure a healthy future. A company addicted to environmentally damaging industrial farming, supported by phosphate from the Western Sahara, fed by palm kernel from destroyed rain forests and producing a low value product using fossil fuel is hardly a sustainable one.

If Fonterra is to survive, and carry its farmer shareholders with it, it really needs to clean up its act. It needs to drop the coal and strengthen its environmental credibility. There will be more sustainable and stable markets for high value, quality products produced from pristine environments that support biodiversity.

Tuesday, August 4, 2015

Drug laws make the convicted the victims

I think that the Green Party's policy on drug law reform makes sense to me, it is all about minimising harm and recognizing that any drug use can have negative effects, whether recreational, prescription, legal or illegal. The principles at the beginning of the policy are:
  • A rational drug policy is important for society as a whole;
  • A drug free lifestyle is the healthiest;
  • Some individuals in society will choose to use alcohol, tobacco, cannabis and other drugs regardless of their legal status:
  • Current Government policies in relation to cannabis, alcohol and other drugs are failing to minimise harm and instead are creating a further set of problems;
  • There are adverse health, social and economic consequences from the use of alcohol, tobacco, cannabis and other drugs for both individuals and society.
  • Dependence on prescription drugs is also a problem;
  • Not all drug use is abusive or problematic.
One of the most horrific examples of how our current drug laws are failing was seen in an article in the Northern Advocate yesterday, it involved a 38 year old mother of three and community leader. Kelly van Gaalan was a member of the Kaikohe-Hokianga Community Board, the chair of the Kaikohe Community Arts Council and the promotions manager for the Kaikohe Business Association. Van Gaalan's husband was subjected to a home invasion by three armed men last year and managed to escape to raise the alarm. When police arrived they discovered a bucket of dried cannabis that van Gaalan admitted was hers and that she knew was unlawful to possess. It was a quantity greater than the 28g allowed for personal use, so she was charged with possession for supply and was jailed for two years.

I am not going to defend the use of cannabis because I understand how it can have negative consequences, especially on teenagers, but I do think the sentence was out of all proportion to the crime. There is no sense nor purpose in removing van Gaalan from her family and the community she was obviously serving so well, especially when no victim was established.

It seems inconceivable that someone who is obviously of little risk to others, and had 32 unsolicited references to her good character (including from a former mayor, the school principal and local pastor), should be deemed too dangerous to remain in society. What she is guilty of is actually little different from having a drinks cabinet or home brewing beer and yet the state is prepared to spend over $90,000 a year to have her incarcerated. 

Cannabis largely became illegal because of racist attitudes rather than it's intoxicating properties. Making it illegal was just a useful ploy by the US Government to manage a flood of Mexican immigrants escaping a civil war. Sadly both the US Government and ours learned little from the failures of alcohol prohibition and has continued a policy of criminalising cannabis users and suppliers. It has cost our police and justice systems millions of dollars to arrest, prosecute and imprison people when it made little difference to the numbers of users. New Zealand is ranked 9th in the world for cannabis use, almost 50% of us between the ages of 16 and 64 have used it at some time and around 1 in 7 will use it any year.

Random drug testing of workers and the testing of beneficiaries also had the unintended consequences of pushing people into the use of legal highs which caused far more dangerous behaviours and more harm than ordinary cannabis. What was intended to be for good ended up causing more harm yet again.

Van Gaalan has had her life, and that of her family's, negatively affected by a law that is unreasonable and thousands of others have experienced similar consequences for a crime where the convicted becomes the victim. Our laws should protect us from harm, not be the cause of harm. We need to change the law. 

2015 Rich List and Poor List

The NBR Rich List 2015 has just been released, it has the usual black cover, gold title and the first few pages are advertisements for luxury sports cars and the back pages are for luxury real estate in Queenstown and the Bay of Islands.

There are 15 newcomers to the Rich List (they have to be each worth at least $50 million), this is up from 13 added last year and 12 in 2013.

To quote NBR News Editor who wrote the introduction:
"One thing is clear: property stands out as one sector where returns have been almost immeasurable and the absence of a capital gains tax continues to favour investment in this area."

Six of the top twenty have property investment as their source of wealth and income.

While dairy farming has not fared well with international prices the Chinese demand for farms has kept farm property prices high.

I could only find three women listed as individuals in the 2015 Rich List.

Our hundred richest New Zealanders, together with our New Zealand based international billionaires have a total wealth of almost $70 billion and the total New Zealand crown revenue from all sources for 2014 was just under $80 billion.

Top executives in NZ also saw their salaries increase by an average of 10% over the past year (average income $1,645,000) while almost 50% of workers got no increase in 2014.

While the very richest have seen their numbers and wealth increase steadily over the past 5 years in New Zealand, the very poorest have seen a similar growth and yet no glossy publication details their struggles.

The number of homeless sleeping rough within a 3 km Radius of Auckland's Sky Tower more than doubled during 2014, increasing from 68 in 2013 to 142 last year. I was able to see the extent of this myself when attending a conference in the central city at the beginning of the year. Early in the morning many doorways and bench seats seemed to have a sleeping body and there even appeared to be some family groups.

The Salvation Army released a report to show that the regions have experienced markedly varied economic fortunes. Northland especially has suffered more than most in terms of low employment and economic participation and growing industries like swamp Kauri have benefited few.

Many poor communities have become poorer and despite a strong regional economy, Invercargill has ended up with a new Decile 1 school after the 2013 census. New Zealand's rock star economy doesn't appear to have reached those at the bottom.

More children and adults are ill or dying because of cold, damp unhealthy homes.

The number of working families in Marlborough needing food parcel support has doubled over the past year.

Over 300,000 workers are now on or near the minimum wage ($14.75 an hour) which is almost $5 an hour less than what has been calculated as a living wage.