Using Infrastructure to Kick Start the Economy by Chris Olsen 11/1/2007

Thu, 02/04/2009 - 1:02pm

It makes sense

“The World economy is now entering a major downturn in the face of the most dangerous shock in financial markets since the 1930s” reported the IMF (International Monetary Fund) in its recent World Economic Outlook.

Over the past couple of months I've heard those in the financial markets many times saying “desperate times call for desperate measures”.

So it's not surprising that the British Government practically nationalised its Banking institutions on 8 October and the United States have been attempting to do the same. Iceland, meanwhile, has practically gone bankrupt due to its 4 Banks operating mostly outside of Iceland with turnovers of up to four times the size of Iceland’s economy.

So what about New Zealand? How do we compare?

I've heard some say that there are parallels between New Zealand and Iceland but certainly not to the same extent.

Our high interest rates have flooded New Zealand with credit that has resulted in the purchase of assets by Jo Citizen through debt. I understand that this has driven up prices and resulted in the average New Zealander being one of the most indebted in the World. Commentators are now saying that the balance between asset values, debt and incomes has been lost and a correction is (needs to) occur. This is clearly shown in the Reserve Banks Financial Stability Report of May 2008 where it states “the ratio of total household debt to disposable income is to have risen from around 100% in the late 1990s to 160% in March of this year”. In a nutshell this means that you cannot rely on Jo Citizen to kick start the economy because he or she does not have the cash.

So what about the Government? How is it placed to prime the economy and keep the money flowing. According the 2008 Pre Election Economic and Fiscal Update the Net Core Crown debt (including NZS Fund financial assets) is currently $12.9 billion that will reduce down to $0.4 billion by 2013. This means the Government is pretty much debt free and well placed to prime the pump. The question is what options does the Government have and which one will it favour.

Essentially, commentators say there are 3 options; tax cuts, Kiwi Saver or infrastructure. The question is which one is the best. Is Government better to reduce its income through tax cuts, provide Kiwi Saver concessions and tax credits or fund new infrastructure construction.

Funding infrastructure construction must be pretty much the only option that not only primes the pump economically, but also provides sound long term economic benefits for the country, such as congestion savings and a reduction in health spending due to better safety outcomes. But that’s not all. Everyone knows that if you build infrastructure during a recession you will never get such value for money. What an excellent opportunity to address New Zealand's inadequate infrastructure, the most problematic factor for doing business in New Zealand according to the World Economic Forums latest Global Competitiveness Report.