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How to make $20 billion and save $180 million

Strap yourself in. We are about to show in 600 words how the government can save $180 million a year and greatly reduce its financial risk. There are no adverse impacts and no political downside.

There are no job losses; $20 billion is knocked off government debt; and the need to sell shares in state-owned enterprises eliminated.  

Besides, I’m ambivalent about the government’s part privatisation programme. All government businesses should be privatised, not just a bit of only a few.  

The reason is simple: politicians suck at running them. Politicians don’t add value as shareholders – they flush it away.

It’s not that politicians are stupid. Far from it. They are clever and hardworking.

But they’re clever and hardworking at chasing votes, not shareholder wealth. Given the choice between 100,000 votes and $100 million in shareholder value, politicians will take the votes. Clearly.

Selling bits of government businesses for a bit of money won’t make much difference to the government accounts and next to none to the economy. Privatising all government businesses would shift the economy up a gear.

The government has $20 billion odd sitting in the New Zealand Superannuation Fund. It serves no public purpose. It changes the future cost of super not one bit.

The fund is properly and transparently run. It has done much better than I had ever hoped. The board and the management have done a bang-up job.

The fund’s problem is politics. The government recently directed the fund to stick 40% of its investments into New Zealand. That’s costly and reckless – but good for votes. That political interference will continue and get ever more risky and costly.

The fund has had good returns. No complaints there. It has earned $6.91 billion since its 2003 inception and paid $2.31 billion in tax. The pre-tax return is 7.65%.  

The government can sell the fund for $20 billion and still collect the tax. Doing so would save $180 million and rising a year.

How?  Well, the Treasury estimates the long-term nominal interest rate on government stock at 6%. The fund is only returning the government net of tax 5.1%. That negative margin is costing the taxpayer $180 million a year.  

Selling the fund would only sell the after-tax return: the government would still collect the tax on the 7.65% pre-tax return.

And paying off $20 billion of debt is risk free. Running a super fund is risky.

Selling the New Zealand Super Fund would lose no jobs and would raise twice the money the government’s hotly contested part privatisation programme is supposed to raise.

The fund was always a dopey idea. It also forces New Zealanders to invest in toll roads in Australia and North America, Zurich airport and Samsung Electronics. Those investments alone total half a billion dollars.

The fund taxes New Zealanders hard to build roads in Australia, hotels at Zurich Airport and to fatten further Samsung Electronics. I suppose it could be justified if the fund was making money at no risk. But compared with paying off debt the fund is costing big money and is highly risky.

The fund does invest in New Zealand. It’s got $70 million in SkyCity Entertainment. It’s astonishing really. There’s a huge hue and cry over the government’s “conference centre for pokies” deal. Luckily for the government New Zealanders don’t know their taxes are helping to fund the pokies through the New Zealand Super Fund.

Sell the fund. That would save the tax on newspaper boys 50 times over.

Comments and questions

no. the government are bound to the people through democracy but commercial fund managers are not. if you sell the fund you kiss it goodbye.

You would also kiss goodbye to $20b debt!

If all politicians were fiscally responsible then yes but they are not so it would just be spent.

Only one flaw in this plan.
Two words: "Treasury estimates"

But the cost of capital is not so difficult as say estimating tax revenue and welfare spending coming off as it does the ten-year bond rate.

The comment "The government recently directed the fund to stick 40% of its investments into New Zealand. That’s costly and reckless – but good for votes" is alarming and replicates exactly what the US government is doing to raise cash.

When you run low on cash what better way to get your hands on more than hijack the pension/ retirement funds of private individuals, force the Kiwisaver fund managers to invest in government stock (whihc will happen with this 40%) and guess what, the money go round means the unlocked cash is now back in the government coffers to squander.

Indeed. That's the danger of the Fund. Why stop it 40 percent. On the political surface it doesn't make sense to be investing in roads overseas when we need them here. But -- of course -- that's not the point of the fund.

Great idea and makes perfect sense. It's note the Government's role to borrow money and speculate on equity investments. By maintaining the Cullen Fund, that is all it is doing.

Got it in a sentence!

Smart people keep it simple.
Keep it simple.

But comments can be too simple and therefore ambiguous.

The fund made sense when we were running in surplus, but as anyone knows, if the P&L moves into negative territory, it's time to draw down on savings. Not borrow to maintain them.
The other saving from shutting down NZSF is the huge cost of running the fund itself, be that third party managers, the staff at NZSF and the Treasury people who must be paid to monitor the fund. Big bucks.

Tax cuts would have been better than the fund but the fund was better than spending it!

Completely agree. It's like paying your mortgage's the best risk free investment you can make.It's a policy out of the "end of history" Treasury view of the world. The last 5 years would show us how out of touch our policy people are.

Liquidate the Cullen down debt and maybe keep a few $100m back to cover a few teachers and paper boys.


Why the hell do you talk so much common sense Rodney.

You and me both.

What would be interesting would be for he Government to put this idea in front of Labour/Greens as a serious alternative to the partial asset sales. I would love to see the looks on their faces .

Me too. But I have observed that lefties don't believe there have to be trade-offs. They believe there's free money.

"GreezLab want this fund intact to raid for voter inducements or downright voter bribes on their watch.

I aggreement , and the best time to sell is when the NZ dollar is strong

Actually, the best time to sell is when the NZD is weak, as the assets are denominated in offshore currencies and our liabilities (debt) is in NZD...

Weak or strong? Could government tell?

The govt role is not to try and run businesses, they should sell all assets incl Landcorp to reduce debt there role is not to take on risk but to reduce it.

Agreed. But the purpose of quitting business is not simply to pay off debt -- though that would be nice -- but to ensure the businesses are properly run.

Politicians suck at it.

Government businesses should be sold to ensure a more productive and wealthier country whatever the state of the government books.

Dumb Rodney,seriously.The fundamental problem is we do not have control of our financial equity.We are driven by external forces.Unless we can identify,recognise and take ownership of them we will be for ever at the mercy of them.Just look at the amount of equity the 4 Australian banks drain out of our economy annually,it is staggering!

Anon: Who is the WE you speak of?

This bit of written "political trivia" is perchance , written by a politician, who's bread and butter comes from a majority party giving him a seat .....why do I waste my time comenting when all it really says is Sell our assets, are we so so dunb that we forget the real agenda that hise is hiding ..?

Dear Anon -- I have no idea why you would post such a comment. Beats me too.

WE is our Nation,NZ and its people.WE are being impoverished and marginalised by external forces that our elected representatives lack the will,skill,ability or expertise knowledge of to maximise better outcomes that do not require trade offs of our sovereignty, human rights or the wealth of the Nation.

Oh, what rubbish. Where did you learn such pathetic helplessness? In our State education socialist factory?

I don't buy the "WE" argument. I am not a collectivist. I also don't know of the external forces that are out to make us poor. The only external forces I can think of are prices and responding to prices through trade is what allows us individually and as a society to prosper.

Rodney, the GSF is 'owned' by its contributors and not government who hold in trust. can you remember your words about the auckand city merger - where are the benefits? Rates are going up, fees and costs are up - all without any increase in service level or quality. In the last year, I have see more potholes on the roads! stick to trivia - you are good at that.

The GSF is not owned by its contributors. I have contributed. I didn't want to. I was forced. I now want to cash out. I can't. In what sense do I own my little bit of the GSF?

Pollis,- don't you dare touch the Cullen fund - all those of you including you Rodney, who pooh poohed it. Leave it alone - its safer with fund managers than with any politician or state servant meddling with it whether to sell or manage it - just leave it alone!

Anon -- How is it safe? And don't forget its purpose is eventually to be run down to zero. That is, the Fund is not going on forever. The issue when is it best to run it to zero. I say now.

"its safer with fund managers than with any politician or state servant meddling with it "...

But this doesn't stop politicians meddling with it. They have already done so. The direction to invest 40% invest in NZ Assets is an example of polical meddling.

As this fund gets bigger and bigger there is going to be more temptation for future governments to tinker with the investments of the fund for their own political ends. This applies equally to both sides of the policital spectrum.

Well done Rodney. I agree with you. I never thought I'd be writing those two sentences.

I never thought you would either. I had better re-read what I wrote. And check my assumptions!

Another thought provoking article. Excellent.

Rodney tell me...Is the snail pace decision making of Government the fault of John Keys approach, the National Party itself or just plain MMP politics.
Its just that nothing happens,let alone anything thats bold or futuristic. We need bold changes of direction but we just stagnate.

Thank you. I think we pretty much get what the middle voter wants. Politicians don't want to get ahead of public opinion and more follow the mob rather than lead it.

I think, say, both Helen Clark and John Key were and are capable of bold leadership but it would need some great challenge or crisis to enable it publicly.

A bit ironic that the fund goes out and buys NZ assets that the Government sells....AIA, Kaiangaroa they take a huge stake in any SOEs that end up going to market. A pointless exercise of taking money out of one pocket and putting it in the other, with investment banks grabbing their part on the way. Might as well just gift the shares to the fund ala Telstra and Future Fund.

Good point. We go through all the political pain for what exactly?

the forces that are out to make us poor aren't external, they are card-carrying Labourites (suported by the Greens).

Also, Rodney, being capable of leadership and the execution of (sometimes challenging) decisions are two entirely different things - especially when applied for the betterment of the nation, instead of the betterment of the Party. The turning point for NZ political responsibility for me? It was the arrogance of Michael Cullen's "We won, You lost" vindictive statement. It wasn't just the Opposition that lost: we have all been paying for that man's ego and his parasitic Party ever since.

I remember that statement well. There is, I think, a different psychology to the Labour and National parties. The difference is not one of policy principle. They are both too pragmatic for that.

Looking back I wonder if Michael Cullen exactly said succinctly what all politicians in government haven't silently thought!

The train set was part of the scorched earth policy used by Cullen and Clark, an albatross that will bleed us taxpayers, the sellers are still celebrating their good fortune, and be the focus of other "we want a train set as well". Why doesn't Len just have cycle tracks where the trains run? Now that would be a green sustainable option and save us a fortune. I can see enterprising students making a killing like they do in Denver pedalling customers all over the place in covered cabs.