Searching for the Key to New Zealand’s Recovery

By Chayut Setboonsarng

Air New Zealand plane on a rainy day. The airline has been cited as an example of successful mixed ownership, as New Zealand strives for economic recovery. Source: Abaconda's flickr photostream, used under a creative commons license.

Fresh off his election victory, New Zealand’s second-term prime minister, John Key, is getting back to work on fixing the country’s sluggish economy. The sale of state owned enterprises (SOEs) is a controversial plan that his National Party put forth in an effort to curb the government’s growing mountain of debt (currently $55.6 billion).

Key plans to sell minority stakes in four energy companies: Meridian Energy, Mighty River Power, Genesis Energy, and Solid Energy, and reduce the government’s stake in Air New Zealand. These divestments are expected to raise $4-5.5 billion. Some of the funds will be invested in modernizing schools as part of National’s Future Investment Fund. The sales are expected to take place within the next 12 months.

This proposal was strongly opposed by the Labour Party and even by National’s own coalition partner, the Maori Party. Although the goal of Labour and National are the same — fiscal consolidation by 2014-15 and stimulating economic growth — they are at loggerheads on how to achieve this goal and particularly over the sale of public assets.

To stimulate New Zealand’s economy, the government has eased monetary policy over the last few months. Interest rates were reduced half a percent in March to 2.5%, and the New Zealand dollar has fallen. However, as a center-right party, the Nationals do not have raising taxes in their fiscal toolbox nor can they incur more debt, both of which are in Labour’s playbook.

Former Labour party leader Phil Goff argued that by selling the SOEs, Key would cut dividend streams and $702 million in annual profits. Critics are also concerned that no investment prospectus was produced ahead of the recent elections and that details of the sales have not been scrutinized. Some worry that the cost of electricity could rise sharply if private shareholders adopt a strategy of urging the energy companies to limit supply and raise the price.

Prime Minister Key, a former international banker, downplayed these concerns and pledged that as the majority stakeholder, the government would not allow runaway prices. He also cited the example of Air New Zealand’s success under the mixed ownership model, arguing that private sector involvement could improve efficiency. But when confronted with the question of foreign buyers, he did not offer guarantees that the new shares being offered would not fall under foreign ownership.

The partial sale of these companies is not a return to Rogernomics, New Zealand’s period of intense restructuring and deregulation in the 1980s led by former finance minister Roger Douglas, but a measured response to budgetary stress. There are no quick fixes to structural economic problems. Even though Labour was praised for its capital gains tax policy and KiwiSaver pension program, the recent elections demonstrated that voters were adverse to taking on more debt, especially with a doomsday scenario building in Europe. In many countries in times of economic uncertainty, voters lean right and prefer fiscal conservatism — making last-ditch solutions an attractive option.

Chayut Setboonsarng is a recent graduate from the George Washington University Elliott School of International Affairs. He was credited as a researcher in the CSIS report “Pacific Partners: The Future of U.S.-New Zealand Relations.”

1 comment for “Searching for the Key to New Zealand’s Recovery

  1. Andrew Butcher
    December 8, 2011 at 21:15

    Thanks for this commentary. I would just want to raise a few factual errors. Until the Labour party elects a new leader, Phil Goff remains its leader. The government doesn’t set interest rates. The Reserve Bank, which is independent of the government, does, though within legislative parameters. The Maori Party was a coalition partner under the previous National-led government but is not (yet) a coalition partner under the current government, which technically has not yet been formed as coalition negotiations are still proceeding and the Prime Minister has yet to confirm to the Governor General that he has the numbers to form a stable government.

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