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August 15, 2011 | by  | in Opinion | [ssba]

Politics With Paul – The Economic Flu

It’s been a tumultuous couple of weeks. First there was the US debt-crisis, which alone was absolutely astounding in its development.

Then there was the subsequent announcement from international credit ratings agency Standard & Poors (S&P), reducing the credit rating of the world’s largest economy from AAA to AA+. Furthermore, accompanying the credit downgrade, the US has been put on a negative outlook, increasing the likelihood of further downgrades.

As the old adage goes: When America sneezes, the world catches a cold.

So, where does this leave New Zealand, and more specifically, the Government?

In the wake of the NZ sharemarket plummeting to an 11-month low last Monday, both John Key, and his Minister of Finance Bill English are stressing the country is well placed to weather this kind of economic storm. The same international credit rating agency that downgraded the US, isn’t so sure though.

S&P have identified NZ’s balance sheet as continuing to bear “the scars of the recent downturn,” recognising that the country is significantly vulnerable in the wake of the current strife in the financial markets.

This is primarily because NZ’s reliance on foreign debt means the country might find it hard to roll over current debt, and that the country could face further weakening demand for exports. This of course, is a strain that has been felt for weeks now, as a result of the high value of the New Zealand Dollar that had reached above 88 US cents before dropping back again last week.

S&P already put NZ on a negative outlook at the end of last year, warning of a potential downgrade in the country’s credit rating. If this were to happen, the cost of borrowing would increase across the economy, severely hindering economic recovery. The fact Bill English has managed to stave this off, despite the $380 million a week the Government was borrowing until recently, is a credit to his economic management, and there’s the crux.

This election will be fought and won on one platform only. To borrow Bill Clinton’s laboured catch phrase from the 1992 US Presidential Election: “It’s the economy, stupid.”

Voters will reward in November that party who they deem most fit to manage the country’s economy. Global economic events notwithstanding, one might expect, therefore, that National would be punished for pulling the economy into a deficit, which by the Government’s current projections, won’t be dealt with until 2015.

But, as political journalist Ian Llewellyn explains, “The problem for National’s opponents is that most voters don’t seem to hold them responsible for the economic conditions, and polls indicate that (people think) National are better managers, even if they don’t entirely agree with their prescription.”

People trust Bill English. They trust John Key, and the success the Prime Minister has had in labelling Labour as the party of ‘tax and spend’, has only served to strengthen voter loyalty.

That’s not to say Labour doesn’t have any good ideas. The proposal of a capital gains tax is long overdue, and is an eventual inevitability in NZ. It’s just that the voters don’t find Goff & Co. to be a credible option in terms of economic management in 2011.

One of the most noteworthy political effects of the current market woes has been on National’s controversial asset sales policy. The state of the international financial markets has helped Phil Goff gain some traction on his opposition to the proposal. As he points out, assets can only be sold once, and the prospect of selling them in a depressed market simply adds further flaws to the proposal.

However, while Key has admitted there may be a delay of a few months, the Government’s plans are still firmly on the table. If Key gets the mandate in November through a return to power, 49 per cent of Mighty Power River, Meridian, Genesis Energy and Solid Energy will be up for grabs.

Further consequences of the international turmoil will no doubt trickle down over the next few weeks and months, and while it will be interesting to note the effects on the domestic political situation, don’t hold your breath for any reversal in the polls. *


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  1. David Brabant says:

    Anna gave me this web site and I have read several of your columns as time allows. You write very well Paul and obviously have a good knowledge of the political scene, something I have always found very frustrating. Keep up the writing and I look forward to your next piece.

  2. Richard says:

    Do you really think that S&P has a clue what it’s doing? This is the same credit rating agency that rated all the CDOs held by Freddie Mac and other banks as being AAA right up until the point where the whole system collapsed. Then when calculating the US credit rating they miscalculated on thier figures by TWO TRILLION dollars. I think a credit rating agency that is in error by two trillion dollars when calculating debt should not be looked to for sound financial advice.

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