Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Key's proposal to sell down long overdue

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John Key's proposal shows a point of difference from Helen Clark's Labour Government. Photo / Greg Bowker
John Key's proposal shows a point of difference from Helen Clark's Labour Government. Photo / Greg Bowker

Finally John Key has staked out a real point of difference between the National Government and Helen Clark's regime.

Key's decision to float the prospect that National will sell down the Government's 100 per cent stake in a raft of blue chip state assets if it wins the election is long overdue.

It is high time more tangible steps were taken to build an "ownership society" and slay the ideological dragon that says private ownership of major companies is wicked.

Realising up to 49 per cent of the Government's holdings in Meridian, Mighty River Power and Genesis Energy, plus, selling down the Government's 76 per cent stake in Air New Zealand will bring in considerable cash, boost the NZX, and provide reliable investment opportunities for retail investors (the mythical 'mums and dads'), KiwiSaver funds, the NZ Super Fund, iwi and also offshore investors.

There is plenty right with the mixed ownership concept. But the Key Administration needs to apply some much tougher reasoning if it is going to persuade the bulk of Kiwis it is on the right track.

Key has proffered the notion that the realised cash from the four state blue chip companies would be applied toward funding the next generation of infrastructure - hospitals, schools, operating theatres, ultra-fast broadband and major investments in state highways and other transport infrastructure.

But selling shareholdings in SOEs to fund assets such as hospitals and schools will inevitably run up against the argument that the Government is forgoing reliable dividend streams to fund assets that it cannot afford to build just now.

Realising shareholdings to fund the investment in ultra-fast broadband (for which the Government should want a commercial return) and designated highways which could also produce useful revenues is a more understandable concept.

But the reality is that unless the Government gets more revenue in from somewhere it remains vulnerable to accusations it is flicking assets to fund last year's income tax cuts for top-earning Kiwis.

If Phil Goff hadn't already queered Labour's pitch by unveiling a raft of election policies that will send the NZ Government's debt serving bill soaring to stratospheric level, he would have been able to puncture Key's plan as a fatal conceit.

The Prime Minister repeatedly stressed this week that the 2010 National's "tax-switch" package was revenue neutral. But the 2010 Budget package was not predicted to be revenue neutral until its fourth year of operation.

Finance Minister Bill English betted large that his Budget tax-go-round would put a rocket under domestic growth by switching the tax system towards the productive sector and away from property investment.

But even on Budget night, Treasury forecasts predicted the switch would result in a $460 million shortfall in the 2011 year - which was certainly not enough to fund the big personal tax cuts at upper income levels that went into effect on October 1.

Trouble is the budget cash deficit turned out to be wider than the Government forecast as lower-than-expected spending curbed GST receipts. High income earners - like their middle-income counterparts - did not go on an all-out spending spree.

Talk to any banker around town and you will be told that their high-net worth individuals have been pretty focused on reducing their own debt.

There have also been shocks to the New Zealand economy - the Canterbury earthquake where the Government will have to pick up a substantial slice of the infrastructure rebuild, and, the South Canterbury Finance receivership.

It is a very fine balance.

Key wants to build an aspirational society where it's not a crime to want to get ahead.

The kind of society where aspirational Kiwis will be attracted by New Zealand's competitive personal tax rates to stay here rather than join the Australian exodus. It is a big call given the propensity of Kiwis to fall for demonising "the rich".

Key also deserves plaudits for taking a tougher approach to Government expenditure to rein in the $300 million a week National is borrowing. But the jury is out on whether what Key is proposing will be tough enough to meet the scrutiny of the international credit rating agencies.

The trouble is the Clark Administration had already stripped the cupboard bare through its major election bribes such as the explosion of Working for Families tax credits and interest-free student loans.

Key seems too worried about electoral consequences to tackle these "permanently" embedded expenses.

But unless the economy gets on to a very fast growth track future tax rises will be inevitable.

That said Key's renewed boldness is welcome.

Far better to be led by a Prime Minister who values enterprise and taking New Zealand's place in the real world than the alternative approach of dividing up a cake that has yet to be baked.

- NZ Herald

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