Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Treasury forecasts dangerously optimistic

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Directors such as Joan Withers and Sue Sheldon are often more capable than their male counterparts. Photo / Sarah Ivey
Directors such as Joan Withers and Sue Sheldon are often more capable than their male counterparts. Photo / Sarah Ivey

The Rugby World Cup is over and we are now in the pre-Christmas rush when a large number of companies hold their annual meetings while others release their interim results for the March 2012 year.

This year will be more frantic than usual because of the election campaign with its focus on asset sales, KiwiSaver and the sustainability of NZ Super.

The post-RWC period got off to a flying start on Tuesday with the release of the Treasury's pre-election economic and fiscal update.

This is an important document because it contains economic and government Budget forecasts that should form the basis of debate during the election campaign.

The problem is that the Treasury has failed to recognise the consequences of the world economic slowdown and, as a result, its forecasts have been too optimistic.

The October 2008 pre-election forecast for the 2009, 2010 and 2011 years, which was compiled in the middle of the global financial crisis, was far too positive on GDP growth, unemployment, the budget deficit and Crown debt.

The latest pre-election also seems to be far too optimistic, particularly as far as the budget deficit is concerned.

The accompanying table shows Treasury's October 2008 pre-election budget deficit forecasts and its subsequent yearly December and May forecasts.

In October 2008, Treasury was predicting a $2.5 billion deficit for the June 2011 year compared with the actual deficit of $18.4 billion. The latter figure includes $9.1 billion from the Christchurch earthquakes but without this the deficit was still $9.3 billion.

The forecast deficit for the 2012 year has increased from $3.1 billion in October 2008 to $10.8 billion.

Finance Minister Bill English is putting a great deal of emphasis on the June 2015 year when a $1.5 billion surplus is forecast.

This positive forecast is based on the following assumptions:

* Crown revenue, mainly tax, is expected to increase from $57.6 billion in the 2011 year to $74.4 billion in 2015.

* Crown expenses are forecast to rise from $70.5 billion to $75.6 billion over the same period.

* The state-owned enterprises and Crown entities balance is expected to go from a deficit of $5.5 billion to a surplus of $2.2 billion.

In other words the Treasury is forecasting a huge increase in the individual, corporate and GST tax take over the next few years. However, it also points out that "the risks to our main forecasts are skewed to the downside".

The latter statement indicates that the Treasury is taking an optimistic rather than a realistic approach to its forecasts. This positive bias does a disservice to the country because politicians are unlikely to address the huge budget deficit if public servants are forecasting a surplus four years hence.

The Labour Party's proposal to raise NZ Super's eligibility age from 65 to 67 by 2033 has implications for the Government's long-term budget deficit.

The Treasury's financial model, which offers general guidelines only, predicts a budget deficit of more than $30 billion in 2033 based on a continuation of recent government revenue and expenditure policies.

The main 2033 year expenditure items are health, around $42 billion, and New Zealand Super, $33 billion.

About 1.1 million will be 65 or older in 2033 with an estimated 10 per cent of these aged 65 and 66.

Thus raising the eligibility rate to 67 will reduce super costs by about $3 billion in 2033, a relatively immaterial amount.

There is little doubt that the country cannot afford universal super in the longer term and the eligibility age will have to be raised or some sort of means test introduced. Labour's policies should put the spotlight on NZ Super and KiwiSaver over the next few weeks.

Director fee increases and executive remuneration were expected to be the main issues at annual meetings but this week's meetings were dominated by the excellent chairmanship of Susan Sheldon at Freightways and Joan Withers at Auckland International Airport.

There has been a great deal of debate about the role of women in the boardroom and there is no doubt that Sheldon and Withers are more professional and capable than many of their male counterparts. They also raise the standard of dress as a number of directors who normally adopt a casual approach are dressed in more formal attire when their company is chaired by a woman.

Sheldon went on the front foot as far as the proposed 29 per cent increase in director fees, from $336,000 to $434,000, was concerned. She said she welcomed the debate on the issue but there was only limited discussion.

One shareholder took issue with directors wanting to raise their fees because others had done so. He argued that if three companies compared each other and the bottom one wanted to raise its fees to the average of the three then this would raise the overall average and encourage the others to raise their fees as well.

Shareholders' Association chairman John Hawkins said that his organisation supported the director fee increase which was carried by a poll vote.

Withers was particularly assertive when a shareholder criticised Auckland Airport's involvement in property developments. The shareholder said that he invested in an airport and he didn't want the company undertaking high-risk property projects.

Withers told him in no uncertain terms that modern airports were more than glorified railway stations and Auckland Airport had a large amount of unused land, an excellent property team and ambitious development plans.

Many male chairmen would be reluctant to adopt the assertive approach that Withers does at Auckland Airport. This is because of a number of factors including political correctness and the desire not to offend shareholders.

Female chairmen don't seem to have the same constraints.

By contrast the Skellerup annual meeting, which was chaired by Sir Selwyn Cushing, started late and meandered slowly through an agenda that included a proposed director fee increase and a share issue to chief executive David Mair.

A great deal of tension was taken out of the proceedings because the company secretary announced at the beginning that 96.1 per cent of proxies supported the 48 per cent fees hike, from $320,000 to $475,000, and there was 92.9 per cent proxy approval for the share issue.

The late kick-off and extended formal presentations meant that shareholders were exhausted by the time the director fee increase and share issue were considered.

There was limited discussion on these issues and they were both passed by a poll vote.

Mair will be issued 1,947,533 redeemable shares. He will initially pay 1 cent for these shares which will then convert into ordinary shares once they are fully paid. The fully paid price is effectively the current market price.

The problem with this share incentive is that the chief executive receives all of the upside if the Skellerup share price rises but he can let the shares lapse, and not pay for them, if the share price falls.

The other issue is that this scheme is only available for the chief executive and Skellerup does not have a share scheme for staff.

Mair has done an excellent job at the company but should he be the only executive to participate in a favourable share scheme?

The impression at Freightways and Auckland Airport is that Sheldon and Withers and their boards are in control and their chief executives are singing from the same song sheet.

The perception of Skellerup is quite different; Mair seems to have more control.

The obvious solution is that Skellerup appoints a strong female chairman when Sir Selwyn retires.

Liz Coutts, a Skellerup director, is an obvious candidate.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management. bgaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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