We're not a South Pacific Greece yet

OPINION: In an excellent speech to the Wellington Rotary Club last week, Business Roundtable chief executive Roger Kerr presented Greece's economic emergency as emblematic of a looming global fiscal crisis as governments struggle to contain burgeoning debt and rising public spending.

He is not the only business commentator concerned about the implications of the rising tide of sovereign red ink. Former Fidelity International chief investment officer Michael Gordon recently asked whether government bonds, in the light of Dubai and Greece, could still be viewed as risk free.

Given the status of government bonds as the cornerstone of every diversified investment portfolio, Gordon's query is almost heretical. Yet he believes that unless a concerted effort is mounted to manage sovereign debt, a tipping point will arrive.

This will entail a rewrite of applied theory of finance and portfolio management, which holds that government bonds are risk-free in theory and practice. The Greek government's bonds may be junk but, Gordon says, all government debt is now under scrutiny by the private sector.

Mohamed El-Erian, chief executive at global investment company Pimco, one of the largest private bond holders, all but endorsed Gordon's prognosis. Sovereign balance sheets are now part of the picture in making decisions about investment portfolios, he told British media.

Greece and Dubai are but two extreme examples, but there are others, Kerr says. ''Japan's debt already stands at 200 per cent of gross domestic product; in the United States, the budget deficit has risen to about 11 per cent of GDP and debt is rapidly approaching 100 per cent of GDP.'' By implication, Kerr suggests New Zealand risks joining a handful of basket-case economies unless it quickly moves to cut spending.

In light of new Treasury figures, however, Kerr perhaps overcooks his argument. New Zealand's net cash position is a little under 3 per cent of GDP, its net debt stands at $22.73 billion, or 12.3 per cent of GDP, and its net operating balance is a deficit of $1.41b  hardly the stuff of a South Pacific Greece.

But he makes  interesting points about public attitudes to public spending and taxation.

Despite 30 years of global reform that saw governments relinquish central control of the economy, the privatisation of state-owned enterprises and the embracing of free trade, public spending as a share of GDP has continued to increase.

In a wonderfully self-referential line, Kerr notes that spending increases give ''the lie to the claim that a so-called neo-liberal, market fundamentalist ideology has triumphed throughout the world''. Many surveys show that a majority of taxpayers are prepared to pay more to fund core government services, such as health and education. Public high-mindedness is never so marked as when put to the test by a public survey.

''In practice,'' Kerr says, ''the people turned out to favour higher public spending more than higher taxes.'' He could be talking about the present National Government when he says that ''even conservative parties have gone along with the consensus that a large part of the national product is a common [property], available to be redistributed by the state in the light of goals and principles collectively determined by transient political majorities''.

The last phrase  transient political majorities  holds the key to Kerr's thinking. ''Fiscal decisions by simple majority rule, we believe, are too exposed to the biases of special interests to reliably reflect genuine collective preferences.'' He doesn't believe that people, given the choice, would really vote for higher government spending. If additional spending decisions were put to a referendum, Kerr believes, a different outcome would occur.

With all due respect, public votes on pay rates for nurses and teachers would likely result in wages higher than the Government  envisages at present.

There is also a philosophical difference between Kerr and the Government. As Prime Minister John Key noted, Australia, with its more measured approach to economic reform, had performed better than New Zealand.

There is a consensus and it doesn't involve a radical shrinking of state spending: ''The best way  in fact the only way  of getting on top of this significant fiscal challenge,'' Finance Minister Bill English said recently, ''is to get the New Zealand economy growing and giving businesses the confidence to invest and create higher-paying jobs.''

To that end, he will seek to implement recommendations in the Capital Markets Taskforce and the Tax Working Group reports.

Creating a fairer tax system is also the  wish of Reserve Bank governor Alan Bollard, who emphasised the importance of reform in a speech to the Canterbury Employers' Chamber of Commerce. Bollard noted some of Kerr's concerns about the looming fiscal crisis: ''We need to be realistic. The world is not ours to influence and it is unlikely to offer us perfect conditions.''

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