Government doesn't exist to extract a return from its people

Act have adopted the New Zealand Initiative's privatisation arguments. In doing so, they may be advocating for higher costs on households and businesses.

Last week business lobby group the New Zealand Initiative launched a report called “The People’s Portfolio: A $571 Billion Question” which aims to put privatisation back on the table. It notes that:

The Crown’s asset portfolio includes everything from commercial entities to houses, hospitals, schools and 40% of New Zealand’s land area. How much of this does the Crown really need to own?

In a NZ Herald op-ed about the report, author Bryce Wilkinson argues that, “the government’s income in rent and dividends from all these investments is less than its interest payments on its borrowings.”

This reasoning has since been picked up by the the Act Party, arguing that “it’s time to ask serious questions about what assets the government actually needs to own.”

Let’s take a look at some of these numbers in a bit more detail.

The $571 billion figure is taken from Treasury’s 2024 end of year financial statements, combining financial assets, property, plant and equipment (aka “fixed assets”), and other assets. However the $571 billion figure looks at only one side of the balance sheet, as opposed to net worth, which includes another $380 billion in liabilities, totalling $191 billion.

As a share of the economy, net worth comes to 46.2 percent of GDP. This doesn’t seem that huge, until you compare it to other countries.

New Zealand is one of the few OECD countries that has a positive net worth. The below graph is from 2022 and uses a slightly different measure, but it’s worth noting that most of our traditional comparator countries are on the other side of the ledger.

Source: Musical Chairs.

We’ve heard a lot of complaints from players like the Act Party and the New Zealand Initiative about the size of our public debt, and the 2024 Financial Statements put total borrowings (i.e. gross debt) at $251 billion (see here for a broader discussion on debt and definitions).

However the interest income earned on the financial assets we own basically covers the entire cost of servicing our debts. While financial assets make up 45 percent of the $571 billion figure quoted by Wilkinson, interest income itself is missing from Wilkinson’s analysis that “the government’s income in rent and dividends from all these investments is less than its interest payments on its borrowings”.

The below graph shows that the interest income of central government institutions, for example, almost completely covers the interest expense from its borrowings. It’s probably a bit hard to see without zooming in, but the numbers on the orange bars are interest income as a percentage of interest expense. In the most recent quarter it was 89 percent. The percentages in the green bar are combined interest and dividend income of central government institutions as a percentage of its interest expense.

In 27 of the 34 quarters covered by this dataset, interest and dividends payments completely cover the cost of interest expense. Cumulative interest and dividend income over this period comes to $42 billion, 16 percent more than the $36.2 billion in interest expense over the same period.

Privatisation’s profits are a tax on households and businesses

More broadly, public ownership of assets is valuable because it delivers benefits right across the economy, without having to necessarily apply the brutal profitability imperatives of the private sector.

Shifting service delivery into the private sector brings with it the requirement of to maximise profits, which lumps extra cost onto service consumers. This is particularly acute when the asset being privatised is effectively a government monopoly or there is limited competition in the sector. The extra cost involved in funding private sector profits (as well as the relatively higher cost of private sector credit) acts as a regressive tax on households and businesses, and could well be inflationary.

Government doesn’t exist to extract a return from its people, and public ownership of assets helps to prevent vulnerable populations being on the receiving end of unscrupulous behaviour from rent-seekers, monopolists and profiteers.

It is of course far from perfect, and I think it’s worthwhile that political parties consider how we regulate things like state-owned enterprises that deliver goods and services to citizens. I’ve written in some detail about how the partial privatisation of our electricity companies resulted in the collapse of capital investment while dividends skyrocketed. Last year we saw large-scale job losses as manufacturers could no longer contend with high winter electricity prices, and there are concerns that a dry winter this year might result in a repeat.

Consider, then, what the impact might be if the government contemplates the privatisation of state housing, hospitals, education and other public services in NZI’s crosshairs. Sure, there is probably money to be made from buyers hiking up returns across these sectors, and that has no doubt helped motivate the publication of the report.

Money to be made from who, though?