It's gradually dawning on Kiwis that the cost of fixing NZ's depleted infrastructure is fast becoming unmanageable. Whangarei hospital needs $1 billion spent and Dunedin hospital $3 billion to make them fit for purpose. The interisland ferry needs $3 billion if it is to be rail-enabled. Meanwhile Wellington, with its tunnel plans and broken water supply, is wanting billions to sort out those problems. Meanwhile Auckland has no second harbour crossing. The proposed highway from Auckland to Whangarei, promised in the coalition agreement and so exempt from cost-benefit, will gobble up much of the money that instead should have been spent on these other projects.
So what's Gross Domestic Product got to do with this shambles? Not many people know this - you have to be curious about one of the less-interesting topics in economics, namely how GDP is measured, to be into it. But the "Gross" in Gross Domestic Product refers to the fact that depreciation is not deducted from the total. In company accounts, by contrast, depreciation is deducted from revenues. If you're into accounting, the reason is important. It is to ensure that funds are being set aside to do capital spending in the future to replace the firm's assets as they become worn out. You're not meant to declare a profit before you can say that you're able to keep the firm operating at a similar capacity in the future. Otherwise you could declare big profits now and then in a few years time have to tell shareholders you're bankrupting since your buildings & machines don't work anymore. Not so with GDP. It measures the total value of production within the boundaries of country, without any expenses like depreciation being subtracted.
It may sound a trivial point, but its not. Successive NZ governments have tricked the public into thinking that because GDP has been (weakly) increasing most years, we're not doing too badly. But they have not been investing in the future. They have not been doing the necessary investments to keep the productive capacity of the country intact. They have allowed depreciation to diminish tens of billions of value from our hospitals, schools, water supplies and more, and the public have, in a sense, been conned into thinking all was okay, since the depreciation on those assets never appeared in our national accounts. Essentially, our politicians have done the equivalent of running a business whilst falsely inflating profits, pretending the firm was doing well, until it reached the point where everything broke, and then gone and blamed the previous managers (who had done the same thing).
It may sound a trivial point, but its not. Successive NZ governments have tricked the public into thinking that because GDP has been (weakly) increasing most years, we're not doing too badly. But they have not been investing in the future. They have not been doing the necessary investments to keep the productive capacity of the country intact. They have allowed depreciation to diminish tens of billions of value from our hospitals, schools, water supplies and more, and the public have, in a sense, been conned into thinking all was okay, since the depreciation on those assets never appeared in our national accounts. Essentially, our politicians have done the equivalent of running a business whilst falsely inflating profits, pretending the firm was doing well, until it reached the point where everything broke, and then gone and blamed the previous managers (who had done the same thing).
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
2 comments:
Grant Robertson was a master of this tactic. We can now all see that the facade is crumbling and the emperor worn no clothes.
The country's infrastructure may crumble - but, the budgets for Te Reo and Te Ao vision projects continue to be funded.
Reality check: 3rd world status is very close.
Tax payers: prepare to reap what you sow!
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