Just Some Questions about our Overseas Debt

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Possum

240 posts

Master Geek
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Topic # 87252 23-Jul-2011 18:10

What day did New Zealand become a Debtor Country?
When will pay off our overseas Debt?
How Much do we Borrow each Week ? Year?
What do we Pay back?
Can we Pay the Principle?
What is the Interest?
Why do we Borrow Money that seems impossible to pay back?
Is this Borrowing Mainly to pay the public sector?

Thank you...

uDoPage

mattwnz

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Reply # 497185 23-Jul-2011 19:11

Possum: What day did New Zealand become a Debtor Country?
When will pay off our overseas Debt?
How Much do we Borrow each Week ?? Year? ?
What do we Pay back?
Can we Pay the Principle?
What is the Interest?
Why do we Borrow Money that seems impossible to pay back?
Is this Borrowing Mainly to pay the public sector?

Thank you...

interest.co.nz for all things money in NZ

traderstu

148 posts

Master Geek
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Reply # 497187 23-Jul-2011 19:16

good questions, possum. Sorry I can't help with the answers

jonherries

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Subscriber

Reply # 497200 23-Jul-2011 19:59

Hopefully this goes someway to explaining why a country has debt.

It helps to think of the country as a large business, with income and expenditure. Generally the income is tax (PAYE, company, GST, tarrifs etc) and any other revenue from other "minor" businesses (eg. Genesis Energy, Air New Zealand etc).

The expenses include things like: superannuation, other benefits, healthcare, education, other government services.

Generally if you want to grow a business (or the economy as a whole) you need to invest. Either you find this through your revenue, or sell ownership of our business in the form of debt or shares.

In good times when the economy is growing strongly (2003-2007 here), you can reinvest the profits into paying off debt, and expanding your revenue generating and expenses.

Normally even when things are going well, you tend to want to invest more money than you have (as this sets the platform for growth in the future).

The cost of borrowing money largely sets the pace of the economy. When this cost is low, the economy grows quickly. When it is high, we can move into recession. This is how the reserve bank attempts to ensure the economy grows at a "safe" rate.

The reason debt rises in a recession is that a series of businesses fail, and more people are out of work. This has a double effect by reducing the income for the country (company and PAYE tax), and increasing unemployment benefits.

This recession is a bit special for a number of reasons including the fact that most of the debt owed by New Zealand is on their houses, cars and hire purchases. This is largely the reason our economy isn't recovering as quickly as it has in the past (along with the fact the our major export partners are also in a similar position.

There is masses of detail that I could explain in any of this, but I will stop here as I could just write a book.

Any thoughts?

Jon

Antzzz

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Master Geek
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Reply # 497246 24-Jul-2011 00:03

As noted by the previous poster most of the NZ overseas debt is from the private sector, and a high proportion of this is from housing. This makes the NZ situation a bit different to say Greece, where the highest proportion of debt is from the public sector - mostly due to endemic tax avoidance. Or the US where the previous administration dropped taxes, but did not make corresponding cuts in services lest it make them unpopular...

So this should answer at least your last 2 questions
- Why do we borrow so much: due of our fixation on leveraged property investments that overall burn/tie up capital
- Is this borrowing to pay the public sector - by and large no, that is funded from taxes. Some borrowing occurs here, but it is dwarfed by the private sector

The situation could have been a bit different if the previous government had given in to temptation and lowered taxes rather than keeping the surplus they were running - a fact that seems lost on the current government...

John2010

532 posts

Ultimate Geek
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Reply # 497340 24-Jul-2011 13:41

Antzzz: As noted by the previous poster most of the NZ overseas debt is from the private sector, and a high proportion of this is from housing... So this should answer at least your last 2 questions - Why do we borrow so much: due of our fixation on leveraged property investments that overall burn/tie up capital...

This reference to housing is only correct if there is a surplus of property in NZ (and it would seem that there is not) and if in comparison to other like countries the average level of indebtedness over property is higher than them. I have not seen any evidence that the last is so, but it may be I do not know. A couple of years back if I recall correctly, it was authoritively claimed that around (I don't recall the exact figure) 55% of houses are mortgage free which was a surprise to many people with mortgages - maybe someone knows what it is now.

Its correctness is also influenced by other factors such as the quality of property and the cost of building as that may increase the level of indebtedness if those things are high here compared to elsewhere and so inflate the cost of property, but I think it would be a long bow to draw to claim that they are.

In the end someone has to own the houses we live in and one assumes that will always be enabled through debt. and savings.

It also needs to be kept in mind that a considerable level of private consumption (food, entertainment, housing, brownware, whiteware, etc) is actually funded by the taxpayer by way of benefits such as Working for Families and so contributes to public debt. It is able to be converted to private debt if it is recovered by way of taxing those who would otherwise have saved the extra they pay in tax as a result (as happened in the 2000's and as is currently proposed by several political parties should they become the next government). Unfortunately, it is not so easy for holders of private debt to convert that to public debt

wreck90

780 posts

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Inactive user

Reply # 497346 24-Jul-2011 14:19

I don't think the question was serious.

oxnsox

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Reply # 497349 24-Jul-2011 14:28

John2010: ...(edit)...
It also needs to be kept in mind that a considerable level of private consumption (food, entertainment, housing, brownware, whiteware, etc) is actually funded by the taxpayer by way of benefits such as Working for Families and so contributes to public debt. It is able to be converted to private debt if it is recovered by way of taxing those who would otherwise have saved the extra they pay in tax as a result (as happened in the 2000's and as is currently proposed by several political parties should they become the next government). Unfortunately, it is not so easy for holders of private debt to convert that to public debt .

Private debt, borrowing for houses, whiteware, brownwear, creditcards etc... is however largely funded through banks who borrow this money offshore, hence the large public debt.

Saying private consumption (thru benefits) is taxpayer funded is a bit like a Policeman saying he is self employed because he pays taxes...