4 The $22 billion fiscal hole

by Christie on October 13, 2018 at 9:00am

Jacinda Ardern Taxes meme

Many things are not going well for this government, and some of them are beyond their control. They do have control over how much tax they put onto fuel, but they have no control over the international oil price. They did crash business confidence, causing the dollar to start to fall, but the strengthening greenback has caused our dollar to fall further. Now that world stock markets are falling significantly, all managed funds and share portfolios are losing value and the biggest by a long way is the NZ Superannuation  Fund.

Stuff  reports: quote.

A repeat of the global financial crisis could see the New Zealand Superannuation Fund shed more than half of its value.

The scenario was laid out in the fund’s annual report, released on Thursday, explaining that more than $22 billion would evaporate if the events of 2008 and 2009 were repeated now.

By coincidence, it was released on a day when sharemarkets around the world tumbled, with the NZX-50 down 3 per cent, dropping in response to a plunge in technology stocks in New York. end quote.


Okay. First of all, no need to panic. This is not another GFC. Stocks have fallen around 3% in the past week, and certainly, that has been felt in the value of all managed funds and share portfolios. Here in New Zealand, and also in the US, we have enjoyed unprecedented growth in stock values in the last year, and so this is nothing more than a market correction – seen by many to be long overdue. quote.

Rather than signalling a change in approach away from its moderately risky investment strategy, chief executive Matt Whineray said the fund issued the warning to ensure that if markets tumble, the public – and the Government – does not lose confidence.

“The risk is that we don’t have the discipline and capability and that we lose the support of our sponsors [and] broader stakeholders, whether that’s the Government or the public or the media, that people don’t understand the expected range of outcomes.” end quote.

A lot of people do not understand the markets and get spooked when values fall. This can result in both individuals and fund managers selling out prematurely and locking in losses simply because of market jitters. It has to be said that the Fund has a long-term medium to high risk strategy that may result in short term losses but it has been proved in the past that the strategy works long term.

None of this is a significant risk to the government, you might say. Well, actually, that is where you are wrong.

Guess who – or should I say, what – is the biggest taxpayer in New Zealand?

The NZ Super Fund.

The NZ Super fund paid about $1 billion dollars in tax last year. That was more than government contributions into the fund.

So, if they have a tough year – and this year is shaping up to be a little turbulent, with a lot of global uncertainty and trade wars to add into the mix – that not only affects asset values, but it reduces the tax take into government coffers as well.

So don’t panic too much about your share portfolio or managed funds. If you are investing for capital gains, you either have to sit back and wait, or you should have taken your profits already. If you are investing for return, then your dividend yield just got better. In either case, so long as you are not forced to sell out for other reasons, you should be fine in the long term.

However, for the government, there could be a real headache coming. If the tax take from the Super Fund falls, it could be a significant hit to their revenue stream. We all know what that might mean. The way they have been splashing money around everywhere, including the Pacific, they could run out of other people’s money to spend really fast.

James Shaw wants to spend the surplus and James is an Associate Finance Minister. Clearly, we should be very worried.