It's gradually dawning on Kiwis that the cost of fixing NZ's depleted infrastructure is fast becoming unmanageable. The run-down Whangarei hospital needs $1 billion spent on it and the decaying Dunedin hospital $3 billion to make them fit for purpose. The breaking interisland ferry needs $3 billion if it is to have a rail-enabled replacement. Wellington, with its tunnel plans & leaky water supply, wants more billions to fix those problems. Meanwhile Auckland has no second harbour crossing. The proposed highway from Whangarei to Auckland, promised in the Coalition Agreement, and so exempt from cost-benefit, will gobble up much of the money that should've been spent on these other projects.
So what's Gross Domestic Product got to do with it? 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. It's a "gross" figure, not a net one.
In company accounts, by contrast, depreciation is deducted from revenues when working out how well the firm is doing. If you're into accounting, the reason is important. It's to ensure funds are being set aside to do capital spending in the future to replace the firm's assets as they get worn out. You're not meant to declare a profit before you can say you're able to keep the firm operating at a similar capacity. 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 nation, without expenses like depreciation subtracted. Its closest comparator in company accounts is "sales".
It may sound a trivial, academic point, but it's not. Successive NZ governments have tricked people into thinking that because GDP has been (weakly) increasing most years, we're not doing too badly. But they've not been investing in our future. They have not been doing the necessary investments to keep the productive capacity of the nation intact. They've 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).
Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. Rob blogs at Down to Earth Kiwi
I thank you Mr. MacCulloch for exposing the old GDP scam. I understand that the sale prices of rural. commercial and residential properties are also included in the domestic production figure? Could it be that our modest annual growth is accounted for by the appreciation of these 'products'?
The disasters which currently afflict Wellington's water infrastructure are usually met with the plaintive lament that deterioration over 150 years is inevitable? This begs the question, where have 150 years of rate accumulations been spent? Not on maintenance of essential services it would seem, but perhaps when repairs are completed and costed, these will also be reflected in our GDP illusion?
The depreciation aspect is valid and is just another trick used to try to help disguise the fact that Western financial capitalism, based on fiat currencies, is in its death throes.
I totally endorse Charlie Baycroft's excellent analysis earlier in this comment string
However, Macculloch, as part of the 99% of commentators and analysts that subscribe to the eCONomics narrative, yet again totally ignores the elephant in the room - ie the entities and the architecture that create MS - (the Money Supply).
In most Western fiat economies, more than 90% (often 97%) of MS is created by private bank alchemy - IOWs, creating money out of thin air when they make loans and mortgages. Until we reform this and…
And then there is the Green Party.
The ignorant “OK, Boomer” level of thought awarding themselves intellectual honours. Too dumb to feel appropriate shame and regret.
If, as we are trained to believe in 3 act TV paced denouements, theirs will be the most terrible.
The most painful in fact would be to wake up.
Interesting and important, a very useful article, thank you.
Not all assets are physical, and yet the concepts you explain briefly still apply.
Gritty older New Zealand generations, the VietCong, and Job were better under duress than the generality today.
The Labour Party has fallen far - see what praying to Mammon and kneeling to materialism earns you, when times turn hard. The party that prided itself on staunch independence of no nukes descends to aping foreign thought in matters domestic and whatever that unhinged W Coast MP said about October 7th.
It’s sad to see such a falling off.
Why? And what to do?
Your article curiously useful.
Does this ring a bell?
"Developed economies cannot live without new and larger spending plans. The result is more debt, weaker productivity growth, and declining real wages.
In a recent report, Bank of America showed that the rise of unproductive debt has created a significant problem for the United States economy. For every dollar of new government debt, the gross domestic product impact has slumped to less than fifty cents. The United States is drowning in unproductive debt. However, at least the United States has some productivity growth. If we look at the euro area, the negative multiplier effect of new government debt is extremely evident. Despite enormous stimulus plans and negative nominal rates, the euro area has been stagnating…