Robert MacCulloch
Robert MacCulloch is a native of New Zealand and worked at the Reserve Bank of NZ before he travelled to the UK to complete a PhD in Economics at Oxford University.
It’s gradually dawning on Kiwis that the cost of fixing NZ’s depleted infrastructure is fast becoming unmanageable. The run-down Whangārei 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 and leaky water supply, wants more billions to fix those problems. Meanwhile Auckland has no second harbour crossing. The proposed highway from Whangārei 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 and 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 its 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).
This article was originally published by Down to Earth Kiwi.
