Our fear of government debt is holding us back
For more than 15 years, New Zealand households have carried more debt than they earn in income. Our total private debt — mostly in mortgages — is now one and a half times national income.
But when it comes to the government’s finances, pressure to balance the books is a handbrake on even modest public spending. Until recently, the Labour government’s self-imposed budget rules required it to reduce the national debt to 20 per cent of GDP.
Those rules have been jettisoned, and government debt is expected to rise to over 50 per cent of GDP by 2023. But to most politicians, reining in the debt is a priority. In the last election, parties argued over who would reduce debt fastest; “keeping a lid on debt” has been a common refrain from Finance Minister Grant Robertson in the lead up to this month’s budget.
The upshot is a continued squeeze on public spending that is preventing us from addressing looming problems, from infrastructure to housing to climate change.
Borrow more money!
Since the 1980s, we have lived with what Victoria University of Wellington economist Dr Geoff Bertram says are deeply conservative ideas about public finance — that government should be small and budgets should always be balanced. Like other economists, Bertram sees public spending as a crucial tool for addressing society’s needs when the market can’t or won’t. “Accounting fictions” about balanced budgets have “killed our ability to think sensibly about government,” he says. “The government is not a household or a firm.”
If a household starts spending more than it earns, pretty soon someone will knock on the door asking for their money back. By contrast, when a government spends more money, it can kickstart the economy when times are tight. Building a railway creates jobs, which means more money in workers’ pockets, which means they spend more.
The government also has more ways to get money than a household. In addition to tax, it can borrow from private lenders at low rates, or from the Reserve Bank — essentially, printing money. None of these options are unusual, but each comes with different trade-offs and benefits.
“Yes, government has to be prudent,” says Bertram. “But what is prudence? The government’s responsibility is to provide services in the public interest.”
That often means spending big to do things that aren’t profitable for the private sector.
The first Labour government’s ambitious housing and public works programme was financed largely by Reserve Bank borrowing. It helped stimulate our depressed economy and provided work and shelter for those who needed it.
Our fear of debt stems largely from the Muldoon era, when the government borrowed heavily in overseas currencies to fund Think Big. That left us vulnerable to falls in the New Zealand dollar and interest-rate surges.
This kind of borrowing is no longer the norm. The government now borrows mainly through domestically issued, fixed-rate government bonds.
The proportion of debt owed to foreign lenders has fallen to around 41 per cent, down from 80 per cent in the early 1990s. Interest rates are much lower, so servicing debt doesn’t cost the government much. In short, borrowing is less risky than it used to be. “Government debt is a very, very small issue,” Bertram says. “But it dominates the political landscape.”
New Zealand’s debt level, currently just over 30 per cent of GDP, remains well below that of many comparable countries before the pandemic began. Japan’s was nearly 240 per cent of GDP. The United Kingdom’s debt passed 100 per cent in May 2020.
We don’t know where the redlines really are
Nobody knows for sure what a safe debt-to-GDP ratio actually is, so there’s a risk we could go too far without knowing it. But most estimates for a safe level of debt are well above where we are now — and New Zealand has dealt with far higher levels of debt in the past.
– The household model of public debt is literally written into the law, with the Public Finance Act 1989 requiring reducing debt to “prudent levels”. This may make legal reform necessary.
– Conservative fiscal practice is seen as good politics. “Our politicians have internalised this mindset. They are terrified that if they say it doesn’t matter they won’t get elected,” Bertram says. “Anybody who departs one iota from the standard austerity narrative risks getting characterised as one of these wackos.”
Ollie Neas is a journalist and barrister based in Wellington.