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Opinion: Government debt becoming an election issue
August 4th, 2008The Prime Minister, Helen Clark has quickly attacked the National Party’s announced policy to fund central Government capital expenditure/infrastructure projects (roads, schools, prisons, broadband networks) out of increased NZ Government debt.
She thinks it is wrong and reckless to increase debt at a time when global financial, credit and investment markets are in such turmoil.
Her criticism does not stand up to scrutiny, from either the perspective of prudent management of Government finances or from what is going on in Government bond markets.
For nine years under the Labour-led Government the poor taxpayer has been paying taxes to fund current superannuation, part-fund future superannuation liabilities through $2 billion per year going into the Cullen Fund and paying for all capital expenditure on infrastructure as the policy has been not to borrow to finance these assets.
Their approach to Government finances has been unfair and inequitable and the burden has fallen too heavily on current taxpayers.
The National Party recognise this “intergenerational equity” paradigm of borrowing for capital infrastructure projects as that spreads the cost over the economic life of the asset and the people who get the benefit of the asset pay for it. Local Government borrowing by Councils has always been based on this concept of fairness. As long as the central or local Government debt is kept within prudential limits of ratios to GDP or rates income, there is not a debt problem.
The second aspect of the Prime Minister’s criticism is also poorly supported by the facts. Since the credit crunch hit 12 months ago, investors around the world have sold risky fixed interest securities and put their money into the safety and security of Government bonds – the “flight to quality”.
Local and foreign investor interest in an increased supply of NZ Government bonds over coming years would be higher in my view, with much needed liquidity hopefully returning to this debt market which has been moribund for years.
*Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com.
Tags: capital expenditure, central government, Credit Crunch, Cullen Fund, debt, flight to safety, GDP, Helen Clark, infrastructure, Labour party, Local government, National party, Roger J Kerr, rogersadvice.com
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August 5th, 2008 at 8:32 am
Good post
August 5th, 2008 at 1:27 pm
Doesn’t one first have to determine what “prudential limits of ratios to GDP or rates income” are? And surely there is also the question of the actual cost of borrowing – and in the case of local government – there is also the ridiculous methodology of charging ratepayers depreciation on the assets over a 20-year period – whereas the life of the assets is in most cases far, far longer.
August 5th, 2008 at 9:22 pm
For some of the most very recent and informative charts of our ever increasing net balance of payments situation go Here
August 6th, 2008 at 8:48 am
[...] debt for infrastructural investment. Now I’ve got no problem with this, and Roger J Kerr says here we could view it as an intergenerational issue – borrowing allows us the stagger the cost of the [...]