Finance Minister Grant Robertson has ruled out writing off Government debt, while the Reserve Bank (RBNZ) has said it doesn’t expect it to be written off.
Robertson made the call during question time in Parliament on Wednesday, initially saying writing off Government debt wasn’t his “intention”, before finally conceding to National’s finance spokesperson Paul Goldsmith that he would rule it out.
Much of the debt the Government is taking out to pay for the Covid-19 response is sitting on the Reserve Bank’s balance sheet.
Treasury is issuing debt in the form of New Zealand Government Bonds. Investors are buying these bonds. The Reserve Bank (RBNZ), through its quantitative easing (QE) or Large-Scale Asset Purchase (LSAP) programme, is then buying these bonds from the investors. It’s doing so to push interest rates down to help it achieve its inflation and employment targets, and also to provide liquidity in the market.
To date, the RBNZ has bought $26 billion of New Zealand Government Bonds. Its current commitment is that it will buy up to $100 billion, ensuring it doesn’t end up owning more than 60% of the outstanding New Zealand Government Bonds on issue.
Theoretically, this debt, which the RBNZ treats as an asset, could be written off.
Asked by interest.co.nz to detail exactly how this would be done and what the consequences would be, an RBNZ spokesperson provided a brief statement: “The Reserve Bank does not expect this debt to be written off.
“Central banks globally have purchased government bonds as part of large-scale asset purchase programmes because they are the highest quality asset in the financial system.
“The bonds are backed by the Government’s unique ability to gather future taxes, which in turn is backed by the ability of the economy to produce goods and services and generate income in the future.”
Goldsmith confirmed to interest.co.nz he too would rule out writing off Government debt.
“Simply because orthodox economic policy has always been that if you borrow money, you need to pay it back,” he said.
“Countries that default on debt have been punished by international markets and rightly so.
“I was glad the Minister of Finance confirmed that’s the Government’s policy as well, and his policy.”
Here’s a transcript of the exchange between Robertson and Goldsmith:
Goldsmith: Does he agree that Government debt eventually needs to be paid back?
Robertson: Well, Government debt does need to be paid down. It's very rare in New Zealand's history for us to have got to the point where we had almost no public debt. I believe Sir Michael Cullen got us, in terms of as a percentage of GDP, as close as we've got in history. But we have to manage debt carefully—for example, the record of this Government speaks to that: the fact that we inherited 21.7 percent net debt and we reduced that to under 20 percent.
Goldsmith: Will he rule out cancelling or writing off any of the Government debt that has been bought by the Reserve Bank, as long as he is the Minister of Finance?
Robertson: That is definitely not my intention.
Goldsmith: Rather than his intention—
Speaker: Order! Order! I am going to ask the member to answer the question again because, I mean, there's no requirement for yes/no answers, but that answer could have been taken either as a positive or a negative response to the question.
Speaker: That's much clearer.
Goldsmith: Sorry, so he won't rule out cancelling or writing off any Government debt that has been bought by the Reserve Bank? Is that his answer?
Robertson: It is not my intention to write off any of that debt.
Goldsmith: Just clarifying: rather than his intentions, will he rule out cancelling or writing off any Government debt that has been bought by the Reserve Bank, as long as he is the Minister of Finance?
Robertson: I am ruling that out, yes.
Modern Monetary Theorists are among those who believe government debt can be written off in some instances. For more on the pros and cons of this, and for Robertson's response to this school of thought more generally, see this story written earlier in the month.