National, Labour and the Greens want to reduce government debt. But is it the right time for political parties to be campaigning on tightening the government’s purse strings?

Being in the red isn’t ideal, so the government should try to reduce its debt as a proportion of economic output.

This is the line the major parties are pushing ahead of Saturday’s election.

National is proposing to reduce net Crown debt as a percentage of GDP from the 24.6% it's at now to 20% by 2020. From there it aims to reduce debt to 10-15% of GDP by 2025.

Labour and the Greens have a similar target of reducing debt to GDP to 20%, but are giving themselves until 2022 to achieve this.

The Maori Party won’t put a figure on it, but supports a “gradual reduction” of debt to GDP over the next five years.

But as Infrastructure New Zealand CEO Stephen Selwood suggests, should the government see “borrowing as an investment in the future, not an increase in debt”?

There is general consensus New Zealand is in desperate need of improved infrastructure. Various groups also argue there’s a lack of investment in affordable housing, healthcare, education, research and development, etc.

Interest rates around the world are low (even though they’re slowly rising) so borrowing is relatively cheap. New Zealand’s debt to GDP ratio is also really conservative by international comparison.

So is this really the right time for the major political parties to be campaigning on tightening the government’s purse strings?

Not all the parties on board

Neither New Zealand First, ACT nor The Opportunities Party (TOP) support specific debt reduction targets, with ACT saying the other parties have simply set targets to make themselves look responsible.

New Zealand First says: “The question is not debt to GDP, it is the nature of the debt. And if the debt is purely for consumption, which is what National has done, then expanding on that consumptive debt would be a silly idea.

“However, if the debt was to expand production, exports and wealth in this country, then such a decision will be soundly based.”

Similarly, ACT supports the “prudent use of debt to fund long-term assets like infrastructure, or productivity-enhancing investments like education”, but says the government should only take on more debt once “wasteful” spending has been cut.  

As for The Opportunities Party (TOP), it says we should “judge spending on return on investment, not on debt targets”. In any case, it believes government debt wouldn’t be an issue if superannuation was means tested.

TOP and ACT say the real problem is household debt.

What do the economic experts think?

Asked about the extent to which they believe the next government should be focussed on bringing down Crown debt to GDP, economists and economic commentators are divided.

ANZ chief economist Cameron Bagrie says it’s complicated, NZ Initiative executive director Oliver Hartwich, and Business NZ CEO Kirk Hope are more firmly in the “reduce Crown debt” camp, while independent economist Shamubeel Eaqub and BERL chief economist Ganesh Nana are in the “debt reduction shouldn’t be a priority” camp.

A ‘fool’s paradise’ to believe lower Crown debt will benefit NZ

Eaqub says: “I am not worried about our [Crown] debt position. We should be focussing on the quality of investments made with any new borrowing. ​

“We should be using cheap and long-term funding to invest in capital. We are significantly under-capitalised relative to the OECD.”

Chart from Trading Economics.

Eaqub believes National, Labour and the Green Party’s debt reduction targets are “silly” and suggest neither party believes we can make investments that will increase New Zealand’s ability to repay debt and be better off.

Nana sees increasing debt to fund necessary infrastructure as a “no brainer”, as this will benefit the future generations and be paid for over the long-term.

He agrees Crown debt as a percentage of GDP is low by world, as well as historic New Zealand, standards.

“New Zealand’s debt problem is not one of Crown debt, but of private debt (in particular household debt) arising from lending/borrowing on the back of unsustainable house prices,” he says.

“Priorities need to be focussed on broader economic performance - not narrow fiscal indicators. Priorities such as skills, training, education, research and development, and infrastructure to address productivity - coupled with social supports (health and wellbeing) to build community capacity and resilience in the face of challenges that confront us (climate change, robotics, ageing population, regional depopulation etc).

“It is indeed a fool’s paradise if we believe that lower Crown debt on the back of deferred maintenance and a consequent infrastructure deficit will somehow benefit the New Zealand economy (let alone New Zealand).”

‘It is prudent to fix the roof while the sun is shining’

Hartwich on the other hand says: “Paying down debt as a percentage of GDP makes good sense because New Zealand needs to be prepared for the next natural disaster and the next global economic downturn.

“In some ways, there is no urgency to pay down crown debt because it is quite low by international standards.

“However, when the economy grows by around 3% a year, you would expect to run budget surpluses. If 3% growth is not enough to run a surplus, you can imagine how deficits would spiral out of control if there was an economic downturn.

“So it is prudent to fix the roof while the sun is shining.”

Bagrie and Hope agree.

Bagrie says: “The government has a big balance sheet (around $300 billion of assets), and leaning on that balance sheet during the tough times (i.e. spending and borrowing more) is an important economic lever than can be pulled when shocks hit the economy.

“But to be able to lean on that balance sheet, the balance sheet has to be in good order and this means strengthening the balance sheet during the good times by having debt to GDP on a falling path and running operating surpluses.

“When you have the accounts in the black, you have options. These can take the form of cutting taxes, raising spending on government services, investing through critical infrastructure or paying down debt…

“So yes, paying down debt (as a share of GDP) should be a strong priority to build up a war-chest or buffer, but it’s not the be all and end all in terms of a magical target or number…

“If I saw the current account widening and net external debt rising I’d be attaching a very strong priority to paying down government debt and running bigger operating surpluses. You don’t want to see the current account deficit widening and the government debt rising at the same time.”

High household debt the spanner in the works

Hope reiterates that “governments should have a firm focus on reducing crown debt” and says both National and Labour have “reasonably sound” fiscal strategies.

He goes on to say: “Lower debt levels mean New Zealand can be viewed as a good investment risk, allowing the Government to borrow on international markets without the risk premiums that apply to countries with very high debt levels.”

Bagrie is on the same page, adding: “New Zealand has a high net external (private sector) debt burden so we need to be better than most on the fiscal front to maintain our credit rating. Rising government debt as a percentage of GDP, and rising net external debt would be a bad combination.”

A place for Crown debt

“We also need to recognise that borrowing to fund critical investment can be both timely (it can boost growth in the near-term), effective (interest rates are low and quality investment can give both a social and economic payoff over the long-haul) and is inter-generationally fair,” Bagrie says.

The crucial thing is what the additional borrowing is used for, and whether it delivers value - keeping in mind the fact borrowing comes at a cost.

Bagrie says: “A lot of investment such as roading should be debt funded. I’m not enthusiastic about the idea of borrowing to punt equities.”

Yet Hartwich believes the private sector could step in on the infrastructure funding front, “for example by using targeted rates for residential infrastructure”.

Hope maintains: “The decision to borrow and invest should be made only if there are sound public benefits in doing so. Low interest rates alone should not be the deciding factor. Low interest rates to build questionable infrastructure assets makes no more sense than households borrowing at low rates to purchase questionable personal assets.

“The biggest risk for crown debt - as for household debt - is that interest rates can be expected to rise at some stage, and the taxpayer will be left with the bill.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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53 Comments

"Bagrie is on the same page, adding: “New Zealand has a high net external (private sector) debt burden so we need to be better than most on the fiscal front to maintain our credit rating. Rising government debt as a percentage of GDP, and rising net external debt would be a bad combination.”

This statement is completely wrong in my view.

If the government insists on reducing public debt at the same time as the country is running a trade deficit it's the household/private sector that must accumulate more debt. It could be argued that the overwhelming level of household debt in NZ is in fact accrued trade deficits, yet it is never recognised or discussed. Instead the pundits obsess over the level of public debt which is already at the lower end of the OECD range.

Why don't our governments borrow and invest wisely to help increase our national income ie improve per capita output?

"Why don't our governments borrow and invest wisely to help increase our national income ie improve per capita output?"

Because, put simply, it's harder to do and politicians hate a gravy train arriving at terminus.
Why go to the trouble of investing to improve normalised productivity (which has a longer lag than headline measures) when it can risk your ability to be reelected. It's much safer to just pump up short term measures and leverage that rhetoric to the idiot public.

Brings back memories of the Muldoon era of "think Big"..

I don't think I would entrust any of my money to Politicians, bureaucrats and Treasury ( academic economists )... in making wise "investment " decisions ...

I have to agree that National is following Muldoon Era nonsense. Think Big was mismanaged and stick us with very large public debt with little benefit. Essentially after selling off the assets it ended up being corporate welfare, although those corporations have more effectively utilised the assets (unless you need to go on a flight).

".. at the same time as the country is running a trade deficit.." So, how about we run a trade surplus for a change? That's what Developed Nations are supposed to do, and then lend out those surpluses to Developing Nations. Are we saying that after 150 years odd of Development, we are still an Undeveloped Nation? Yes, I guess is the answer, and we will continue to be whilst we allow Household Debt to 'balance the equation'. Reduce Household Debt, and so reduce imports and Voila!, a Trade Surplus might just emerge.....

Exactly. My point is that Bagrie et al believe we should continue with the status quo - keep the public balance sheet lean and load up Main St with the debt instead. Then these pundits will emerge on another day claiming the household savings rate is too low. Well, if NZ Inc is incurring losses you can't have it both ways. If households are to increase savings the government must increase its expenditure -and I'm not referring to wasteful pork-barrel spending, but rather, well considered investment. The fibre rollout is one great example and it doesn't matter who's in government, these kinds of projects make sense.

Well, if NZ Inc is incurring losses you can't have it both ways. If households are to increase savings the government must increase its expenditure -and I'm not referring to wasteful pork-barrel spending, but rather, well considered investment.

Yes, that is correct. If h;holds are to save more or, wait for it, reduce their debt levels, the public sector has to increase spending. However, I'm not sure of the ideology that persists whereby h'holds are carrying the can through the bubble economics mentality of debt-driven asset appreciation while the govt conveys a prudish message and disposition of having to live within its means. Australia and NZ both carry the same economic ideology, but I don't see it replicated the same anywhere else, except for perhaps Canada and the U.K. (the latter being a total disaster as an economic model).

I think the outer bounds of the borrowing idea becomes any credit rating downgrade that leads to higher interest rates on any existing debt.

Also, governments don't generally "invest" in financial terms. A road for example doesn't give any direct return unless it is a toll road.

"Also, governments don't generally "invest" in financial terms. A road for example doesn't give any direct return unless it is a toll road."

Shhhhh, don't tell TOP.

Also, governments don't generally "invest" in financial terms. A road for example doesn't give any direct return unless it is a toll road.

Nonsense. The construction of roads provides a public good. Furthermore, the transfers resources from the public sector to the private sector.

1. A public good is not a financial return.

2. Wealth transfers from tax payers to the private sector give extremely tenuous financial returns of any kind. If they can be properly measured at all.

1. A public good is not a financial return.

Right. Japan does not have the greatest infrastructure in the world because they were investing for "financial returns". They eventually privatized the largest train network after their initial goal of providing a public good.

2. Wealth transfers from tax payers to the private sector give extremely tenuous financial returns of any kind. If they can be properly measured at all.

You missed the point. Govt spending ends up in the private sector. Sectoral balances. Economics 101. Back to Japan. Massive govt spending has ended up in the coffers of the private sector. You may argue that is a bad thing. Who knows. Is it any worse than households carrying massive amounts of debt? Remember, govts don't go broke. H'holds do.

Your point one argument reinforces my point; the Japanese government didn't make a financial investment, they made a social policy decision about infrastructure. Which is what I said, "governments don't generally 'invest' in financial terms".

You can believe government spending is a good "investment" in a wider sense only when you abandon the financial meaning of the word investment. In this wider context just about anything can be called an investment, but I specifically said in financial terms because using the word in its wider context it means almost *anything* and therefore the word loses most of its meaning.

Your point one argument reinforces my point; the Japanese government didn't make a financial investment, they made a social policy decision about infrastructure. Which is what I said, "governments don't generally 'invest' in financial terms".

Wrong. The Japanese govt invested in their transport infrastructure as part of their objective becoming an economic superpower of which social stability was a pillar. Economic development is :financial" in that it enables movement for society and business, thereby providing support for cost and logistic efficiency.

It's very "financial", just not in your or the NZ govt and public's frames of reference.

What you call wrong others call accounting.

We're aren't running a trade deficit. We've had a small trade surplus 5 months running. I'm not sure what direction this will head in but in the short term we're in a surplus.
https://tradingeconomics.com/new-zealand/balance-of-trade

"The annual trade deficit for the year ended July of 2017 narrowed to NZD 3.21 billion, from NZD 3.65 billion in June of 2017. Balance of Trade in New Zealand averaged -47.59 NZD Million from 1951 until 2017"
So on average, we have run a Trade Deficit since 1951!

Correct, we are world beaters in that respect. Traditionally our surpluses are short lived. I was assuming the claim was a current trade deficit rather than the expected deficit.

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All the tired old chestnuts being rolled out to justify increased debt.
For me, as a prudent citizen who works with a positive balance, I support reducing the govt debt. Sooner or later there will be another shock which will require increased spending. Low interest rates are not a good reason to borrow more. That is exactly the thinking which has got the private side of the ledger in such a mess.

OK, you're quite happy for households to be squeezed at this time. Do you have faith that the the house bubble will take care of the hoi polloi?

Spending a few billion of tax take each year on interest payments is obviously not in NZ's best interests. Fiscal prudence with long term policy focused on debt reduction through optimally combination of paying down debt and growing GDP is the rational course. The imprudent borrow-and-spend alternative that steadily makes everyone's lives worse is just emulating the sad debt-slaves that we see ruining their lives with endless HP agreements and loans to fund their consumption. No-one want's to be like them in their private lives, so why is the country's economy different?

Foyle (or is it pronounced folly?)

whooooosh....
(the sound of the article you are commenting flying over your head).

"growing GDP is the rational course"

You sit squarely in the demographic that think they know a lot about things, but their arguments present an entirely different scenario.

"The imprudent borrow-and-spend alternative that steadily makes everyone's lives worse"

I sometimes wonder if it actually does make their lives worse. I eventually came to the conclusion that it is only "worse" if the debt is ever called in.

Many debt's just keep on rolling over to the next generation. So the smart thing to do is borrow as much as you can, make bare minimum repayments, pass the debt to your kids, and encourage them to do the same....

Eventually the whole system becomes too big to fail, so everyone wins/loses, or is that a draw?

Do we really know the extent of government liabilities? Who will force disclosure of off-balance sheet derivative debt and PPP liabilities present and future?

Something of substance surely filled the debt growth vacuum recorded here, since record household debt to income ratios tempered bank lending to this sector.

Not really sure of the linkage between govt liabilities and off-balance sheet derivative debt but would be interested to hear the explanation.

Every day, trillions of dollars are borrowed and lent in various currencies. Many deals take place in the cash market, through loans and securities. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. And yet one cannot find these amounts on balance sheets. This debt is, in effect, missing. Read more

I am pretty sure almost all corporate balance sheets don't account for every contingent liability.

This isn't a matter of conspiracy or competence but practicality in most cases.

No matter. Let's open the off-balance sheet government books to public scrutiny - the voting citizens need to know their tax liabilities in full. Who would want otherwise?

I guess, but to some extent a law of diminishing returns must apply to the cost of doing so because some some contingent events may never happen.

There has to be "reasonable disclosure" so it's where you choose to draw that line.

And Labour borrowing to invest for the NZ super fund when markets have experienced an 8 year bull run and are at record highs, is nuts.

I know, the super fund returning 10% pa is woeful.

Past returns always a prediction of future returns eh. Sell low, buy high. Has never been a successful strategy but the inexperienced Jacinda party believes it might just work, this time.

But look at the performance of those that borrowed to the hilt with their house as security so they could buy shares in 1986/1987. Sell low and buy high is the mantra of the common man when reacting to asset bubbles. It has strong political appeal.

Only to those with short memories or who believe that relentless positivity renders investment savvy irrelevant.

Not too different to National suspending contributions and missing out on those recent returns

Which would have required borrowing at a time when they were having to steer NZ through two of the worst crises the country has faced. Would have been crazily risky then, it's just as crazy now but with different drivers. Hindsight makes us all experts.

Yes, easy with hindsight which is why standard advice is to continue with contributions to a fund through thick and thin. National will be as guilty as labour if we resume contributions just as returns drop.

Better we just borrow more for accommodation supplement and first home buyer subsidies to pump up and already over-inflated property market

Just remember that the money has to be paid back. Borrowing to invest in infrastructure is good anything else needs to be closely scrutinised. Just think in personal terms, if you borrow to pay the groceries you need to think again.

"Just remember that the money has to be paid back" Are you nuts! Borrowing NEVER has to be paid back. Haven't you been to the local meeting of your Property Investors Association or the Grand Order of Economic Banking Minds? Just like any borrowing; Public or Private, it's the Capital Gain that matters and as long as that's in play, what's the problem? ( sarc/off)

So much depends on context.

Austria did a 100 year bond issue that was, on Tuesday, yielding 1.52%. I understand it was over subscribed.
https://www.reuters.com/article/austria-bond-century/austria-tests-new-w...

If you can buy money that cheap for that long and do it in our own currency then I'm with Mr Eaqub in asking what are the best infrastructure wins.

If the return is greater than the cost of borrowing then we should be doing all of them. Greater prosperity awaits. (Caveat: return may be subjective and manipulated to the meet the criteria of the ruling politicians)

The key to debt is what we spend it on. If it is to grow the economy then that's good as it won't affect the debt to gdp ratio. However, debt to fund the daily expenses isn't a good idea unless during poor economic times like the last 10 years. Labour wants to spend more on health and education and take longer to pay of debt. That does mean extra interest payments and I wonder if there will be any benefit to the economy with their spending plans. I can't see Labour actually reforming the education system given their reliance on the PPTA. National wants to spend more on roads (RONS 2.0) but the business case for most of them is low and there are far better alternatives. So poor operating spending or poor infrastructure spending - what a choice!

"So poor operating spending or poor infrastructure spending"

Yeah i think thats a nice summary of the choice. Either way if growth is dead (which low interest rates say it is) then there is no sensible use of debt now but to extend & pretend.
A govt with vision would spend on infrastructure which was useful post growth ... ie anticipating a collapse of living standards situation. And it wouldn't be 4 lane highways or diesel powered irrigation.

When it comes to ordinary operating expenses there should be enough tax revenue to pay for those. Genuine investments in infrastructure (rather than jobs programs) is worth borrowing to support. Beyond that wasteful spending that has no future benefit but accrues debt is harmful as it just pushes out payment and add interest costs. Inflation is just not high enough to justify deferred payment as every dollar of debt is still a dollar of debt in the future.

There are many on this site that think the economy is doing well. If the economy is doing well this should be reflected in the Government tax take and we should have a massive budget surplus. We don't seem to be doing as well as what people claim, I don't know if that's a taxation issue or an expenditure issue. In either case I think that National, Labour and the Greens have it wrong with their policies.

All governments expand to expend all tax taken.

It's only a question of how long it takes them to do it.

Better to borrow more when the economy is doing well and the interest rates are low, invest the money in infrastructure development, to take care of the increasing population and pave the way for future consistent growth....

......when the interest rates on the huge debt increases to such a level that it becomes unsustainable?

Usually governments lock in their borrowings to very long terms at the most favourable rates and terms, right ?

with nz high household debt tied up in housing, it is imperative that the government books have little or no debt. We may well need to borrow for a rainy day sooner than later.

Any debt that the State does take on should be linked to improving infrastructure, with a metric to improving productivity.

No mention of the massive Council debts??; surely we should be putting rates up to reduce debt and cope with the woeful infrastrucure backlog in the major cities??Then you would not need land/asset taxes either...?

Best and crisp election article I have read in the last month, includes mention of government debt as well>
Any one knows the answers ? Or getting the answers from the parties asking for our votes ?
http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=119...