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After years of underinvestment is fiscal stimulus the solution to New Zealand's infrastructure deficit?

After years of underinvestment is fiscal stimulus the solution to New Zealand's infrastructure deficit?
Finance Minister Grant Robertson. Photo by Jenee Tibshraeny.

New Zealand’s infrastructure deficit continues to make the headlines and with calls by some economic commentators for the Government to do more to stimulate the economy through fiscal policy, are such ideas gaining more currency?

Finance Minister Grant Robertson announced in May that he would change the Government’s net debt target from the existing 20% of GDP to a range of between 15% and 25% by 2021-22. The announcement was seen as a shift from the approach he’d previously adopted with his Budget Responsibility Rules which had a target of reducing debt to 20% of GDP within five years of taking office.

Robertson said the increased debt target would give the Government more options if it wanted to combat the impact of an economic recession, or fund high value investments that will produce future economic dividends. New Zealand's core Crown net debt is low by international standards and the debt restrictions have been criticised for restricting government investment.

A theme picked up on by Kiwibank chief economist Jarrod Kerr in a recent column for where he stated:

“Our obsession with balanced budgets and debt limits has created a burgeoning infrastructure deficit. We’re one of the 10 most highly rated nations in the world. And we have less debt than most nations in the top 10. Our Government has access to some of the cheapest funding in the world. But we haven’t taken advantage of our advantage. Our lack of investment has effectively choked our potential.

“We should use the record low interest rates to invest and stimulate the economy for our children. We have to live with the poor decisions of the past. But it’s up to us to ensure the next generation has a healthy, vibrant, and efficient economy to grow into.”

NZ’s infrastructure deficit

According to Infrastructure Minister Shane Jones in an interview this week with TVNZ’s Q&A the country’s infrastructure deficit is massive.

“There’s $130 billion dollars, according to Treasury, that we’re going to have to chew through over the next 10 years and not all of that can be funded from the public purse within our current debt constraints.”

From roading and rail to ports, schools and hospitals, the lack of long term investment is there for all to see.

“We didn’t suddenly arrive at this rather dismal point in the last 18 months. When our government was formed, in my view, we inherited a miasma. We’ve written heaps of reports and we’ve become so risk averse in terms of process, it’s almost as if we’ve lost the pioneer spirit of earlier generations of Kiwis that developed our infrastructure.” 

And Jones says increasing Government debt to pay for some of it has been discussed with his cabinet colleagues.

“Both [Phil] Twyford, myself and Grant Robertson have been in quite intense discussions about this and I accept that Grant Robertson’s view that you have to maintain a moderate level of debt to cope with adverse events carries a lot of ballast. But naturally I’m constantly agitating for us to increase the amount of infrastructure expenditure. Currently if what the economic commentators are saying comes to pass then we are going to face bleak weather and infrastructure spending is fantastic in that context.”  

Spending from core Crown debt

When asked if the Government should continue to run surpluses when we have an infrastructure deficit, Jones is philosophical about it. He says a surplus will enable the government to act when the country’s struck by genuinely adverse events.

“But if you are asking me if there’s if there is scope for more infrastructure spending to come out of core Crown debt? Yes, I do,” he says.

“Whilst private capital is capable of doing some of the heavy lifting public debt is often very cheap debt and if it is dedicated to long-term public assets like key railways and roading infrastructure it’s a good thing.”

And the idea of thinking beyond monetary policy and the levers controlled by the Reserve Bank isn’t unique to New Zealand.

RBA’s support for infrastructure spending

Across the Tasman Reserve Bank of Australia (RBA) Governor Philip Lowe has called on the recently re-elected Government led by Scott Morrison to spend more on public infrastructure.

Last month, in a speech to the Australian National University’s Crawford Australian Leadership Forum, Lowe said reserve banks around the world were running out of options using traditional monetary policy and governments needed to come to the table with more expansionary fiscal policies and fund more infrastructure.   

“It’s a legitimate question to ask, how effective will further monetary easing be? If you’ve got just a single country and it eases its monetary policy the main benefit you get is a weaker exchange rate. It improves the trade position. So the exchange rate channel is an important channel through which monetary policy stimulates growth.

But Lowe says if all countries are easing at the same time the effect of exchange rate depreciation is neutralised and you don’t get the same stimulus from monetary easing.

“So there are limits to what further monetary easing can achieve. In my mind that means we need to focus on fiscal policy and structural reforms. I’ve long been talking about the benefits of infrastructure investment. In our economy it would benefit the demand side of the economy and it would add to the productive capacity of the nation and there tends to be quite high multipliers from public investment in infrastructure. So in Australia, but also globally, I think there’s a lot to be said for investing in infrastructure.”

He said with record low interest rates infrastructure projects that can produce a higher return and help stimulate further growth and a good investment.

“So the government here and right around the world should have their top drawers full of real good ideas that are shovel ready in case global growth slows. Increased spending and fiscal expansion in the current environment is going to be better than further monetary easing.     

“The Australian Government can borrow for 28 years at less than 2%. There must be projects out there that yield risk adjusted rates of return greater than 2%.”

But there was a caveat. Lowe also said major infrastructure funding should be run like monetary policy - at arm's length from the politicians so voters can trust it’s fit for purpose.

No doubt Lowe’s message would have been music to Jones’ ears.

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"Lowe also said major infrastructure funding should be run like monetary policy - at arm's length from the politicians so voters can trust it’s fit for purpose. No doubt Lowe’s message would have been music to Jones’ ears."

If I read this as intended, I think you need to add a /sarc tag......because the NZF Re-election Provincial pork-barrel Growth Fund is firmly under Jones' greasy thumb....

Smoke and mirrors, anyone?

1 To what extent is the "infrastructure deficit" due to excessive (ie faster than we can cope with) inward migration of the past decades?
2 To what extent was the Shanes Jone Fund funded by scrapping the Roads of National Significance?

"2 To what extent was the Shanes Jone Fund funded by scrapping the Roads of National Significance?"

Not at all, because road funding is ring-fenced from general taxation funding. Road funding is never topped up out of general taxation.

road taxes are ringfenced, but road funding isn't

That is, road taxers are never used for building e.g. schools. However the previous government often put general taxation funding into roads too, because the road taxes aren't high enough to build a tiny amount of dual carriage motorways.

About 800,000 immigrants since 2000 - without them would there be an infrastructure deficit?
Many journalists and some economists claim immigrants pay taxes therefore they pay for the infrastructure they need. That works for highly paid immigrants but probably not for those earning less than the national average wage. Low paid immigrants are not good for the Kiwis at the bottom of the economic ladder.
and the NZ Herald has the headline "National house shortage hits 130,000, could rise to 150,000: Kiwibank economists"

It works. In the past two decades we have taken outstanding mortgage debt /GDP from around 50 percent to 90 percent. More debt more growth , could not be easier.

Comparing public debt to mortgage debt would be fair if the government were to take on debt for operational spending.
To be honest, there is a chance that future governments might be forced to borrow for opex because in the last two budgets, optimistic projections of tax revenue have been earmarked for funding generous welfare programmes.

I had an idea that I'd heard earlier that NZ effectively had to maintain a low level of Government debt because of the very low levels of national savings. That is, the Govt has to borrow foreign money which adds to our overall national debt, and we are overall a highly indebted country. Compare with Japan, which has a colossal Govt debt, but it isn't a huge issue since it is pretty much all sourced domestically. So as far as their overall economy goes, the money simply goes around in an internal loop.

I'd be interested to hear from others on whether I'm correct in saying that this has constrained successive Govts on their spending.

Please check out this link to a series of comments I posted about this topic starting here: Audaxes | 10th Jul 19 11:59am

You might be interested to know the RBNZ borrows off balance sheet foreign currrency via 'FX swaps and basis swaps"- section 10, but to my knowledge the Crown borrows NZD on balance sheet.

We have low private domestic savings because our government runs too big surpluses and we have a current account deficit. Japanese donestic sector saves cause the government runs large deficits plus the xurrent account surplus. We go into debt to allow our government to save. Save fiat currency on spreadsheets. And suck demand out of real economy.

Sure public debt is cheap but it still needs to be repaid and it is only repaid through taxes.

So unless taxes increase you can't spend more. It's a zero sum game.

And we've had a while now of government by "kick the can down the road for someone else to deal with".

Do believe we need wider roads, better maintained roads, safer roads, median strips, passing lanes, right turn arrows. So we build cycle lanes for non existent cyclists. There it is.

Yes but not only those guys, but the slavish local body brown cardigan brigade(s) that energised themselves, a very rare happening usually, to impress themselves on those guys.

What we are talking about is an increase in real infrastucture spend making the economy more efficient which enables a major increase in economic activity. This puts more money in people's pockets and increases the tax take to pay for the new spending.

Problem is the Political selected infrastructure that gets selected DOES NOT help GDP.
Can anyone explain how billions on light rail from Auckland and Wellington airports will help the countries GDP ?
Or the country as a whole ?

Wow, the argument is its not just for the they are saying having 23km of track is going to benefit 1.65 million people ?
Wonder how long its going to take to move everyone at 500 people a specifics just pie in the sky info with no actual details....WE GOT THIS, IT'S GOING TO WORK.

By the time it is built that will be over 2m people - our infrastructure deficit is a moving target. Every time we try to fix infrastructure by bringing in cheaper foreign labourers it gets worse.

It's the issue of government and illogical allocation of resources. The issue at Auckland airport could be rectified a hundred ways that don't include building a railway ~ more customs officers to speed up processing, more luggage belts, higher tourist arrival tax to cut numbers back a bit etc etc. Likewise the crazy ass idea to build a cycle bridge to the North Shore without first testing demand with a bus service exclusively for cyclists with bikes during peak hours. Spending millions on a new path around Okakei Basin ... The list of dubious spending priorities knows no bounds irrespective of National or Labour in government.

We've got plenty of debt. Almost half a trillion NZ$'s in total (corporate, govt, personal, mortgage) so you're right, we need to be careful. But we've also got very poor road & rail infrastructure, which need a lot of attention. However, we've got a poor infrastructure building pool of resources, which plays out on this site regularly, so we're really struggling to fill the gaps. There's also 300,000 working age people who can't/won't/don't work which adds massively to the unproductive overheads of the (un)well-being state, education is ordinary & often impractical, especially at the universities, & we've done away with the training support of the trades leaving us with over-immigrating to try & solve it. This is not going to plan folks.

Keep the powder dry.
When interest rates go below zero the infrastructure tidal wave can be unleased to prop up the economy.

Agree, as long as debt is NZD denominated.

We need to get rid of our parochial mindset and let the Chinese come here and build our roads , and we pay them back through tolls , build our light rail to the North Shore and let them run it , build a new port for us and let them run it .

It makes a lot of sense

Now watch the chatterers give me a hard time .........

It works if and only if our govt can negotiate capably and write iron clad contracts. Would also keep your Chinese on their toes if contracts were to a range of suppliers from several countries: India, Vietnam, Phillipines, S Korea. It is what the British did building railways in Argentina 150 years ago. Likely to have difficulties with our health and safety rules being applied to foreign workers.

Communist Chinese you should have said.

China is not very communist these days, please keep up. If you mean a non-elected Politburo, running a command economy then maybe, but the Chinese people do have a lot of freedoms and self-made wealth that was not possible previously.

Well what do you expect. Record high immigration and poor planning.

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See Party Policies here. Party Lists here.