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Raf Manji argues we must forget about government debt to GDP targets and run deficits to make up for a contracting economy

Raf Manji argues we must forget about government debt to GDP targets and run deficits to make up for a contracting economy

By Raf Manji*

I’m just back from a strategic investment conference in the US. It was a virtual trip, as all travel is these days, and there was plenty of talk about virtual money, the coming depression, economic disruption and the humongous debt being created to fund the COVID-19 response with the Federal Reserve expanding its balance sheet to supertanker size. With 33 million jobless claims in the US already, expectations were for some hard times ahead, with little political leadership to provide calm and a volatile election not far away.

The same concerns and uncertainties have reverberated around NZ post-Budget 2020. There has been some breathless talk about the increasing and possibly cataclysmic debt to GDP ratios and how this is going to impact future generations. These are fair questions but they also reveal orthodoxy of thought that has dominated NZ for the last 30 years, namely that low government debt is a desirable position. Previous finance ministers have sought to outdo each other on how low they can get government debt, regardless of the cost to the wider economy and society. After all, the market will sort everything out.

Recent years have seen the debt to GDP target of 20% as a stake in the ground, and a line that could only be crossed to huge consternation and outcry. In fact, last year we were down to decimal places! But what we tend to ignore is that we need debt in the economy, as debt makes up most of the money supply. If the government won’t create it, then the private sector, namely the commercial banks, must do so. And for many years, it has done so, with private credit the main driver of the economy.

This approach has led to a focus on running surpluses where possible, by constraining public expenditure, but to what end? The level of debt in the economy has kept rising, as it must, otherwise the economy contracts. The squeeze on basic public spending, in housing, health, education and general under-investment, has all been driven by this mantra of low public debt. As a result public services have suffered for many years, and the social impacts have been all to clear.

In a crisis, this focus on public austerity is put aside, as governments are able to run deficits, as they should, to make up for a contracting economy. This happened after the Christchurch earthquakes where government deficits enabled funds to support the rebuild. Unfortunately, the relentless focus on ‘getting back to surplus’ meant that the job was not finished properly, funding was squeezed, major projects sat unfunded, and the city has struggled to fulfil the promise of the over-hyped Blueprint. This was a mistake that the current government rightly looks keen to avoid.

But what of the debt? Does the level of public debt really matter? The somewhat heretical answer is not really. What matters are other indicators, such as inflation, employment, capacity in the economy (GDP and the output gap), as well as the affordability of that debt. Whether the debt is created in the public or private sector is really a matter of credit allocation, risk, and the state of the economy and stability of financial markets.

In a financial shock, as we are experiencing now, the private sector struggles to generate new credit growth. Banks are not keen to lend, and businesses and households are not keen to borrow. Everyone is busy calculating losses in their income and hunkering down. This is not the time for dramatic interventions, such as negative interest rates.

This is where the public sector steps in, and provides new funding using its own balance sheet (with various ways to do this1. It also directs the spending as well, hopefully to productive outcomes, such as infrastructure, housing, as well as income support. Once the economy starts to recover, and that’s hard to predict, the public funding support can relax, can be reined back in and the private sector can resume its job as the major engine of growth.

As an example, the US ran annual post-war deficits as high as 27% of GDP and public debt reached 106% of GDP. Current forecasts from the Congressional Budget Office show the US deficit hitting 18% next year and public debt reaching as high as 107% of GDP. New Zealand really doesn’t have much to worry about other than where the money will be spent and that is where the debate should really be.

1) Finance Minister and RBNZ unwilling at this stage to link up directly to fund the fallout from COVID-19

*Raf Manji is a strategy and risk consultant.

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I worry that when National next gets in they will start an unnecessary austerity program


I worry about Labour wasting money on flights of fantasy and utopic schemes of doubtful value.


and there is Nz's problem, too parties that nobody in their right mind would let them anywhere your own cheque book.
they are both as bad as each other
I had to explain this the other day to someone only been here ten years, I told them our political system is yin and yan. we vote one lot in and then after a couple of terms they piss us off so we vote the other crowd in to sort it than after a couple of terms they piss us off, so we vote the other crowd back in to fix it and so on and so on


I worry about Labour wasting money on flights of fantasy and utopic schemes of doubtful value.

Like changing the flag or something?

Or our very own statue of liberty with a halo and a certain persons face.

26 million - against 200 billion hmmm - lets change the flag -- got to be better than most of what has been announced so far --

I actually thought changing the flag was a good idea. Give us a sense of a grown up nation. I still think aussie and nz need to become republics.

I worry that NZ will blow it's govt debt:GDP firepower bailing out the banks, and financial sector. Not investing a cent in tangible infrastructure or future-proofing that would grow the economy into the future.

How about dividing 60 billions by 4 million adults lol.


or the roughly 2 million net tax payers in NZ - this govt is loading each of them up with ~$30k debt.

Since when are we people in the West concerned about taking on debt?
If a significant portion of this debt is utilised in keeping the lights on for longer, or better, fixing our outdated infrastructure, we should be glad to have come miles ahead of the mindless debt-fueled speculation our 'advanced' economies have been built on.

Bill English used to call such things "a good problem to have" and "a sign of our success".

Debt caps are simply political tools to economically control the size and strength of government placing the power of the state in a straightjacket, as has happened here for the last 40 years. In absence of the ability to raise more debt the state is then forced to look around for things to sell at an asset garage sale....Ports, Electricity Companies, Railways...which the private sector is only too happy to buy and then charge a lot more for the same services, Sound familiar? Its been an ideal tool to help the private sector exert supreme influence in the age of neoliberalism. Yet, no one raises an eyelid when corporations borrow more money for their latest undertaking, its just stacked on the balance sheet in differing layers of priority and maturity and business generally carries on. Why can't that be the case in government?

Or charge for slowly deteriorating services. Then get a bail out or allowance under their regulatory regime to get the infrastructure back up to acceptable spec.

Not disregarding private sector greed and do whatever they can to get money attitude (which is obvious). But I wonder if a government organisation is providing something "cheaper" than greedy, cut throat private sector, is because they are subsidizing it and are allowed to accumulate huge losses (something the private sector is simply not able to)? So if government controlled entities are not allowed to accumulate significant losses, i bet that the cost their charge for their services is even more than what you pay now.

Really well put 4th estate. Completely agree with you. The mention of the word "Debt" starts getting negative comments. The reality is most successful companies borrow lots to expand and create more jobs etc.

Or more likely - absolute nonsense 4th Estate

“The public sector directs the spending”. That’s a recipe for disaster.

Only when governments despise their own public sector. They call themselves liberals.

I think the headline nails it; don't worry about the amount, worry about where it is spent. Exactly. And as the commenters have already indicated, both sides of the divide have their issues where this is concerned, although it is all too easy to armchair quarterback it.

As yet we have yet to see the evidence of the Government's 'reset', and I am loathe to criticise their emphasis on preserving jobs. But I do want to see a change happen that makes things easier for the majority.

Just a shame that increases in debt over the last decade have been largely focused on the trading of the same houses back and forward between people, rather than producing anything new.

This will only happen if the said majority are also on the same page of what is good for them "LONG TERM", are willing to work hard for it, and have the "I can do it" attitude necessary for overcoming massive number of problems that are sure to arise in their path. That is a very hard and bitter medicine because it is unlikely to change life circumstances for many but will make NZ gradually a much stronger and fairer place over few generations. So in a sense, a generation that is going to sacrifice their lives so there is a better future (or a future at all) for their loved ones.
The above IMO, is the only sure way to transform NZ, but it is impossible to politically sell it.

We need the reset - but we don't have it.
Sorry Raj. Government debt matters as much to you as your private debt. There are reasons occasionally to do, and it does not disappear.
There is no fairy magic in government borrowing.
So. Raj, if you think it wise, borrow big and personally. I am sure you will spend the money more wisely than any government.

The government always creates new currency when it spends, spending comes first and taxation and borrowing happen afterwards. Government spending creates bank reserves and borrowing then lowers them again. The government doesn't even need to borrow, it is an archaic function left over from the gold standard days. Look up sectoral balances, a government deficit is equal to a private sector surplus, they make us wealthier not poorer, only the government can create net financial assets for the private sector to fund our savings.

I've been saying on this forum for years that it is all about consumption of resources. Debt is the driver, so I totally agree with Raf in that it really shouldn't matter where the debt comes from, as long as it results on consumption. What does matter is having something to consume, and matching money to consumption is going to be important. What also matters is continued borrowing to pay interest on existing debt over an above consumption, now that is the bit that is really in doubt.

Exactly right -- where and what is this being spent on

a new 4km stretch of highway -- or ultra fast fiber for all New Zealanders ?

minimum wage work cleaning a river -- or high end technology preventing continued pollution

changing our tax system - so families with 2 adults working earning 100K between them -- dont pay 20K in tax and then get the same 20K back in wtf or AS payments

this is a once in a lifetime sized borrowing and opportunity -- why is this government so focused on rushing back to an old economy ? that clearly failed in meeting its ambitions of a fairer more just society ?

I think you missed the bit where there isn't a plan... And don't get me started on the 'plan' the opposition has. They both have no real plan.

Overall Conclusion = there's a magic money tree

Which is fine and dandy if there is someone watering the tree … but deficits to infinite doesn't sound like a watering can

So you might want to consider where energy & resources come in to play...

"meant that the job was not finished properly, funding was squeezed, major projects sat unfunded, and the city has struggled to fulfil the promise of the over-hyped Blueprint..."

Christchurch has been rebuilt on the premises of everlasting economic growth to infinite … ie a swamp
And so it proves to pass …
Without consumption and debt ever rising, its all a ponzi

And you can forget about this nonsense about capacity and GDP
We have reached a point where there is too much of everything
- too much debt
- too much capacity
- too much drawdown on resource bases
- too much leverage
- too much retail
- too many passive incomes recipients
- too many promises ….

And the only solution is bigger deficits ….

By the end of this crisis one of the many things we will learn is if MMT is valid. I agree with Raf that the only way to keep our debt fueled speculative asset bubbles going to increase public debt and in about 10 years time we can do this all over again if this "succeeds". My wishful thinking is that we will finally realize we should be incentivizing making money though profit rather that asset speculation.

I will give the government and RB credit that most the printing its doing looks like its going into personal income and business cash-flow where it will provide short term relief and at least tries to target inflation to right places.

MMT may pretty much describe whats occurring … but it doesn't mean its a sustainable or valid system in any way ..

"we should be incentivizing making money though profit..."

All money (and growth in money claims = profit) is just a claim on the futures ability to deliver more resources ..
so youre at least 40 years too late for any vague sense of resource restrained profit limit

By profit I meant net income or net earnings (for a business). For example when someones buys a farm they are doing to make the vast the majority of the money through business income rather than capital gains from the farm sale at the end.

Just in case I was not clear, I was accusing Raf of using an MMT based narrative to justify his column, which sounds nice is still very much disputable. The obvious point being his assertion that Sectoral balances are to blame for low economic growth. I hope I came across as skeptical of both the column and MMT's validity.

Profit doesn't create money, only banks and the government can do that.

Very hard to have profits without growth in the money supply....
But yes chicken and egg
I was responding to reference above re profit

"and the private sector can resume its job as the major engine of growth".

And on the seventh day the lord rested. (Well, it's a similarly ridicuous statement).

At the ened of the day, we turned out a whole echelon of priests, who chanted the mantra. Growth is good, growth is possible forever, growth is even possible forever and on a finite planet at that.

Econ 101. Total horsepoo, still pouring from a University near you. While across campus, a reduced amount of reseacch is being allowed into the existence-threatening repercussions. Madness.

I honestly do not understand your utterly unreasonable disregard for economy. In it simplest form it explain how prices are set, and how these prices will affect different players motivation. It can explain these under many circumstances and models. And as long as there is trade of any kind, there is a need for prices. And even the uncivilized humans (i.e. humans before permanent settlement when humans where nomads wondering across the face of the planet, with their ability to impact its "finite' resources being next to nothing), bartered when opportunity arose.

You may not like certain economic models with certain assumptions that may be wrong (or you think is wrong) but to dismiss economics so comprehensively is unjust and wrong.

To be fair B1980 PDK just challenges the assumption that unlimited growth persists. All economic models appear to have this as an underlying premise, which is patently flawed. A part of those theories is that scarcity of resources will drive prices to the point that they are unaffordable, but what if before scarcity has an impact, the effect of the generation of the raw resources to drive consumption has a significantly negative impact on the ecology? So before we run out of coal, oil, metal, plastics, whatever the mere act of making and turning them into consumable product makes our planet uninhabitable, what then?

trouble is when we introduced FREE money to the system, Price discovery and free markets became a nonsense ….

B1980 - I have no trouble with people wanting to measure trading. Nor do I have trouble with people measuring the number of deckchairs ordered on the upper decks tomorrow.

But The sinking is tonight. In that light, how many of those 'valuations' are worth the paper they're printed on? And if the trade-measurers cannot predict the sinking, nor what lifeboat-life will be like, why give them any airtime at all? What have they got to contribute? They merely peddle a false narrative - the MSM pick it up and pass it out the backline, politicians dare not suggest the Emperor is naked, and the whole dodgy charade runs over the cliff.

I think we were wrong with 'Sapient'.

Another good article from this writer. I feel the main reason we haven't had much productivity growth in NZ is that we have consistently run the economy "too cold" by the government dampening demand via its ideological (rather than rational) commitment to surpluses. This has led to a deficiency of demand, persistent under-employment and a lack of investment in productivity. Along with the importation of cheap migrant labour. People invest in productivity improvements when labour is scarce and demand is high. Right now the government's deficits will merely make up for the loss of private sector spending, not run the economy "hot". The writer is correct - we need to spend wisely and direct money into productivity enhancing investments. However, we do need to get money into people's pockets. I worry that without benefit increases and/or income tax breaks this won't happen enough. Have I mentioned the virtues of an MMT style Job Guarantee???

cs - sigh. Another economics- trained one, are you?

Less than 1% of the work done on the planet is human labour. Over 99% of work done is from fossilised sunlight. Without going into EROEI (which rewards study) there are thermodynamic limits to the possible efficiencies with which you can convert Fossilised sunlight into useful work. The 2nd Law and Carnot's musings apply. Thus has productivity tailed-off globally, inexorably, and never-to-be-rebootedly. Only economists (still minutely inspecting the 0.7% of work-done, are bemused. Go figure

There is always unused spare capacity within the economy, that is why we have unemployment and underemployment.

How about getting people to work hard, smart & often.

The government should balance the economy and not its budget economist Stephanie Kelton tells us. Unemployment is a sign that the government is not spending enough. A job guarantee can be used to maintain demand within the economy. Economist Pavlina Tcherneva is an expert on this policy and she can be found online for further information.

You gave us the 'what' doesn't matter, but not the 'why'. Without the why, I can't tell if you're a classical economist or a MMT proponent. At the moment all I see is spend, don't worry. Used car salesmen do that too, but with them all we get is the Fair Trading Act. With government we only get a triennial chance to change, and cost is only one of the factors voters take into account when voting.

I think we should care about debt.
We are selfish and without care for the future.
Keep on keeping on..
More people reliant on the government printer, higher prices and the gradual errosion of our wealth and time.

Yes, we should certainly care about private debt created through bank manufactured money. In normal times banks create far more money than governments do, hence the Reserve Bank lowering interest rates to try and encourage more private borrowing.

What Friedman told his stunned audience in 1967 was that the central bank cannot peg either interest rates or unemployment beyond the short run, and that what had occurred between the Great Depression and that time was the pendulum had swung too far in the other direction. If the central bank was thought useless or at best secondary in 1930, by 1960 it had been revived as a powerful agent to try and control those main factors.

That’s the set of assumptions we recognize today. But they still proceed from a faulty basis. He said:

“Let the Fed set out to keep interest rates down. How will it try to do so? By buying securities. This raises their prices and lowers their yields. In the process, it also increases the quantity of reserves available to banks, hence the amount of bank credit, and, ultimately the total quantity of money. That is why central bankers in particular, and the financial community more broadly, generally believe that an increase in the quantity of money tends to lower interest rates.”

But all experience shows this is not so. As Friedman detailed, that’s only the beginning of the process rather than its end. There are feedback effects, very positive ones that in the end leave interest rates moving higher; to the extent that the initial policy actually does stimulate investment and spending, it will also mean rising incomes and liquidity preferences, maybe even the price level (inflation), all of which should combine to pressure interest rates into going only upward.

The result of successful stimulus is higher rates. As back then, today everyone including central bankers seem unaware of the multistage processing. Or they are insidiously disingenuous; they know higher interest rates would confirm their success with monetary policies but in their absence keep calling low interest rates “stimulus” so as to stave off questions about their performance. Link

By buying securities. This raises their prices and lowers their yields. In the process, it also increases the quantity of reserves available to banks, hence the amount of bank credit, and, ultimately the total quantity of money. That is why central bankers in particular, and the financial community more broadly, generally believe that an increase in the quantity of money tends to lower interest rates.”

Unfortunately, fractional reserve banking/reserve money multiplier rules no longer apply to modern banking practices - hence higher reserves are irrelevant to credit creation actions undertaken today.

There were two major evolutions in money and banking that seem to fall outside the orthodox narrative. The first was a shift of reserves and bank limitations from the liability side to the asset side. The second was the rise of interbank markets, ledger money, as a source of funding rather than required reserve balancing: replacing the old deposit/loan multiplier model. Courtesy of J. Snider from Alhambra

An old fellow once told me that the non-export sector of the NZ economy was like two boys each with ten raffle tickets to sell, price $1 each. A passing stranger bought one ticket off one boy, who then used the $1 to buy a ticket off the other boy. who then bought a ticket off the first boy …….. When all the tickets were accounted for they still had only $1, and were $19 short of contributing to the prize. If we are to increase the benefit to NZers of our economic activities we need to sell all our tickets to passersby. All I can see at present is that the two boys now have a hundred tickets each to sell and still only each other to sell to.

As PDK will tell you, it takes far more resources, time, energy and effort to produce a 5 megabyte hard drive today than it did in 1956. Oh hang on, have I got that right?

No, you haven't.

It takes far more resources and energy to produce the global collection of electronics, than it did in 1956.

See the difference?

The focus has to be on quality spending. Stop wasting money on areas of the community where it is politically advantageous but achieves little. What we should be looking for in the budget is not just what money is going to be spent on but what areas are they going to stop spending on. I often quote JFK "Ask not what your country can do for you but what you can do for your country". Regrettably we are too self focused. There are insufficient of us who vote for what is good for the country rather than what is good for us. We lack that sophistication, intelligence and maturity as individuals and as a nation.

A couple of points Mr Manji.

1. Markets fix everything is a straw man.
The continuing suggestion that ‘markets fix everything’ is an empty straw man. Even those who favour freedom know that all markets are a regulatory constructs, I don’t see anybody suggesting that markets fix everything. For decades almost all New Zealanders, almost all of the time, have gladly accepted our social welfare system and our health care system. Both examples of non market based systems.

2. Debt if not free.
Debt does indeed drive economic activity, but also debt is not free. If creation of debt sorted everything out (another straw man back the other way) then places like Argentina would be the richest places on earth.

3. Sometimes low debt has a benefit.
One benefit of low public debt has just been shown in stark reality, the government had money to splurge in a disaster. Compare our response with poor nations and what do you see? Poor nations have no money for increased health care or epidemic responses like testing. Poor nations have close to zero social welfare and the poor take an immediate material hit and people are starving now in some of those nations.

4. High private AND public debt?
As Mr Manji points out, private debt has been the form driving our economy for a long time now. But how wise it it really to run both high private debt and high public debt at the same time?

The government must spend, that is for certain. But the implication that because sometimes debt levels don’t matter too much that therefore debt levels never matter too much is a false conclusion.

As sectoral balances prove, when NZ is running a current account deficit then the government sector and the private sector cannot both be in surplus at the same time. Why the government must run deficits.

The govt has spent $12 Billion on the wage subsidy, employers have paid it out, people have spent the money paying their bills. The wage subsidy has worked. Nothing else has worked very well. '$50 Billion spent on stimulus' is the headline. No $50 Billion hasn't been paid out. $12 Billion has been spent and all the rest is smoke and mirrors.

Is it enough to keep things from going under until the economy creeps back into gear? No it isn't. Something has to compensate for the lack of tourist revenue, the decrease in consumer spending and the halt in capital expenditure.

Exports will continue, a reduced pattern of consumption will come back, but Govt spending is the only game in town for the next few months. Don't wait till you see the whites of their eyes Mr Robertson, the invaders are already within the castle walls killing off the castle inhabitant's financial futures.

The intelligent thing to do would have been to extend the wage subsidy to the existing recipients, no questions asked for another three months. The aim being to continue with the only thing that has actually worked to get money into the hands of those willing to spend it. Instead the claws are coming back out.

If I was King of the realm I would have extended the wage subsidy, made a one off refund of one month's paid lease, rent or rates bill for each adult in the kingdom then gone to Mr Orr and said this is going to cost $20 Billion, I will issue a bond which you and only you will buy. The interest rate will be negative .25%. You may forgive the bond any time you like.