David Hargreaves suggests that if the Government is considering lifting its spending cap it should do so as a one-off and for specific infrastructure projects

David Hargreaves suggests that if the Government is considering lifting its spending cap it should do so as a one-off and for specific infrastructure projects

By David Hargreaves

Such has been the gradually rising volume of chatter on the subject, I had begun to wonder if the Government was running some incredibly subtle reverse marketing campaign.

I'm talking about the spending cap.

A country that, for those with memories of the Muldoon era, has long been terrified by the subject of debt, is now clamouring for more of the stuff. Bring it on. Yeah. Right.

And it's because the Government's saying, in effect, well gee we would like to be a good Labour Government and splash some cash, but we've got this spending cap, see?

Remember when you were four and you were told you couldn't have any more ice cream and you threw a tantrum? Well, don't pretend you've changed. Because we don't. People always want the things they are told they can't have. So, if we can't have that debt then we want it. And we want it now.

Whether by accident or design the Government is likely to need to face up pretty soon to whether it sticks with its self imposed fiscal rectitude, (which let's face it sounds painful), or loosen up a little.

I think this question should be resolved this year because the longer it's left hanging there then the more there may be a clamour for increased spending. And I don't think such pressure being brought to bear would be healthy because, yes, it might promote a big splurge in spending at some point. And the spending might prove to be aimless spending for spending's sake.

We could if we are not careful talk ourselves into thinking we need to spend more than we do. Most people in this country still enjoy a pretty good standard of living. We need to do something about those that don't. But we mustn't talk ourselves into some sort of massive crisis. Because if we do we might get reckless with our money.

Too risk averse

At the same time it has to be conceded that the previous National Government's approach was too risk averse.

Time and again it seems that as Finance Minister Bill English would get away with justifying the zero contributions to the NZ Superannuation Fund by saying, in effect, well you wouldn't borrow money to give to a fund. Well, actually, beg to differ. You might do that if that fund was really rather good at getting great returns on the money. By such don't borrow-to-invest logic the concept of a bank would be defunct too - borrow money to invest at higher rates of return? Surely not? How do banks survive? Oh, that's what banks do?

There is a deeper point in there though. Yes, the National Government should have been borrowing money to give to the Super Fund, which would have undoubtedly done very clever things with it.

But that would be money borrowed for a specific purpose - IE for helping out with our looming superannuation headache.

What we are seeing at the moment, however, with the clamour for higher wages and a general increase in state spending would amount to an operational blowout. Now operational spending only goes one way. It doesn't go down. So, if the Government loosens the purse strings generally now then we are stuck with a higher ongoing crown bill. That might work. Some more spending and more money in pockets could stimulate growth. But it would leave us more exposed to shocks.

The other thing is blowing out the operational budget will be a very amorphous thing. It will be hard to see tangible benefits. Everybody might feel good - the way you do if you go out and have a great meal - but what are you left with?

So, I really do not think we need to be even thinking about going there.

Plans for one-off spending

What we should do - and this is something Governments all around the world have tended to historically struggle with - is develop plans for one-off spending, borrow money for those particular projects and stick to it. Don't increase overall spending - just find extra money for specific, targeted, projects.

In the dim dark distant past people were told that they were being taxed to pay for their retirements. And you can still find some older people who remember that. Trouble was, once the money went into the pot the Government spent it, didn't it? The temptation's too great. So, the money's gone but the pension requirement's still there.

That's why if you are raising money for a specific purpose - make sure it's absolutely used only for that purpose.

So, in other words don't blow out the operational budget, leave that virtually as is - but identify projects that would benefit from a one-off spending boost.

The most obvious thing would be in tangible assets - things that would be of lasting value and of benefit to everybody.

I've already previously opined that the Government needs to go way beyond the $2 billion currently (inadequately) committed for KiwiBuild and raise an amount of money more realistic - and I reckon you could be talking about say $5 billion - to really get cracking with the project. Look, if the Government really could get 100,000 houses built in 10 years, and this really was in addition to existing private sector projects then that would be of big help for the country.

What else? Well, roads and transport surely come into the mix here. The Government's already put a big target on its forehead with the fuel tax, which looked to me a lot like electoral suicide. So what about creating a proper, muscular, infrastructure fund. Borrow, I don't know, $10 billion and target this to specific projects - projects that again would produce actual tangible assets for the good of the people.

There may be other infrastructure projects that come to mind that could benefit from a prioritised fund.

Don't just loosen-up

My worry here is that we are setting ourselves up for a situation where we simply say, to hell with it, loosen our belts, borrow money and spend. As I say, it's very easy to increase the operational budget - but it never goes back the other way.

The world is a pretty scary place at the moment. The feeling is that a lot could go wrong. And if things do go wrong then we could quickly get into trouble. That's the problem with debt. Your incomings might dry up but your debt burden remains. So, if the economy starts tanking through some sort of GFC II then the ability to service the debt is suddenly much more of a struggle. Not good.

But at the very least if we do borrow money for a specific purpose - to make tangible assets - then we will still have those. And the ongoing operational budget won't have blown out.

So, that I think, is the way to go. And I think that's the kind of decision that needs to be being made about now. Don't wait until absolutely everybody decides they need more money immediately because then things might not end well.

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26 Comments

Should we borrow more you ask. Answer. No.
More borrowing seems to be the question in various places these last few days. But it seems to be the arguments are that we could get things done. Well yes. But that's not this issue. When it comes to a nation things like infrastructure are not 'investment' they are just daily expenditure. Because there is always more to do tomorrow.
Borrowing is an easy answer, but for a nation it's still just borrowing to buy groceries. Going to end badly.

How about, New Zealand stops borrowing any more - at all!
How about we work, hard, and create surpluses to spend on future 'development' and take the social sacrifices now to do that?
Japan did. Germany did. China did. They all have surplus-run economies and lend to profligate economies living in the dream-land of ever more debt. Yes, they may have started as Developing Nations and borrowed to get going, as we did, but then they ran C/A surpluses and repaid their debts. New Zealand is supposed to be a Developed Nation!
At some stage, economic reality is going to hit this, and similar Anglophile economies and the social sacrifices are going to have to be made anyway. So why not do it now - whilst we can still afford it and can accommodate it? Answer: Nah! Leave it to the next generation(s) to do that. Onya, New Zealand....

How about, New Zealand stops borrowing any more - at all!
How about we work, hard, and create surpluses to spend on future 'development' and take the social sacrifices now to do that?
Japan did. Germany did. China did. They all have surplus-run economies and lend to profligate economies living in the dream-land of ever more debt. Yes, they may have started as Developing Nations and borrowed to get going, as we did, but then they ran C/A surpluses and repaid their debts.

Say what?! The same japan that currently has a govt debt of 240% of GDP?

"External Debt in Japan increased to 413448 JPY Billion in the first quarter of 2018 from 404921 JPY Billion in the fourth quarter of 2017."

https://www.economicshelp.org/blog/1178/economics/japanese-national-debt/

We cannot do that by pushing all money into property investment as has been incentivised by recent governments.

Germany's public debt is 68% of GDP, Japan is nearly 200% of GDP. China's debt is hard to quantify as the line between public and private is blurred but official government debt is 41% but probably a lot more. NZ is around 20%.

So, that [capital spend] I think, is the way to go. And I think that's the kind of decision that needs to be being made about now. Don't wait until absolutely everybody decides they need more money immediately because then things might not end well.

What you are effectively saying is - head off the labour share of income demands before they overwhelm us, and ensure that any future increase in income/debt goes to capital instead.

https://blogs.imf.org/2017/04/12/drivers-of-declining-labor-share-of-inc...

I agree if we are to spend money (and you know Labour and Co can't help themselves) then it has to be targeted and not for operational matters. But I fear that won't be the case.

But why should they borrow money at all? We have our own sovereign currency. Why not just issue the money for these special projects? It won't be much more inflationary than borrowing it, because the money is being spent right now in both cases. And borrowing creates new money most of the time anyway:
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creatio...
Obviously, creating money to spend on ongoing expenses is a terrible idea (just like you have outlined above for debt). But why not issue it for projects? My understanding is that was how the original state house building programme worked (but I could be wrong - would love a good reference). Try a pilot programme, hire some economists to measure the effects, and go from there. We really need to free ourselves from the idea that money is a finite resource - we went off the gold standard a long long time ago.

Here's a reference to the Act of 1936 which enable this type of credit issue;

https://teara.govt.nz/en/1966/history-settlement-and-development/page-19

“Where will the money come from?”; the Government's answers were never explicit, but in fact a good deal of the money came from State credit created by the Reserve Bank. This institution, by an Act of 1936, had become a fully governmental body; where these expensive programmes could not be financed out of current revenue or overseas funds, the Government simply borrowed from its own bank. Neither the housing programme nor the guaranteed price could have been financed without such credit.

Thanks Kate - very interesting. Surely Labour could sell such a programme? "We did it before, we'll do it again, let's build houses without using debt." As I said, make sure economists are engaged to measure the effects. Run it as a pilot. Don't scare the horses, etc.

You do realise Debt = Money.
So you are saying lets build houses without using money.
Which is fine. Apart from the small fact that we are kind of linked in to this thing called the world economy.
Which trades in money to direct energy.
Which is where we get the other stuff which goes into those houses.

But yes, i believe if you engaged an economist, they could see a way around this bind.

I am not convinced that debt has to equal money. After all, under the gold standard it didn't (not that I'm recommending that). I see no reason why the reserve bank could not create money without creating a corresponding debt. Obviously, done in an uncontrolled fashion we would get run-away inflation so its a dangerous road. But I am yet to read a good reason why it couldn't be done in a careful and controlled fashion.

I think what you might be getting at non interest bearing or cost free money to somehow sit alongside other money? ... which assumes zero risk and isnt the basis of capitalism and requirement for profit etc ...

https://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-ba...

Add in we are not the worlds reserve currency ... which happens to be the US courtesy of the petrodollar.. the US can print away (and have willing foreign buyers for this new issued currency) since the US$ is effectively linked with the price of Oil/energy - result = they dont get rampant inflation. If we start creating too many of these new NZ$, we'd just devalue our (energy token)...
And in the end, its energy you need to do stuff

"We really need to free ourselves from the idea that money is a finite resource.."

Actually its not a resource at all. But it has been used a proxy for resources since resource limits came into play. Hence the debt ponzi we have internationally ... one which is just waiting for some more resources to show up.

I've commented a couple of times the following. That nowhere in the natural world does any organism live today on the promise of doing some work tomorrow. Except us. It's a perverse thing, money.

Indeed - it has a magical time shifting ability ... which is why it is so useful as a trading mechanism.

But it only holds if tommorow can deliver more resources than today.

We should borrow more and ignore (one of) the elephant in the room being national superannuation. I know its a gamble, but every day I get one day closer to entitlement age myself and it hasn't blown up yet.

Er, but isn't it fungible? Baldrick would be pleased with this cunning plan. Doesn't more debt for infrastructure just mean more income for public sector unions? Surely not?

Far cheaper than borrowing more money is to cut the immigration rate to something sustainable & target maximizing gpd/capita growth.

Before we decide that, let's get a working group together to debate whether we should or shouldn't.

What we are seeing at the moment, however, with the clamour for higher wages and a general increase in state spending would amount to an operational blowout.

This sentence alone goes to the heart of the matter for me. The Gubmint, intentionally or not, planned or not, has set off a relativities and expectations cascade which will take quite some time to run its course. By doing everything at once, starting with WFF and other giveaways, continuing with Minimum Wage and Living Wage increments, and then beginning the long march through the unions (Nurses now, teachers next) they have started a snowball which will simply gather more steam, more layers and more spend commitment as it rolls down the hill. Phrases which served well to Elect 'em - 'Nine Long Years of Neglect!', 'Woeful Infrastructure Underspend' - will be picked up and used by everyone who feels (Feelz!) a tad UnderValued.

And as DH so rightly points out, this sort of spend is irreversible. There's no more Output, no more Productivity, no more useful additions to national product. Just a jolt to input costs across the board.

So this belated talk of Investment in Productivity is lost in the noise of the queues already formed, and clamouring for Their Slice of the Action. Until the queue dwindles to nothing (or to those who can be safely ignored), the main task will be to Control that there Snowball.

Good luck with That....

Great article David, completely agree. A month travelling through Europe enjoying their awesome rail infrastructure makes me wish we could achieve something of equivalence - putting in a decent gauge rail system would be a good start, as we faff around talking about running a ‘fast’ train from Hamilton to Auckland on a post War rail line...like putting a turbo on an old Lada.
The Paris we see today was founded on a grand vision held by Napolean III, bought to life by a visionary planner (Haussmann), and funded by a private-public partnership and bond raising excercise. While we don’t need Napolean, we do need a Napolean like vision for better infrastructure - Key had his cycle way, but time for something bolder - maybe four laning the Golden Triangle between Akl-Ham-Tga, then a (truly) fast rail network?? Set up a govt-transport bond to help finance it and borrow the rest- future generations will thank us for it.

'Should we borrow more?'

Nope. too late already..

Nic J.

Why is it that male dominated infrastructure projects is always valued more than improving female dominated public services jobs. Investing in teachers would be a great boon for tomorrow's human capital. But no. Buildings ok. People no. There is a gender bias in this view.

Does this also mean women (assuming they identify themselves as women) in infrastructure projects are more valued than the underpaid males in the teaching profession?

You are right about buildings vs people, but not gender.