The Budget Policy Statement this week has frustrated some fiscal hawks who want to see the Coalition Government get the Crown accounts back into surplus as soon as possible.
Finance Minister Nicola Willis would do well to ignore this peer pressure and stick to the gradual path of fiscal consolidation she appears to prefer — even if it means more debt.
Her budget policy statement said international evidence shows reducing deficits is best done over the course of several years and without gutting services New Zealanders rely on.
“We won’t be chasing a surplus in any one particular year at any cost, particularly when that cost would be to frontline public services,” she later told reporters.
Willis was not specific about what evidence she had been looking at, but it could have been a broad review of academic research published by the International Monetary Fund (IMF) last year.
Staff from the financial agency recently advised the minister should aim at restoring a budget surplus over the four year forecast period, meaning the 2027/28 fiscal year.
New Zealand does not face anything akin to the sort of crisis that would require the Government to slash spending overnight and risk scarring the already troubled economy.
Net core Crown debt has likely already peaked at about 44% of GDP and net debt is also nearing its peak at about 23.2%. Credit rating agencies are very comfortable with these levels.
This gives the new Government the luxury of time; it does not need to rush to surplus.
Easy does it
In 2023, the IMF published a working paper which reviewed a broad range of academic research into fiscal consolidation programmes.
A surge in many countries’ public debt since the pandemic had rekindled interest in fiscal consolidations and the complicated policy choices that come with them, it said.
Most countries had seen their debt-to-GDP ratios climb during the pandemic and few had brought them back down to pre-pandemic levels.
These states will need to rebuild fiscal space for the next crisis, but also to prepare for the cost pressures that will come with climate change and an ageing population globally.
Most consolidation policies in the review moved slowly, adjusting the primary balance by just one or two percent of GDP each year for three or four years.
Those who moved faster tended to be in some sort of immediate trouble, unlike NZ.
“Countries that opted for large and quick consolidations were often those with concerns about fiscal sustainability or high credit risk premia,” the IMF wrote.
Gradual consolidations tended to stabilise debt more permanently and helped to limit the damage to economic output that can occur after a fiscal shock.
“The advantage of a gradual consolidation, especially when it is large, is that it spreads out output losses over time, making it more politically and socially acceptable and hence giving the overall consolidation plan a higher likelihood of success,” it said.
First do no harm
There is no avoiding the fact that fiscal consolidation generally has a negative impact on economic activity and income distribution in the short-term.
With New Zealand already in recession, rushing to get back to surplus at any cost could do more harm than good.
The IMF warned some consolidations in advanced economies ended up being “self-defeating” as they depressed economic output and ultimately led to a higher debt-to-GDP ratio.
Protecting investment in human and physical capital, as well as social spending, helped to avoid this outcome and would pay dividends in the long run.
“Gradual, credible, and durable consolidations increase the likelihood of stronger medium-to long-term growth. Significantly lower domestic financing costs stemming from fiscal consolidation are associated with stronger growth dividends,” it said.
“Income distribution may also improve or recover in the long run as stronger growth following a successful consolidation can improve the wage share or reverse its decline and reduce interest rates, which reduces capital income for richer households”.
While National’s pledge to cut income taxes makes consolidation more difficult, having them targeted at median incomes may help to offset the distributional effects of cutting services.
Coalitions fare worse
Another interesting finding in the IMF paper was that coalition Governments tended to be less successful at fiscal consolidation.
The authors said this may be due to “inherent challenges” in consensus building and the sustained implementation of consolidation measures.
Parties with a Parliamentary majority and no imminent elections were more likely to succeed in fiscal consolidations — New Zealand’s coalition has neither luxury.
Whether or not Willis has read the IMF’s paper, she has signalled she wants to consolidate spending slowly and protect the most critical services along the way.
The evidence suggests this is the best path to success, even if it frustrates fiscal hawks.
60 Comments
The IMF should concentrate its efforts in the US.
Interest on the debt is now so large that it exceeded 60% of all personal income taxes collected in February. This is the Treasury’s largest source of tax receipts, and most of it is being consumed by interest. Link
Can always rely on Audaxes for the insight drops.
Ever since the budget surpluses under Bill Clinton, the 24 subsequent years—split evenly between Republican and Democrat-led administrations—have seen spending get out of control with the debt rising by $26 trillion over the period due to expensive wars, generous unfunded tax breaks and Keynsian-style spending to combat deflating asset bubbles.
“When I talk about this statistic, I get frightened,” Fink told Bloomberg TV on Tuesday. “The cost of financing our deficits is going to erode more and more of our disposable income as a country.”
Speaking last week, the president of Bianco Research explained that expenditure as a percentage of GDP remains at levels only eclipsed by a once-in-a-century pandemic and the 2008 financial crisis. In other words, stimulus is being pumped into the U.S. economy at a rate more indicative of a government fighting off a recession. In theory, that approach makes sense when consumers are beating a retreat, but that has not been the case of late.
“We are spending a lot more money than we ever have before,” Bianco said, arguing the GDP will artificially levitate as long as government expenditure continues to comprise an above-average 22% of overall economic output. “They’re spending like it’s the middle of a recession.
https://finance.yahoo.com/news/larry-fink-joins-jamie-dimon-115249796.h…
This just means that after years of predominantly cutting taxes, some braver government will need to get back to a more balanced approach. Since it has been the rich that received the bulk of tax cuts, it is not hard to figure out where they should be raised. This public debt is only a problem if 'Mericans become incapable of accepting higher tax rates. (And that is indeed a real problem.)
This just means that after years of predominantly cutting taxes, some braver government will need to get back to a more balanced approach
Not sure you understand. We know global debt to GDP is approx 3x. Assume long-term debt servicing of 3% and increases to 4%. How much more output do you need just to service your debt, let alone pay back any of the debt?
Pay it back? LOL. That'll never happen and it'll only grow.
All that needs to happen is that interest payments get made. Or there is the potential for them to be made so that rates don't attract a higher risk premium. Confidence is what really matters.
Ultimately, the debt is money. It can be bought and sold, as per any asset. And it sits in the owner's balance sheet as such. But a hint that the interest payments cannot be made, and the value of the asset falls, and then the real pain starts as the 'asset' declines in value.
re ... "Assume long-term debt servicing of 3% and increases to 4%."
What if, as has been happening for the last 70+ years, the debt servicing cost continues to fall? Consider real money i.e. notes and coins. It pays no interest and yet many are quite happy to stash it under the bed. First ranking government debt, issued by tier 1 countries, will become much the same, but better, even if it pays just 1%.
Normally a war is required so debt can be written off, banks nationalised etc etc etc. Harder now we have a MAD policy, and as Ukraine has shown there is actually limited ammunition....
IMHO its more likely that the USD looses its ability to be the dominant currency for the pricing of commodities.... The major players in the BRIC world would like to be able to price in their currencies but the Saudias are going to want to swap rubles and yuan into gold immediately, thus IMHO Gold is going to once again play a big part in the settlement of trade.
The rise in the value of gold tells us more about the loss of faith in the USD side of the pair, then the sudden rarity of gold.
The rise in the value of gold tells us more about the loss of faith in the USD side of the pair, then the sudden rarity of gold.
Big move in XAUUSD last night. Right at the end of close and prior to national holiday in the white man world.
Was explaining at the water cooler about the idea of power over gold now controlled by China. Everyone was shocked.
They don't understand why China and the Global South are interested in gold anyway.
Why should gold be a focus? Anything scarce but useful will do.
Crypto currencies are a classic example - both scarce and useful. Platinum? Yup. Even silver. The list is quite long. And includes land as it's quite useful and they're still not making much more of it.
Why should gold be a focus?
Good question. You might want to research Chinese and non-Anglosphere attitudes as to why demand exists. I can help you out there (or AI might support you as well). It has something to do with the perceived properties of gold. That perception may not hold in suburban Nu Zillun, but that's beside the point.
Anyway, HSBC is claiming the bragging rights for being the first bank to create a blockchain-based real world asset aimed at retail investors in HK. Yes, they are the first bank to do this. However, Perth Mint had a blockchain-based gold token that was discontinued last year. I owned it. Fully redeemable for physical gold.
https://www.coindesk.com/policy/2024/03/27/hsbcs-gold-token-goes-live-f…
Interesting. "Finite supply" has become a value proposition in addition to the other capabilities of crypto.
Governments really need to do a better job of explaining the mechanics and benefits of money supply increase. It's not discussed openly alongside inflation, GDP stats, and unemployment.
In short, it's trying to circumvent the nature of capitalism to have capital proliferate into the hands of a few. Adding money is an attempt to create continual liquidity in the economy, rather than having a fixed money supply sitting in vaults.
I think the end result is roughly similar either way, just that increasing money supply prolongs the inevitable.
Here poors, have some free money, to transfer to the providers of whatever you'll spend 99% of it on.
"You might want to research Chinese and non-Anglosphere attitudes as to why demand exists."
Indeed. Many of the older generation still think gold is great and safe. But far fewer than 30 years. The attitudes are changing and having interests held in overseas 'currency' that provides a return has replaced gold for the wealthier and/or wiser. Thus gold is sought by fewer wealthy locals (and there are a lot of them) who can squirrel it away in easily portable amounts. Should they ever need to use it as money - they'll find its value is wildly variable and not as useful as they believed.
What is government debt but our savings which we hold in the domestic currency. When the government runs a deficit we run a surplus and when the government runs a surplus we run a deficit and so all financial flows must net to zero in the domestic economy. Only when our foreign sector balance is included is there a net loss to our economy. https://theconversation.com/how-government-deficits-fund-private-saving…
An increase in NZ Govt debt *has* to be matched by an increase in credit (or a decrease in debt) in another sector. That's accounting. The three other sectors are briefly: NZ households, NZ businesses, and offshore bodies (eg offshore investors).
But, it is true that the average NZer could miss out - the money is usually hoarded by rentiers.
I guess I am a fiscal hawk. And I see no reason for a government to have any debt at all.
That said we need some frontline services.
Having worked in health and disability I still see lots of quite senseless processes at vast expense. Much of that what happens, not just health, could be issued with a simple stop notice. example: anything that turns up on a government paid tv advert. Anything not actually serving New Zealanders, not frontline)
Put money back in people's pockets I reckon.
See comment below - zero govt debt is achievable if we balance trade / current account and the private sector doesn't take on any additional debt (or increase their savings) This would require a fundamental rethink of our whole economic structure. It's not about govt spending / efficiency.
Yes Jfoe. I am talking "a fundamental rethink of our entire economy.
No government debt. tick
Increase in private savings. tick.
Balanced trade accounts. tick
And you won't get there with efficiency government or otherwise. Surplus !
And, the world owes us, not we owe them.
We are not helpless.
"... do the trade surplus."
How?
We've been talking about doing that since we left the EEC in the 70s!
One way - draconian and drastic - is import controls. But that's been tried before and went down like a cup of cold sick.
We could also dramatically reduce our consumption of the imports that we can.
Like oil. I dunno ... maybe like by going electric which we can produce in huge quantities quite cheaply.
No doubt the government has a cunning plan for that ... No. Wait ...
Timely article ...
https://www.stuff.co.nz/motoring/350230275/electric-cars-pass-mass-adop…
"New technologies have a tendency to blind side. When color TVs were introduced in the 1950s, for example, they seemed like a flop. The devices were expensive, programming was scarce, and after a decade on the market few homes had one. Then suddenly prices dropped, a ratings war ensued, and in just a few years most US households were watching The Jetsons in its futuristic palette."
Did a paper on this years ago. History is littered with examples of cool, new tech that just seemed to go nowhere ... Until it suddenly does. Like they say ...
...
...
...
... Timing, is everything. ;-)
All money consists of IOUs and as debt liabilities. Government liabilities consist of central bank reserves and bonds and which are entirely interchangeable with each other as with QE. Additional new reserves are created when the Government runs a deficit and so Treasury issues bonds to remove these reserves again and the Reserve Bank then used QE to buy back the bonds and restore the reserves and so it was not really money printing. Additional new money is created whenever the government runs a deficit or a commercial bank issues a loan. Money is deleted again when taxes are paid and bank loans are repaid.
Here's the maths.
We are running a trade / current account deficit of around 6% of GDP ($24bn pa) - driven by imports of fuel, EVs, manufacturing equipment etc, which cost a lot more than our exports of meat, milk powder and crap timber.
Now here's the thing. The *only* way a Govt can run a budget surplus is if private debt (household debt + business debt) increases by more than that 6% of GDP. This fiscal year, private debt will increase by around $14bn. So Govt has to run a deficit of around $10bn. This is just the bloody maths (sorry).
So, for Govt to reach surplus we have to get closer to trade balance (-2% GDP maybe) and get private debt increases back up to 4% of GDP per year. This has typically required double digit house price growth. But I guess we could go for huge PPPs instead.
If more people understood this, we could have informed conversations about economic strategy instead of random reckons about revenue, expenditure, tax cuts, wealth taxes blah
On point as usual. Biggest question is how to get the pvte debt back up. Up to now, the Ponzi has delivered and there's no reason why that shouldn't continue.
But what if it doesn't? The marginal punter must be stretched. And indentured slaves from South Asia are not necessarily the answer.
Maybe there isn't an answer.
The standard linear thinking for governments the world over is: investment in infrastructure + r&d spend + education spend = increased productivity and revenue. But these have only loose associations, and malinvestment in these areas can end up being fairly high. University degrees have become so abundant many of them are worthless, public transport can often been underutilized and unprofitable, and much R&D doesn't make it's way into a viable commercial proposition.
More likely, this country, and much of the planet, are living well beyond their means. There likely needs to be a shift towards post-consumerism, but good luck with that.
"Biggest question is how to get the pvte debt back up. Up to now, the Ponzi has delivered and there's no reason why that shouldn't continue."
Once again we need to look at our institutions.
The RBNZ continues to persist with an untargeted (useless?) tool called the OCR that reduces private & business debt at the same time.
Meanwhile our government (with some assistance from Treasury) persists with our hopelessly out of date taxation system that doesn't promote - or reward - business investment that would increase private debt while increasing the likelihood that NZ innovations would address our trade imbalance.
"driven by imports of fuel, EVs, manufacturing equipment etc,"
Not sure why you single out EV's. Double cab utes, uneconomic SUV's and luxury cars is probably more correct,
Lets not forget they can be charged using off peak power that is normally wasted reducing fuel imports.
What sort of infrastructure spend do we need to undertake to viably replace passenger cars with imported electric public transport?
You'd need decades, and likely hundreds of billions. Even in societies with population densities more conducive to mass public transport, their public transport industries struggle to be solvent.
Those maths don’t add up. Plenty of countries with much better current accounts than us have more debt than us. And imagine how low our debt would be if we hadn’t all decided to buy houses from each other at ridiculous prices. These economic theories of a must equal b are way too simplistic.
Some comparisons are equitable, and some can't apply at all.
Can't compare NZ to Singapore.
Or most places as they're closer to other trading partners.
Ireland instituted DVIs, lowered corporate Tax (bit of R and D spin), ended up with one of the highest GDP/Capita ratios in the world, but the actual population still can't afford houses and don't have much savings.
The indicators lack any context. There's a solution for NZ, but it probably involves making value calls about aspects of life that can't be shown on a line graph.
Yes, that's true, but the maths allows for that. If govts rack up big debts and a country has a trade surplus, then the domestic private sector saves a tonne of money (or reduces their debt).
You can't beat (or doubt) double entry book-keeping. It literally runs the world.
I am thinking about this one Jfoe, and it reveals a lot about your thinking.
"... double entry book-keeping. It literally runs the world...."
While double entry book keeping is a real framework, treating it as running the world limits thinking. And leads to the idea we have no control.
But actually we are not helpless, we have lots of choices within that framework. We can change the economy drastically. Sure that is hard, and how do you do it, but it's an entirely different argument.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.