I had basically finished my book in draft when the 2020 Budget was delivered on 14 May 2020. For me it was a cue that a chapter on fiscal policy was also needed. That Budget shows the New Zealand Government has run a substantial deficit (estimated to be $28.3 billion) in the financial year ended 30 June 2020. The deficit resulted particularly from emergency expenditures such as the wage subsidy scheme introduced at the start of the lockdown. Fair enough, the country needed a large government fiscal injection to enable business to survive the lockdown.
It was also clear the 2020/21 Budget needed to pursue that expansionary fiscal policy further, and run a significant Government deficit in the year ended 30 June 2021, to help the economy recover from Covid.
Running deficits to ward off an economic downturn is classic Keynesian economics. When an economy is booming, the theory says a Government should run surpluses so the Government takes more in taxes than it spends in Government programmes. It thereby ‘extracts net worth’ from the economy. This contractionary fiscal policy in theory should act as a brake against the economy overheating. Conversely, when (as now after Covid) an economy is contracting, the theory says a Government should spend more than it receives in tax, and run deficits. Such an expansionary fiscal policy ‘adds net worth’ to the economy and in theory acts as a stimulus to help keep the economy from slowing too sharply.
I have already made clear in chapter 3 on Banking that I have serious concerns about too much debt and too much expansionary monetary policy. What are the implications of using an expansionary fiscal policy, to ward off a Covid-induced slowdown?
REVERSING EXPANSIONARY FISCAL POLICY THE PROBLEM
Over the years since 1935 when Keynes unveiled his theory, politicians have proved far more adept at implementing expansionary fiscal policy (and spending up large) than implementing periods of contractionary fiscal policy (reining in their spending and their deficits). Which politician likes selling their voters a message of austerity? Which likes telling their voters that although the economy is doing well, the Government needs to keep its spending under tight control? President Clinton successfully paid down US Government debt when he was in office. Michel Cullen left our government finances in good shape. Bill English successfully reined in Government spending after the deficits associated with the post-GFC recession followed by the Christchurch earthquake. But the vast majority of politicians over the years have struggled to rein in government spending, and deliver a contractionary budget when circumstances indicate one is needed. As Friedman once said, ‘Nothing is so permanent as a temporary Government programme’.
Which surely suggests that when (as now in NZ) a period of expansionary fiscal policy is called for, it needs to be implemented very carefully with a thought to the future. As the fire hose of Government spending is turned on, an astute Government should be thinking ahead and asking itself: how do we do run up our spending in a way that makes it easier to turn the hose off again when the need for an expansionary fiscal stance has ended?
Take a simple example. Suppose the Government decides as part of its additional spending to increase the amount it pays to veterans in the 2020/21 year. It could pay those veterans say $30 per week extra or it could give them each a one off grant of $1500. The financial effect is the same (and indeed the grant is better to help kick start the economy after Covid – most of such a large cash injection will pass straight through into the economy). But with the weekly $30 increase, the Government has left itself with a problem in a year’s time. Realistically, it will be unable to cut veterans’ incomes by $30 per week at the year end. The increase will have become permanent. The Government deficit, in respect of that item of extra spending at least, has in reality become irreversible.
I am not in this example expressing any view on whether veterans merit an extra $30 per week paid to them permanently. Indeed from what I have said in my Welfare chapter which follows, they may well merit a permanent increase. What I am saying is that with a deficit budget designed to provide an economic stimulus, a measured and forward thinking Government should:
- Draw up an ‘underlying budget’ that is more or less balanced, based on the economic projections for the forthcoming year. So if veterans merit an extra $30 per week permanently, something else should be cut to keep the underlying budget in balance. When the long term ‘underlying balanced position’, which can go forward as the basis for budgets in later years, is satisfactorily written into the draft Budget, then at that point:
- Put on top of that ‘underlying balanced budget’ ONE OFF extra spending items, which operate immediately (to put cash into the economy as quickly as possible) and which do not generate ongoing Government spending in later years. Deliver that extra ‘top up’ spending in ways which as far as possible avoid creating employees, beneficiaries, businesses or other vested interest groups who come to rely on that extra money. They will be very reluctant to be weaned off that new source of largesse when the Government comes to drawing up its succeeding 2021/22 budget.
It is very disappointing that the 2020/21 Budget was not structured in this way. Yes, it correctly provides for a large deficit in the 2020/21 year, but unfortunately it has created that deficit to a significant extent by adopting major permanent spending increases that will make it difficult to avoid large deficits in budgets for many years to come. Because this serious deterioration in the financial position of the New Zealand Government is likely to be felt for many years, I need to address the 2020/21 Budget in detail.
FISCAL STIMULUS THROUGH INFRASTRUCTURE INVESTMENT
But first a word on how government deficits are spent. The most talked about way of applying such deficits is building new infrastructure. One frequently reads that governments need ‘shovel ready projects’ that can be launched to stimulate economic activity and help ward off an impending recession. The reason for this is what economists call ‘the multiplier effect’ – an increase in net investment in an economy will increase national income and GDP by an amount greater than itself. The economist Paul Samuelson described investment dollars as ‘high powered, double duty dollars, so to speak’.
Without going into the analysis why this should be so, it is safe to conclude that if Governments can use their budget deficit to fund new infrastructure projects the expansionary effect on the economy will be greater than if the Government delivers its deficit funding in other ways. Economic theory says that to the extent that it can, a government ideally should use its budget deficit to fund infrastructure investment.
But what is good in economic theory, is not always good in practice. Rushed infrastructure projects have a habit of not delivering the benefits predicted for them at the time the project launches. A country is definitely not ahead if at the end of the slowdown it has a collection of over-budget, late delivered white elephants.
Infrastructure projects have a long lead time. An article in the NZ Herald of 21 May 2020 on Fletcher Building, just after the company had cut 1000 staff, stated:
‘..Budget 2020 included an extra $3 billion for infrastructure with more expected as the Government seeks out projects to fast track. That is on top of the $12 billion allocated in January and will be welcomed by the likes of Fletcher Building… However, while the extra spending will eventually be soaked up and create jobs, it will still take time for those projects to get under way, let alone come up with the right workers with the right skills to do the jobs. Fletcher CEO.. said he expected work put in place to DECREASE by around 10 per cent in 2021, as new projects ramp up.
In other words, it’s a slower burn than the Budget headlines indicated and meantime Fletcher is forced to let go talented staff crucial for when that work does kick in…..Fletcher’s predicament will be shared across the industry and unfortunately is a sign of the tough times ahead for the next few years…It also shows the company isn’t confident in the Government’s ability to bring forward significant projects..’
In summary: if as a result of Covid you are just losing your job and becoming unemployed, $15 billion of new infrastructure investment is of no immediate assistance to you. If you worked in tourism (where many of the jobs will be shed) you may well not have the skills to move to work in infrastructure construction in any event. If you do have the skills, then yes, the Government’s new spending may help in a year’s time. But that doesn’t help you feed your family or pay the mortgage in the meantime.
WAGE SUBSIDIES AND OTHER TEMPORARY GOVERNMENT PROGRAMMES
What about expansionary fiscal policy, where instead of funding new infrastructure projects the increased government expenditure goes into wage subsidies and other policies designed to help companies keep their workforces together, and to individuals to help them to address their suddenly changed economic conditions (including possible loss of their jobs)? This has happened in many parts of the world in response to Covid. What can be said about these temporary assistance programmes?
The downside of fiscal deficits is that governments are inevitably going to be racking up debt equal to the deficits, which is going to have to be repaid in the future. If the wage subsidies and other support programmes funded by the deficits, actually do keep businesses going with their work forces in tact, (and thereby have long term economic benefits), then they are worthwhile. If they merely postpone the closure of companies, and at the end of the period of temporary government assistance, many businesses fold anyway, then the government has run up debt for limited long term gain.
Yes, some of the money the government has paid out, would have been incurred as unemployment benefits anyway, if the businesses had closed earlier, and unemployment started earlier. But it is likely some of these temporary government support measures will be seen in retrospect, as having postponed rather than solved or avoided the economic problems they were designed to address. If this is indeed the outcome, then the country has run up debt from the government expenditures, for limited overall gain, and would have been better to face up to the problems earlier.
So running an expansionary fiscal policy will always result in increased government debt. There is always a detriment from such policies. Depending on how wisely the extra deficits are spent and applied, depends on how well the economy actually benefits from such extra spending. There is a variable benefit (and even in some cases of poorly targeted extra spending, little or no benefit) from the extra spending.
In short- the benefits achieved may or may not outweigh the detriment of the extra debt. Yes, Governments around the world have had to put these extra support and spending programmes together very urgently, when it is difficult to assess the long term outcomes from some of the expenditures. But no, it is not always clear that Governments around the world (including New Zealand) have always appreciated the need to utilise the extra expenditure very wisely, if it is to be worthwhile. And having politicians making decisions on that extra expenditure in New Zealand when a general election is imminent, has added to the challenge of making the very best use of the extra outlays.
So my support of government deficits in times of economic downturn, to help support the economy, comes with an important caveat- that the extra government spending needs to be well targeted. The benefits it generates need to outweigh the extra debt it inevitably creates.
NEW PERMANENT EXPENDITURE IN THE 2020/21 BUDGET
Now to return to the structuring of the extra deficit expenditure in the 2020/21 budget. Was this extra deficit expenditure structured in a way, such that the firehose of extra expenditure in this year’s budget, can be readily turned off again, when the need for expansionary fiscal policy has receded? A table (10) in the Budget Annex lists all the different areas of Government expenditure (‘votes’) and in each of them it sets out new permanent expenditure, described as ‘New Initiatives’, for the year just ending (2019/20), and for the current year 20/21, and the next three years. There are 38 different votes and a line for ‘Unallocated Contingencies’.
To take one line as an example: Vote Corrections received an extra $2 million in permanent additional operating expenditure in the financial year just ending on 30 June 2020. (It seems likely this was in fact a ‘nil’ increase with the $2 million extra just covering inflation). For the current 20/21 Budget period, Corrections have been given an extra $90.3 million Then it will get an extra $52.4 million in 21/22; another $54.5 million in 22/23 and a further $56.2 million in 23/24. Over the next four years the Government has committed to spending an extra $255.4 million in Vote Corrections.
(Is the Government expecting a crime wave? That is on average an extra $63.75 million each year. We have around 10,000 prisoners, so this is an average $6,375 extra spending per prisoner per year. If you take the total Corrections budgeted cost of $2.429 billion in 20/21, and divide that by 10,000 prisoners, it is costing New Zealand on average approximately $242,900 per prisoner per year to keep someone in prison. Then just as this website was about to go live, news reports said it was costing around $1.8 million per year, to keep the Christchurch Mosque shooter in prison. That is $4932 per day !!! Surely twice the price of the best suites at NZ’s most expensive hotels and lodges. If ever there was evidence of the need to improve productivity in the state sector, Corrections is a shining example. But I digress).
This ‘New Initiative’ expenditure of $255.4 million over four years in Vote Corrections is not going to have anything except the remotest impact on getting the economy back on its feet. It is committed new expenditure to occur over the next four years. It will not be wound back. It is now locked into place for the period when the economic downturn from Covid will surely principally play out.
TOTAL NEW PERMANENT EXPENDITURE IN THE BUDGET
In the last financial year, the Government spent a total on New Initiatives across all Votes of $352 million. This year it is committed to spend $3.287 billion in New Initiatives. Next year, 2021/22, the total is $3 billion. In 22/23, $3.37 billion and in 23/24, $3.19 billion. THAT IS A TOTAL OF $13.2 BILLION IN ‘NEW INITIATIVES’ OVER THE NEXT FOUR YEARS.
The major beneficiaries of this ‘New Initiative’ expenditure are Votes Defence, Education, Health (dramatically the largest beneficiary), Regional Development and Welfare. With the exception of Vote Regional Development (which gets about 4.3% of the total of New Initiatives) little of this is going to have any direct positive impact on the recovery of the economy after Covid. Its main impact, will be to cement into place higher budget deficits over the next four years.
NEW CAPITAL EXPENDITURES
In addition to $13.2 billion of additional operating expenditure, the Budget commits to $3.63 billion of new capital expenditure over the next 10 years. Primary recipients of this new spending are Defence (new planes), Health and Transport (new trains). Again, this capital expenditure seems to have little relevance to stimulating the economy. The only good thing about it, given it has been committed over 10 years, is that there may be some flexibility as to when it is spent. If the Government finances are in worse shape than expected in a year or two, this capital expenditure could perhaps be deferred until they improve somewhat. Whether this extra $3.63 billion of capital expenditure has been added to the projected deficits over the next five years is unclear. Assuming it has, then the Government has committed to $16.84 billion of permanent new expenditure over the next 5 years, much of it of no relevance to assisting an economic recovery and all of it adding to increasing Government debt.
With Labour so far ahead in the polls when the Budget was delivered, there did not seem to have been any political need to embark on this major new long term core government expenditure, nor on the new capital expenditure, notwithstanding it is election year. The permanent new operating and capital spending unfortunately makes neither economic nor political sense. The fiscal stimulus should have been limited to temporary additional expenditures in the 19/20 and 20/21 years only. And the additional expenditures in those two years should have been well targeted for maximum economic advantage. It is far from clear that either of these important objectives has been achieved.
THE RESULTING DEFICIT FIGURES.
The Government’s Operating Balance in 2018/19, (the year before Covid, when the economy performed better than projected, and tax revenues were high) recorded a surplus of $7.4 billion. In the year to 30 June, 2019/20, during which the Lockdown occurred, the deficit is projected to be $28.3 billion. That is minus 9.6% of GDP, a MAJOR reversal from the previous year but justifiable (if spent wisely) to try to offset the expected post Covid economic slowdown.
It is reasonable for the Government to commit to another year of high expenditure in the year from and after 1 July 2020 (again, if spent wisely) to continue the attempt to minimise the Covid induced financial downturn which is expected to follow the lockdown (especially with the borders closed). In the budgeted 20/21 year, the Operating Balance is projected to be -$29.6 billion, minus 10.1% of GDP. By the end of the 20/21 year that will represent two years of major Government deficits: two years of expansionary fiscal policy.
It is the three years after that, however, that concern me. In 21/22, the Operating Balance is projected to be -$27.2 billion, – 8.3% of GDP. In 2022/23 the projected deficit shrinks slightly to -$16.5 billion, -4.7% of GDP. In 2023/24 it is projected to shrink to -$4.9 billion, -1.3% of GDP. Yes, the deficits are projected to decrease over this three years (thanks to optimistic growth projections – see below) but even if these reductions are achieved, they represent a further $48.6 billion of total Government debt.
TOTAL GOVERNMENT EXPENDITURE
It is illuminating to look at the figures projected for overall Government spending each year as well as the projected deficits. In 2015/16 total Government spending was $86.2 billion (33.5% of GDP). In 2016/17 it was $89.45 billion (32.6%), in 2017/18, $92,135 billion (31.5%). In 2018/19 it was $99.86 billion (32.9%). For the year just ended, during which the lockdown occurred, overall spending is expected to be $130.78 billion (42.6% of GDP). In the current year 20/21 it is projected to be $129.1 billion, 44.2% of GDP.
So after some relatively steady levels of expenditure from 2015 to 2018 Government spending rose by $7.73 billion (i.e. by 8.39%) in 2018/19 – long before Covid was on the horizon. Then in 2019/20 (the period which included the Lockdown) spending is expected to rise by $30.91 billion (ie by 30.95%) to $130.8 billion. Then in the current year spending is projected to remain reasonably constant at $129.1 billion. These are dramatically large amounts but (if spent wisely) justified as a response to the economic consequences of Covid.
However, government spending is then projected to continue at these levels over the next three years. It is projected to be $130.08 billion in 2021/22 , $128.82 billion in 2022/23 and $131.06 billion in 2023/24. These last three years are surely excessive – especially when (see below) Treasury is projecting a sharp economic pickup in activity during that time. If the economy is doing well again there is no need to continue to run government budget deficits to support it.
A 30% step jump in Government spending, to address the downstream economic consequences of Covid in the 2019/20 year which has just ended, held at similar levels again in the 20/21 year which immediately follows the Lockdown, becomes a permanent spending increase in the next succeeding three years. It is the expenditure levels in those succeeding three years, which are of major concern.
That is the aspect of the 20/21 Budget which has just issued, which worries me greatly. Politicians unfortunately are far better at spending money, than they are at showing fiscal restraint.
RISING GOVERNMENT DEBT
Net core Crown debt over this period is projected to go from $57.7 billion in 2018/19, to $88.9 billion in 19/20, then rise to $129.5 billion in the current year, $163.6 billion in the next fiscal year, $188.7 billion the following year and reach $200.8 billion in 2023/24. Over these five years core Crown debt goes from 19% of GDP to 53.6% of GDP.
WILL CROWN REVENUE HOLD UP?
Even these worrying levels of debt depend on some brave Crown revenue projections in the Budget which could easily prove optimistic. In 2018/19, Core Crown revenue was $93.5 billion. This is projected to have fallen by only 4.27% in 2019/20 and to fall again by 2.79% in 2020/21, before starting to grow again strongly. The Budget projects revenue to increase by 8.74% in 21/22, 9.99% in 22/23 and 5.7% in 2023/24. Starting in just a year’s time, on 1 July 2021, and for three years thereafter, Government revenue is projected to rise by a total of $23 billion annually – bringing deficits of approximately $30 billion a year in 19/20 and 20/21, down to $5 billion in 2023/24. The Government’s expenditure will not shrink; it is relying on a sharply improving economy beginning in only a year’s time to bring its finances back into balance.
Who am I to second guess the Treasury? But these projections assume a downturn of 15 months (March 2020, to June 2021) and certainly less than two years, then a sharp rebound in economic activity – something I have suggested is unlikely to happen when the NZ economy has entered the downturn with monetary and fiscal stimuli and debt levels all on a scale that will likely slow the recovery.
In my assessment the risks in these revenue forecasts are all on the downside. If the projections are inaccurate it is more likely than not the actual deficits and the actual government debt over the next four years will all exceed the currently projected figures.
I hope I am proved wrong. But it was not (in my view) wise for the Budget to lock into place major new longer term expenditures over the next four years, with no guarantee (amid considerable economic uncertainty after Covid) that projected revenues to offset these major new expenditures, will actually transpire. Governments should not enter long term spending commitments when the future revenue from which that spending substantially needs to be funded, is so uncertain. The 2020/21 Budget should have endeavoured to keep its additional deficit spending on a short term, year-by-year basis. That would have enabled new spending to be progressively tailored to the needs of the economy and the levels of revenue the Government receives, as the Covid-induced slowdown moves through the economy.
TAX INCREASES COMING?
Despite the Treasury’s projections, it would be very surprising if the economy bounced back after Covid and grew strongly enough to return government expenditure to not much more than 30% of GDP, as it was in the five years to 2018. I have little faith that politicians will have the discipline to bring this lavish new spending down in the future. So in my assessment New Zealand can look forward either to long running budget deficits and steadily rising Government debt; or increased taxes to bring the accounts back into better balance.
With the worst of both worlds, we will face both ongoing deficits and increased taxes over the years from 2021 to 2024. A depressing grind over a number of years looks likely as future politicians struggle to wrestle back spending, convince voters of the need for austerity and try to persuade the country that a few tax increases aren’t going to hurt. If those depressing outcomes do transpire, they will be the unfortunate consequences of the 2020/21 Budget which didn’t have to pump up spending beyond 2020/21 in the way that it has.
How much more positive it would be, if we could use the post Covid economic developments to restructure the New Zealand economy and drive changes in areas such as welfare, productivity and income equality, instead of dealing with deficits, austerity and negativity, all of which seem depressingly to be ahead after the 2020/21 budget.
HOW THESE BUDGET DEFICITS ARE TO BE FINANCED- WAS MR MICAWBER WRONG?
Charles Dicken’s famous summation through Mr Micawber, of the fundamental principle of economics in David Copperfield was exceedingly simple, and has stood the test of time ever since:
‘Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery’.
With the advent of Covid, governments and central bankers appear to have set out to prove Mr Micawber wrong. How are these massive budget deficits to be financed? This turns out to be astonishingly simple. Page 46 of the Budget has the following explanation:
‘In March (2020) the Reserve Bank implemented a Large Scale Asset Purchase (LASP) programme of NZ Govt bonds, expanding the programme to include Local Government..(debt) in April (2020). Up to $30 billion of NZ Govt bonds and $3 billion of Local Government debt will be purchased in the secondary market over the next 12 months. This provides additional monetary stimulus and support to the NZ Govt bond, and Local Govt debt markets, which helps mitigate the negative financial and economic implications of..Covid…The Government has provided an indemnity to cover losses the Reserve Bank may incur as a result of the LASP programme.’
So the Reserve Bank (which certainly no longer looks independent of the Government) will create $33 billion with ‘Quantitative Easing’ (book entries) and use that created money to buy up stock the Government has issued to fund its deficit (as well as some local government debt). It all seems like monopoly money.
The US, with its vast economic strength, may be able to get away with creating money in this way (although I question whether even the US can go on indefinitely, without repercussions. The Fed’s balance sheet is now at $7 trillion, roughly 30% of US GDP). New Zealand, as a small exposed nation (which has lost 25% of its international income with the suspension of overseas tourism and foreign students) has to be far more circumspect with its finances than the US. NZ cannot assume confidence will always remain in our currency and our country if we push the boundaries on our finances too far. We don’t want to pay for our deficits indirectly through a declining NZ dollar. That $30 billion of Quantitative Easing represents about 10% of our current GDP.
Had the NZ Government needed to fund its deficits in the debt markets, without the Reserve Bank de facto underwriting them, the Government would have remained under pressure to keep its deficits down as far as possible, to make the funding task easier. Under the new arrangement with the Reserve Bank, as explained in the Budget, the Government seems automatically to have its deficit funded. This seems to mean there is unfortunately little pressure on the Government to keep its spending down. Mr Micawber’s misery avoided.
The Economist in a lead article entitled ‘Free Money” on July 23 2020 described the present situation around the world of Quantative Easing being used to fund Fiscal Deficits as one where: ‘Budget constraints have gone missing’.
The unanswered question for me: what happens after the NZ Reserve Bank has created and spent its $33 billion of new money this year, and financed the projected 20/21 deficit? Will NZ Reserve Bank renew the Large Scale Asset Programme for another year, and create another $27 billion of new money, to finance the 21/22 Government deficit (bringing the RBNZ’s balance sheet to 20% of NZ GDP)? What if the economy doesn’t bounce back as the Treasury is currently projecting, and there is another $30 billion of government debt to finance in the 22/23 year (which would bring the NZRB Balance Sheet to 30% of GDP)? It would be interesting to see the legal indemnity the Government has given to the Reserve Bank, to see if it extends to government bond purchases made by the Bank after the 20/21 year.
No sooner had I written the above, questioning if $33 billion was the upper limit for Reserve Bank purchases of government and local government bonds, than the Reserve Bank and the Minister of Finance increased the limit on such purchases to $60 billion. That is $12,000 for every New Zealander: money the Reserve Bank has just created with paper entries. A revised indemnity has been given by the Government to the Reserve Bank. The alacrity with which these major new monetary tools are being rolled out is worrying in itself (and not just because I can hardly write fast enough to keep up with them).
Then, in the course of reviewing this text just before the new website went live, on 12th August 2020, ANOTHER increase in the NZRB’s LSAP programme- this time not by the expected $30 billion, but by $40 billion. The bank now proposes to run up created currency of $100 billion- 33% of GDP; approximately one year’s total tax take for the country; $20,000 for every man woman, child, and baby in the country. From being a country with relatively low public debt, we are going to become a country with comparable created currency on the books of our central bank, to the Federal Reserve in the United States.
We seem to have a central bank which (with respect) is working too closely with the Government to be fully independent. I wonder if the bank is thinking through the downsides of these major new interventions for the long term stability of the economy and the NZ dollar. Sure ‘everyone else is doing it’. But these massive monetary interventions did not significantly revive Japan before 2008; and did not significantly revive the major world economies between 2008 and 2020. Just because other Western economies are taking on massive amounts of new debt for what (on results to date around the world) will likely be a limited benefit and gain, does that mean New Zealand should unthinkingly join them? ‘Everyone’ (meaning all major economies at the time) had policies of trying to balance their budgets, in order to correct the 1930’s depression- only to be told by Keynes when he issued his General Theory in 1935, that such policies were the opposite of what was needed to correct a depression. Countries working to balance their budgets, was actually making the 1930’s depression worse. Safety in numbers is no guarantee the herd will always adopt the optimal economic solution.
Most markets eventually revert to the mean. The further markets are pushed away from their fair value or equilibrium point, the more extensive their ultimate correction. As one commentator put it, ‘The bigger the party, the worse the hangover’. Excessive monetary and fiscal policies are now pushing asset prices to unreal levels, and distorting markets and economies in many ways. Markets head up, as a result of these interventions, as the real economy heads down. It is a disconnect which surely can’t continue indefinitely. If these market distortions do indeed eventually revert to the mean, there is some rough economic weather ahead for the world. Rising interest rates, or a sudden exogenous shock to world markets, causing a widespread loss of confidence, could both be triggers to begin such a market correction.
I keep wondering what our children and grandchildren will ask in 5, 10, and even 25 years, when (in addition to student debt, and the debt which is inevitably going to follow from our present policy settings in both superannuation and health- see chapters following) they are still trying to sort out the debt and economic legacies that our rapid and seemingly briefly considered responses to Covid seem quite likely to leave behind. What if New Zealand took more early pain now and remained as one of the least indebted economies after Covid has receded? Have our policymakers considered how that may stimulate future investment in the country, and benefit our grandchildren, as New Zealand would be one of the few in the world by then with conservative debt levels? There are alternatives to what is being done today- it is just they do not appear to be being appropriately considered.
The arrangements between the Government and the Reserve Bank, in my view, represent a worrying short term financing arrangement to pay for the forthcoming deficits, to go with a disappointing Budget 2020/21. New Zealand before this 2020/2021 Budget debt blowout, had low government debt by international standards, but high private debt (which has funded our overpriced houses). Now we are heading towards the worst of both worlds: high public and high private debt. Potentially combined with a stagnant economy.
And just to complete my depressing analysis- just as this website is about to go live, it has become clearer that the present government members, presented for the first and only time in their political lives with more money than they know how to spend, are applying this ‘Free Money’ on expenditures of poor quality. Which in my assessment, unfortunately leaves New Zealand running up debt with expenditure decisions which are adding little value to the country.
It is no exaggeration to suggest that in 5 years time, the world may look back, and New Zealand may look back, and say the economic damage done by governments and central banks, in their attempts to ward off the Covid- induced economic downturn, was greater than the economic damage done by the virus itself: that the cure ended up being worse than the complaint. As the Economist in its ‘Free Money’ article concluded: ‘The stakes are high. Failure will mean the age of free money eventually comes at a staggering price’.
MESSAGE FOR THE RESERVE BANK GOVERNOR AND THE MINISTER OF FINANCE
Please, Governor Orr, there is a long term cost in excessive monetary interventions. It is disappointing that NZRB moved so rapidly to $100 billion. Please use monetary policy much more sparingly, from now on. Please don’t progress to negative interest rates. They will only distort the economy further. If companies can’t make a case to invest and home buyers can’t afford mortgages at the abnormally low interest rates already on offer, then they shouldn’t be undertaking their transactions at all.
And please Finance Minister Robertson, stop taking the need for a short term expansionary fiscal policy in mid 2020 as an opportunity to have a massive spend up for the next five years. Your early steps to counteract Covid were reasonable. But in your 2020 Budget you have in my respectful view, departed from appropriate economic stewardship beyond the 2020/2021 financial year. Your fellow cabinet members are then spending the massive amount of new stimulus you have injected into the economy, in a manner which I suggest is not going to deliver good value to the country. Your policies are causing New Zealand to run up debt, without adequate corresponding benefit.
I have real concerns that your combined actions in pushing both Monetary and Fiscal policy further than I suggest is either wise or necessary, unfortunately risk leaving our children and grandchildren with a stagnant economy and an unnecessarily large debt legacy to address.
Covid – Catalyst for Change 