Debt seems a four-letter word to our politicians
Reluctance on both sides to utilise lever forces Reserve Bank to do the heavy lifting our two main parties of government . . . are locked in a mindless contest to be the least willing to let the boat out on government debt.
What is it about the debate about public debt levels that produces such bone-headed
posturing?
Here we are in New Zealand with one of the lowest levels of net government debt in the developed world, with public infrastructure deficits staring us in the face.
Add to these factors the likelihood that the US-China trade war and other growth-stifling economic nationalism may yet induce recession in some parts of the world, if not necessarily in New Zealand.
We can be sure that if world growth slows, so will ours, offset by the fact that New Zealand will continue to look attractive to anyone seeking a safe, sane democracy to raise a family in.
Net migration may currently be slowing, but it would be a brave call to expect it to sink even to the 25,000 net inflow the Treasury currently bases its economic forecasts on.
Unemployment might rise slightly, but like public debt, it is amongst the lowest in the rich countries club, the OECD. There is no reason to think that will change much. Skills shortages are more likely to constrain job growth than lower economic growth.
And finally, there is the very real possibility that when we go to the polls next year, the Reserve Bank’s benchmark interest rate will be sub-zero for the first time in this country’s history, and that very low interest rates will be entrenched.
The returns from bank deposits for savers will be feeble while money will be close to free for borrowers.
Yet our two main parties of government, National and Labour, are locked in a mindless contest to be the least willing to let the boat out on government debt.
Yes. New Zealand has had worryingly high debt levels in the past. And low debt was one reason New Zealand didn’t pursue austerity after the 2008 global financial crisis and could cope with the Canterbury earthquakes.
But that low debt mantra becomes unhelpful when it imprints into our political DNA the idea that Budget surpluses are inherently virtuous while deficits are inherently bad.
Yet the whole point of low debt levels is that it gives governments options when the bad times come.
Exposed as it is to the perception that it’s a less able economic manager than National, Labour is contemplating only the most cautious increase in debt levels under its Budget Responsibility Rules — a political totem that has long since succeeded in convincing international credit ratings that it will be a careful manager of public finances.
Yet those rules already contemplate higher debt during a downturn by targeting “a sustainable operating surplus across an economic cycle”. At the bottom of the cycle, there may not be a surplus.
Indeed, this year’s Budget already forecasts deficits on a cash basis for the next two years. Happily for Finance Minister Grant Robertson, no one pays too much attention to that, with all eyes on the inelegantly labelled Obegal measure, which includes gains and losses on the value of the Crown’s assets and liabilities.
The latest Budget forecasts still put the Obegal in surplus this year, but it is a near-run thing. The Treasury’s December update is very likely to forecast an Obegal deficit in the next two fiscal years.
National will crow that this is evidence of a failure of domestic economic management when it is primarily the impact of a disrupted global economy.
More to the point, in that disrupted environment, a mature political debate would welcome rather than deriding shifts in fiscal policy, including higher government debt levels, to smooth the impact of a downturn. Both Labour and National understand this, but neither seems able to say it.
As a result, the National Party would not have got itself into a needless tangle this week when leader Simon Bridges tried to unsay finance spokesman Paul Goldsmith’s concession, apparently under pressure, that current debt levels were about right. Talking the most sense, in an interview with the Australian Financial Review, was Reserve Bank governor Adrian Orr, who despaired at the unwillingness of governments, particularly in lowdebt countries like Australia and New Zealand, to leave all the heavy lifting in a downturn to the central bank.
Orr is under pressure not only to take interest rates below zero but also to consider “unconventional” monetary policy — a polite term for various sorts of money-printing.
Yet there is “very little discussion around the role of fiscal policy”, said Orr, in an unusually frank plea for the Government to use its balance sheet strength. “This is the time for the other significant lever of economic management to be doing its job”, he said.
Orr is right.
An unnecessary political straitjacket on debt levels risks putting the central bank in a no-win position when a credible, mainstream alternative — looser fiscal policy — is staring us in the face.