Crown debt changes bigger than the billions

Grant Robertson’s suggestion last weekend that the Government will loosen its borrowing rules to invest in infrastructure made me think of the French, but not for the reason you probably think. I was not thinking of the French public’s tolerance for high levels of public debt, which allowed investment in fantastic public infrastructure which has yielded dividends in the form of the French labour force’s productivity.

My mind actually went to the French historian Fernand Braudel. He believed the best way of understanding the decisions people make was to take a step back to look at the big, sweeping events that shaped their lives.

He didn’t just mean formative things like whether someone was rich or poor or what neighbourhood they grew up in. For Braudel, the big picture was very big indeed: he focused on the super macro. Think of it in the way ocean waves seem important, but they’re actually just a function of the massive ocean and wind currents that shape the Earth’s atmosphere.

Politics isn’t much different. It’s true a week is a long time in politics. The average political career lasts just six years. A decade is a lifetime and two is a verifiable eternity.

Robertson’s announcement that he would bring forward key infrastructure projects isn’t just significant for how it appears on the surface. It signals a more fundamental shift in how we think about public debt. This is because the investment plan will almost certainly break one of the Government’s Budget Responsibility Rules (BRRs), specifically the promise to have net debt below 20 per cent of GDP by 2021-22.

The Government’s last set of fiscal forecasts, released at the Budget in May, predicted net debt to GDP would hit 19.9 per cent in 2022, or $69 billion. With each percentage point worth about $3b, even a slight loosening of the target will unleash enormous investment in the economy.

It looks like the Government will elide its two targets. In 2022, the rules were meant to be replaced by a new debt ‘‘window’’, obliging the Government to keep net debt between 15 and 25 per cent of GDP. It looks like Robertson will bring that window forward, allowing debt to rise by 2022.

Economists have roundly applauded the move. The BRRs were rightly lambasted for being a ‘‘fiscal straitjacket’’, preventing the Government from loosening the purse strings and stimulating the economy when international headwinds started to put the lid on our growth.

The rules are starting to look a bit dated anyway. Treasury’s last set of forecasts, put out before the 2017 election, showed real GDP growth of 3.7 per cent in 2019.

Its forecasts from the May Budget, which will be revised next Thursday, expected growth of 2.4 per cent this year, quite a slowing from two years ago.

It’s been clear for a while that stimulus was needed, but the BRRs got in the way.

Fortunately, slowing growth isn’t the only part of the economic scenery that’s changed. In 2017, Treasury forecast Government borrowing costs of roughly 3.3 per cent. They’re now 2.3 per cent for

10-year bonds and 1.8 per cent for 5-year bonds. If you were looking for an economic argument for investment, this is it.

But borrowing costs have been low for some time – and it’s been no secret growth has been slowing. So why didn’t the Government open up the chequebook sooner?

It all goes back to those bigger political currents. Since 1994, governments have been asked to outline their long-term fiscal strategy, including how much they plan to borrow into the future.

This was a response to decades of governments not being upfront about how much they’d borrow to finance their promises: NZ had a debt problem.

The idea was to politicise debt, and penalise profligate governments. Debt was such a problem at the time that politicians even wanted to include a debt limit in legislation, meaning politicians in

1994 would be telling the government of 2019 how much it should borrow, despite them being faced with vastly different economies.

The Fiscal Responsibility Act worked too well. Debt shrank as a percentage of GDP to one of the lowest rates in the world. But the political debate around debt has suffered, and investment in the economy has shrunk as a result. Treasury now says we could let net debt increase to 30 per cent of GDP, and still leave breathing space to borrow more should we have another GFC-Christchurch Earthquake-style double catastrophe.

Robertson’s announcement signals he now feels the political currents have moved in the right direction. National’s Paul Goldsmith is on record as saying the current 20 per cent goal is ‘‘about right’’. It shows the debt debate is slowly moving on.

But the debate is unlikely to mature – it’s politics after all. We’ll still be squabbling over minutiae at the expense of the bigger picture.

But this change in the landscape recognises we are no longer living in 1994, and that’s significant.

It’s been clear for a while that stimulus was needed, but the Budget Responsibility Rules got in the way.