Debt has been a bad word in Wellington for decades. All of a sudden the government is planning to spend billions of dollars we don’t have because of Covid-19. Justin Giovannetti on the new appetite for debt, and how it compares with the rest of the world.
New Zealand is about to embark on a spending spree with little precedent in its history, with the country’s debt forecast to nearly quadruple over the next five years as the government battles the Covid crisis and a deep economic slump.
The opposition warns generations of future New Zealanders will be stuck in a fiscal straitjacket because of the buckets of red ink about to be dumped on the government’s books. The view from the Beehive is that the money needs to be spent to avoid another Great Depression.
According to some economists you should be a little concerned. They say the light on the government’s economic dashboard should be blinking yellow: Use caution. For other economists, it should be solid green. The government’s books are some of the most enviable in the world, they say.
New Zealand isn’t going into this debt-loving future alone.
Around the world populations are ageing, taxes are generally low and government books were in poor shape in good times. Most advanced economies were years away from projected surpluses before Covid-19 hit – New Zealand was one of the exceptions.
With economies now in free fall and few options left to get commerce going again, nearly all governments, regardless of ideological inclination, have made the same choice: Spend.
Near record low interest rates make it cheap and easy. Most of the world’s economies see little risk in taking on massive new public debt when the interest on that debt costs next to nothing. The calculation, whether in Donald Trump’s White House or Jacinda Ardern’s Beehive, is that the manageable cost of a mountain of new debt is cheaper than years of soup lines.
Pushing government books deeper into deficit, normal spending also isn’t going down. With Covid-19 putting stress on public services, there’s little appetite for austerity. Nearly no politician anywhere is proposing cuts to health care right now.
These are the hard numbers from the New Zealand treasury on what the situation is here: The country ended 2019 with $57.7 billion of government debt, that equals about one-fifth the size of New Zealand’s economy. By 2024, that number is projected to rocket to $200.8 billion after years of deficits, representing over half the value of the economy.
By the midpoint of this decade, New Zealand will be about as indebted, at 53.6% of GDP, as it’s been in modern times. Crown debt was a bit bigger as a share of the economy in 1992, at 54.8% of GDP.
That year also corresponds with the high mark of the country’s early 1990s drive towards free-market policies, dubbed Ruthanasia, after then National Party finance minister Ruth Richardson. No economist who spoke with The Spinoff expects that the government’s planned debt level will require that type of government approach.
The global economy has changed a lot since the early 1990s. Compared to many of New Zealand’s big trading partners, the country’s debt plans for this decade are exceedingly mild.
The US budget deficit was $738 billion in April alone, a record figure for a single month. That staggering sum was added to a debt now over $25-trillion, about 115% of GDP. Lawmakers in that country are debating adding trillions more to the debt over the coming months. A long recovery from the coronavirus could see the American national debt soar far higher.
The US entered Covid-19 with its national finances in a mess after two decades of significant deficits. Prior to the global financial crisis, America’s debt was a far more manageable 62% of GDP. What about a more sober country like Canada?
Canada’s 10 provinces and federal government are currently expecting to run a combined deficit of at least $350-billion in 2020, that’s about 18% of GDP. New Zealand is eyeing a deficit of 12.6% of GDP this year.
Canada’s national debt is also expected to shoot from about 30% of GDP last year to about 50% this year. Large provincial debts will push that number higher. Canada’s national figure alone is close to New Zealand’s currently planned maximum debt level.
The financial situation of the Canadian province of Newfoundland and Labrador, where most people live on a rocky island surrounded by the North Atlantic, sounds like a nightmare to most New Zealand economists.
The province is running out of cash, its finances are unstable and global banks have expressed concern about lending it money. Canada’s central bank has had to step in and start buying up parts of the province’s debt, an unorthodox move that underlines how difficult it has become for it to borrow internationally.
According to economists, that type of scenario is why New Zealand needs to keep its debt lower than other countries. There’s no indication things will ever get close to that bad here. However, the rules of international finance can be a little unfair for small countries and make borrowing a bit harder, they say. And then there are earthquakes. When disaster strikes, New Zealand needs to create debt to spend.
“We always look at our economic management, our financial position, with an eye to being the shaky isles,” Ardern said on Monday.
“That’s why even in this global pandemic, our debt levels relative to GDP, when you compare us to the rest of the world, were very, very low. Because we always manage our books with that in the back of our mind.”
Across the world, it’s hard to make a long-term comparison to New Zealand because few other countries have tabled full government budgets since the coronavirus hit.
Following the introduction of the government’s budget in mid May, National Party finance spokesperson Paul Goldsmith said he was worried about the level of debt being planned. “Budget 2020 will saddle future generations with debt, an extra $80,000 per household. Kiwis deserve to know that money will be spent wisely,” he said.
The opposition’s reaction to the budget has largely revolved around concern around debt levels and worry about where the money will be spent. However, new National leader Todd Muller hasn’t been able to say whether he would spend less if he enters the prime minister’s office after the September election.
Eric Crampton, chief economist at the free-market think tank the New Zealand Initiative, said while he shares some of the opposition’s concerns about new spending, the country is entering this economic crisis from a good position.
“The rest of the world has gone absolutely crazy and either we’re sane or staying sane longer than anyone else,” he told The Spinoff.
“Throughout all of New Zealand’s recent history all governments have maintained reasonable debt levels. There have been problems like the Christchurch earthquake, they run up a deficit and then they get it back in line. You don’t have those big structural deficits that are hard to fix,” he said.
Crampton said the government’s current plans, for a debt half the size of the country’s economy, is about as large as New Zealand should go. Anything bigger risks possible trouble in case the economic situation worsens or natural disaster strikes.
Cameron Bagrie, the former chief economist at ANZ, said that New Zealand needs to keep a “squeaky clean public debt” because of the country’s small size and high private debt levels. However, he says the response to Covid-19 was the right one.
“The government needed to go big, leaning on the government balance sheet is the best response in the near-term. I have two concerns. I don’t think we have a well thought out economic plan on the other side and I think people will get increasingly concerned about how we’ll get debt down,” he said.
According to Bagrie, his biggest concern is that taxes will need to go up to finance debt repayment in the future. It could be a defining question for the coming election. National under Muller will promise to do a better job of managing the books and keeping taxes low. It’ll be difficult for Labour to promise the same spending restraint, which could mean less infrastructure investment in the coming years, he said.
Neither of our North American trading partners are talking about debt repayment. Canadian prime minister Justin Trudeau’s plan is to grow the economy faster than new debt in future years, so that the debt to GDP ratio shrinks over time. New Zealand’s current budget plan would do that by default. The US political system has shown next to no interest in that country’s debt levels.
Shamubeel Eaqub, an economist who is respected by many on the political left, said Crampton and Bagrie are just wrong. New Zealand doesn’t have a debt problem, he argues.
“Not only can we handle the debt that we’re planning to borrow, but we can take on a lot more if we need to. I’m not sure where this idea comes form that we’re so small we can’t borrow money. Some people are stuck in the 1980s when it comes to interest rates and borrowing,” he said.
Countries like Belgium and Portugal went into this economic crisis with public debts larger than 100% of GDP and are looking to borrow more, he said. Nearly any ranking of advanced economies has New Zealand as one of the least indebted countries in the world for decades to come.
Don’t look at charts that show debt approaching the same level as 1992 and freak out, according to Eaqub. “The world is different now,” he said. “Banks will look at us and see a debt to GDP ratio of 55% while Belgium is at 150%. Who do you think they’ll want to borrow to?”