The Provincial Growth Fund is meant to fund… growth… in the provinces. So why is it building a huge new racetrack in one of New Zealand’s biggest cities? Because the racing industry seems to get whatever it wants, argues Duncan Greive. 

Yesterday morning saw a blazing RNZ report that the Provincial Growth Fund has allocated $10.5m for the creation of an all-weather racecourse at Riccarton. This is humdrum in a way, because we’re long-numb to tawdry or questionable application of funding from the PGF and New Zealand First’s proud championing of the racing industry, an industry that has by coincidence donated tens of thousands of dollars to the New Zealand First Foundation over the past few years.

But even by NZ First and PGF standards, this was a particularly eye-watering example. 

The PGF had previously declined to fund the racecourse, chiefly because of its location. Riccarton is not in some poverty-stricken province in dire need of investment, but instead in the middle of Christchurch, New Zealand’s second (or third, depending who you’re talking to) biggest city. Officials assessing the bid, which was initially turned down in 2018, noted that it was quite a strange place to be spending PGF money.

“The proposed Riccarton Park synthetic racing track is located in Christchurch City, which is ineligible for PGF funding,” assessors from the Provincial Development Unit wrote, according to documents obtained by RNZ.

All that somehow still doesn’t capture the true surreality of what we have just witnessed. Because horse-racing is not a sport in any conventional sense. It exists largely as a vector for gambling. Without gambling, the sport would not exist – aside from a vanishingly small number of marquee races, its stands are near empty. Its races play only on a channel owned by the TAB, New Zealand’s statutory monopoly supplier of bets on its races. This is not to suggest there aren’t many wonderful people involved in the broader equine world – but that its racing subset is almost entirely about facilitating hundreds of short, sharp opportunities to gamble. 

Other areas of our society that facilitate gambling, like casinos and pokie machines operators, are forced to operate under (relatively) onerous restrictions, and give back to the community through grants to arts foundations or sports clubs. The Lotteries Commission, which operates Lotto and Instant Kiwi, distributes tens of millions in grants to entities like Creative NZ and Sports NZ. 

This is a recognition that gambling causes social harm, and only the offsetting of social harm with social good can justify its existence. (And that by making gambling illegal, you simply drive it underground and ensure that it is purely a social harm.)

Gambling on professional sports was introduced as a way of helping to fund its grassroots amateur ecosystems, and a slice of the profit goes back to those roots – though only after it has helped fund the TAB, which is run and controlled by the racing industry.

Which is to say that all New Zealand’s legal gambling is offset by its returning some of its proceeds to a relevant community, and even those who find gambling unpleasant or immoral would at least take some solace in knowing that everything from club rugby to opera gains from its existence.

The one confounding exception is racing. Unlike all other legal gambling in New Zealand, it doesn’t have to give back to any unambiguously good community activity – because, under our bizarre laws, it is a good community activity.

Horse racing is essentially a charitable purpose unto itself, for reasons surely only Shane Jones could explain with a straight face, meaning that money raised through gambling on the product is ploughed back into creating more of the same product for people to gamble on. The proceeds of gambling on horse racing can be spent on promoting more horse racing and even on prizes for horse races, and that’s a charitable purpose in this upside-down world.

This would be bad enough if it were solely a self-perpetuating gambling universe. But for many years horse racing has been suffering a fast-ageing audience. Somehow, despite having spry young influencers like Winston Peters turning out to extol its many virtues, its most fervent bettors are well past 50. Where once it was able to carry its own weight, it now requires increasingly significant public subsidy. 

This is where the most recent term of government has been truly appalling. Peters secured himself the minister of racing portfolio, and set about initiating industry-approved reforms of the racing board that happily consolidated power over the TAB. Then came a $72.5m bailout for the industry during Covid-19 lockdown, well before yesterday’s revelations about Riccarton. The two all-weather racecourses (the second is at Awapuni in the Manawatū) exist because, to the industry, one of the problems that bedevils it is that rain sometimes means meets are cancelled, and thus people have to delay their gambling. Now, thanks to tens of millions in government funding, the gambling will go on regardless of the weather. Jones himself told RNZ that “the need for all-weather tracks was highlighted in an independent review of the racing industry”.

There are plenty more scandalising elements to the story of horse racing. The animal welfare concerns (though Jones claims these are partly addressed by all-weather tracks). The opacity of the industry’s donations to the New Zealand First Foundation, the activities of which are currently under investigation by the Serious Fraud Office. The fact that the PGF, which is meant to be first and foremost about reviving the economies of the regions through jobs, is funding a racetrack in a large city, with long-term jobs listed as “unknown”.

At this point, though, does anyone seriously believe that there is any case for racing industry support outside of NZ First and the industry itself? The bigger question is what the next government will do about it. On current polling, NZ First is a long way out of parliament. That race ends on September 19. Whether horse racing remains New Zealand’s least-deserving winner after that date is still an open question.

It’s become fashionable among some political circles to advocate for a laissez-faire approach to debt, on the basis that the government can issue as much debt as it likes – for as long as it likes. But there’s one big drawback to ‘just print more money’ argument, writes Pattrick Smellie of BusinessDesk.

Ask a New Zealander who Hairy Maclary is and most will know it’s the shaggy dog in the much-loved children’s tale of that name. An Australian equivalent is The Magic Pudding, a 1918 children’s classic that tells of a pudding that – no matter how often it’s eaten – is constantly self-replenishing.

In Australian politics, to call something a “magic pudding” is to promise something that sounds wonderful but does not exist in the real world.

A hardy perennial “magic pudding” formula in politics is the “growth dividend”. That’s the recipe that relies on claiming a party’s policies will produce a magically higher than forecast level of economic growth. This allows a party to sidestep unhelpful problems like that if the growth dividend doesn’t arrive, taxes will need to be higher or public spending will need to be lower if government debt is to be reduced or kept at prudent levels.

The political judgement at the core of this traditional election year debate is how much debt is either acceptable or credible for a government to run.

This time it’s different

In this year’s election, however, the growth dividend is almost old hat. The unprecedented rate of new government debt piling up in response to the Covid crisis is changing the debate and coinciding with the increasingly fashionable concept of “modern monetary theory” – a new magic pudding recipe that says governments can have as much debt as they like, implicitly without consequence.

Dealing first with the Covid-inspired debt pile-up: Every party in Parliament – even Act – agrees the response to the Covid pandemic has been appropriate, at least in principle. There is plenty of argument about the detail of the policies that have seen 1.7 million workers supported through wage and other subsidies and a $60 billion money hose squirted at all manner of public infrastructure.

The important point is that there is no argument that in times of crisis, it is entirely legitimate for governments to lean heavily not only on their balance sheets, but also on the fact that governments are special creatures when it comes to issuing debt. As long as a country issues its own currency – which New Zealand does – there is nothing, in theory, to stop a government issuing as much money as it likes to achieve anything it likes.

So say the modern monetary theorists and they are absolutely right, but only in the sense that if you throw a lighted a match into a tinder dry forest, it will start a big fire. That doesn’t make it the right thing to do.

The upshot is that, for this year’s election, the government debt debate is unusual for the fact that the two largest political parties – Labour and National – find themselves arguing a relatively conventional approach to the Covid debt inferno while the seekers of “transformational” policy reach for the MMT recipe.

Rainy day vs endless summer

The conventional approach has two fundamental elements:

• That the NZ government’s rapid debt creation was not only possible, but also could be achieved without damage to its international credit ratings or economic credibility, because a generation of previous governments reduced Crown debt to very low, arguably unnecessarily low, levels. Ramping debt back up from low levels by international standards was almost a no-brainer.
• The flipside is that, to be in a position to do so again, it’s necessary to reduce debt levels when things return to something more like normal. Call this the ‘rainy day’ theory of fiscal policy.

Hence the conventional argument breaking out over National finance spokesman Paul Goldsmith’s target to bring net Crown debt from above 50% of GDP post-Covid to 30% within 10 years.

That would still be 10 percentage points higher than it was pre-Covid, but also still far below the levels of almost every other OECD country. His leader, Judith Collins, has also made clear that National is not proposing tax cuts at this election – further evidence that a National-led government would take a conventional approach, favouring debt reduction ahead of a lower tax burden.

Labour has pounced on this as evidence that National must be planning huge government spending cuts and Goldsmith has made clear that National, among other things, would do as it did after the Canterbury earthquakes and suspend contributions to the NZ Superannuation Fund.

Labour

Labour has yet to lay out its fiscal policy in enough detail to know exactly how it would tackle higher Crown debt levels, but in her campaign launch speech on Saturday, prime minister Jacinda Ardern was clear that “keeping debt low is important to us”.

Labour may be willing to live with higher net Crown debt for longer than National because she said low debt “need not be at the expense of health and education, and it shouldn’t mean leaving people behind. That is the difference between Labour and others.” But this is not a radical departure from debt management orthodoxy.

Increasingly heard in opposition to this approach is the new entrant – call it the “endless summer” theory of fiscal policy that says no NZ government need care at all how much debt it issues. The debt need never be repaid because the debt has been created by the government, which owes it only to itself, so it doesn’t matter if it’s written off later.

It’s a wonderful-sounding theory and it’s based on an accurate understanding of how governments and, on a “franchised” basis, banks create money from nothing every day of the week, in good times as well as in crisis.

What the theory misses is that governments and banks can only do that for as long as the people who use that money believe it is actually valuable.

Faith

If faith in a country’s money is shaken, it buys less. And if the country simply keeps on printing more money to try and make up the difference, that currency will buy even less again.

MMT advocates are right to say that governments are not like households when it comes to debt. Households have no power to issue money and if they don’t pay their loans back, the consequences can be swift, harsh and lead to penury. It is also right that governments might as well take advantage of the fact that any debt they do create will be at interest rates that are close to zero and will probably stay there for years – free money, in a way.

Where MMT is wrong, however, is to claim that because sovereign states can issue money at will, there are no consequences to treating that money as if it never existed to start with.

Even MMT advocates concede that if a government chooses to run limitless deficits, the result will be inflation and that money in the system will outrun the productive capacity of an economy. That’s a recipe for destroying the value of wages, savings, and other assets.

To prevent this happening, a government would need to raise taxes to “delete some dollars from the system”. The theory assumes that if governments had limitless capacity to issue new money, they would not only invest it well but would also have the moral fortitude to stop creating new debt when signs of indigestion emerged.

Dream on.

A particular allure

Right now, however, MMT has a particular allure. The story of the global economic recovery since the 2008 global financial crisis and the response to Covid-19 has been a massive global experiment in MMT.

So far, the global financial system has not only hung together but is, if anything, stronger than it was in 2008 because of the greater requirements on private debt issuers – banks – to hold more capital in reserve, should a new crisis strike. There has also been a clampdown on private debt structures that carried far more risk than anyone realised.

However, this MMT-type experiment has not produced the kind of social equity nirvana that its proponents so often imply would be its result. Instead, in the wake of both the GFC and now Covid policy responses, money created by governments has made its way straight into the price of real assets, increasing wealth for the already wealthy and exacerbating income inequality.

How else to explain the booming stock markets around the world post-Covid and the evidence that parts of the NZ residential property market are currently overheating?

Legitimate debate

There is a legitimate debate to be had about what an appropriate level of government debt is for NZ. There is no magic number. It is ultimately a political as well as an economic calculation.

Reducing it as quickly as Goldsmith proposes looks hairy-chested, given the size of the debt mountain that now exists. However, voters should beware of the suggestion that government debt “simply doesn’t matter anymore”. It does and it always will.

Just because you can print the dollars that pay for lunch doesn’t make it free.

This article originally appeared on BusinessDesk. Their team publishes quality independent news, analysis and commentary on business, the economy and politics every day. Find out more.