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Must New Zealand Pay Back All This Public Debt?

Written By: - Date published: 9:34 am, December 20th, 2020 - 22 comments
Categories: capitalism, covid-19, debt / deficit, Economy, grant robertson, labour, national, same old national, treasury - Tags:

New Zealand like most countries across the world in the last year, has gone deeper and deeper into public debt.

It’s pretty clear that the New Zealand government’s response to economic crisis from lockdowns and global trade crashes by spending tonnes of debt money has been extremely effective.

Debt is no longer a dirty word in Wellington.

Yet for some, it’s simple: debts must always be paid back.

We can still remember how Greece was treated by Germany during the GFC: pay the public debt you owe to us, and suffer.

Surely our huge new debt means taxes have to get raised in the future?

Well first the good news. In the past our public debt was even larger than seen today, and we’ve always managed to overcome that debt through a variety of methods.

Back in the day, a fast-growing emerging country like ours would run balance of payments current account deficits and slower-growing countries would run surpluses.

But we’re now a developed economy and the pattern is reversed, with many emerging economies running large surpluses or even balanced current accounts when one might reasonably expect that they would be running deficits, and thus supporting demand in the rest of the world.

Now we have advanced economies with debt that already appears too high, especially against a backdrop of ageing populations that just can’t do higher taxes, but there’s not a reserve bank within a thousand k’s that is remotely worried in the medium term.

The bad news is that the old sentiment of restraining further public borrowing now the economy is going gangbusters again is still strong. Here’s National’s version:

We’ve raided the rainy day fund to weather this economic crisis but now that the economy is recovering it’s time for a sensible plan to pay down debt so we are ready when the next economic shock arrives” – that’s National’s economic spokesperson Andrew Bayly. “Saddling our future generations with more debt than absolutely necessary is irresponsible and economically reckless.”

But the decisions of our Minister of Finance since March 2020 are pretty much identical to that of Prime Minister Robert Muldoon in formulating with Bill Birch the Think Big projects in response to the oil crises. Public debt is good, and on big build infrastructure projects, real good.

You can start to see this start of an ideological turn in policy about public debt in this paper from the Reserve Bank Governor Allan Bollard, but still there on p. 53 he says:

A return to sustained fiscal surpluses will, over time, mean a fall in the level of net public debt. But as governments do not generate much of their own income, returning to surpluses involves some mix of discretionary spending cuts, or increased taxation.”

Minister of Finance is apparently rejecting that simple binary.

With GDP now surging ahead, and government income surging with it, there’s no need for any such restrictive anxiety.

Core Crown tax revenue is forecast to be up by $16 billion, when compared to the PREFU. Net core Crown debt peaks in 2023-24 at 45.6% of GDP, and pretty much hangs there.

If anyone needed reminding, National in the previous government responded to a need to significantly lift debt to fund recovery by selling off 49% of our electricity generators.

Debt barely went down. They just lied, and the rest just made money.

Without much fanfare, Minister Robertson has used 2020’s crisis to bury the historic scourge of monetarism and within it the excuses of the governments that used it as a pretext to sell off our key government income generators.

Rather than paying our debt back to ourselves for decades like some cosmic never-ending universal mortgage, all we’ve had to do is organise things differently.

22 comments on “Must New Zealand Pay Back All This Public Debt? ”

  1. Patricia Bremner 1

    Yes Ad, National's view of debt reminds me of my parents' view. They felt borrowing against future income to 4 times to buy a home meant a life time of debt.

    When we had repaid that within 10 years, had an asset, and then began saving for our pensions, they admitted they had always been afraid of debt, and always struggled because of that.

    The poor are kept poor because part of the assistance given should be a Kiwi Saver A/C, into which the Govt should place the amount a minimum wage would provide, plus the bonus. This would give an asset to build on for their future, and help them look to the future with more hope, and have the incentive to train, do better to raise the amount going to their asset.

    Just keeping body and soul together is not and will never be enough. Assistance to a better future would help us all. So benefits need to increase, and the new mind set needs to extend further than it currently does. Wellbeing the goal.

    There is a huge difference between wild spending and building assets. Robertson looks for opportunities to pivot and make spending become a building block in an over all plan, this thinking should permeate and help solve other ills, namely housing and poverty.

    • Ad 1.1

      It was pretty clear when he asked all Councils for a list of "shovel ready" projects that there's wasn't an overall plan. The closest we've got is those ridiculously wide RBA that Robertson tweaked a week ago. Who knows maybe a more detailed plan is just futile right now.

    • Foreign waka 1.2

      Being 16 billion in debt is no easy feat with a small population and largely a next generation being put into repayment of it. And lets not forget, in that emergency of Covid, 16 Billion (yes the same number) were given to companies of which many are now paying dividends due to high profits. Now I am all for planning and taking on calculated risks but having a generation paying for shareholder returns on back of a pandemic is not just wrong. It puts a question mark on the competency of this government and the moral fabric of the entrepreneur class. I would say that poverty, housing and many ills could have been taken care off with that kind of slash fund. With positive results for exactly that generation that has to pay the money back.

      • Pat 1.2.1

        "With positive results for exactly that generation that has to pay the money back."

        and that is the line that the opposition will be pushing….false as it is. So long as the Gov make good decisions around investment (not funds, but people and infrastructure) then the tax will take care of itself.

        • Foreign waka

          I am sorry but giving 16 billions away without a means of getting back what is not theirs to finance what is clearly a wealth transfer, does not make any readings for a socially conscience or pragmatic government. One has to be truly from another planet to believe that the money hording class, read entrepreneur, would be honest when handing the taxpayer funds to them. Or was is as intended?

          That sum if it would be channeled towards relieving the suffering in NZ would have been far more productive. This is a logical and yes, also emotional argument but still valid on the scale of truth none the less. And it has absolutely nothing (!) to do with any opposition party. If this is the counter argument, the next generation will not see any solution to those huge pressing issues they are facing. This constant point scoring between parties is from generations past with no real outcome.

          • Pat

            The falsehood is that taxation is required for (gov) debt servicing….there are many reasons to tax but funding gov spending is not one of them

            What the government chooses to do with that debt is what you should rail against.

            • Foreign waka

              The money is spend – 16 billions – courtesy of the taxpayer. Maybe even against kiwi saver…

              Oh well, maybe one day, maybe one day….


              And if we talk about voting, my vote goes to that party with the most pragmatic approach to solve that ever increasing inequality issue. If it is a minority party, so be it. And I am not the only one thinking like that. Just not everybody is saying anything.

              • Pat

                courtesy of the Government….what taxes people pay in future have only the most tenuous connection to this debt….but as noted below, this line that we are ‘burdening future generations’ will be used to campaign by the opposition (just as Labour would do if the position reversed)….its BS for the masses.

                • Foreign waka

                  So, by extending this argument is it OK not to pay i.e. rates? I mean its the same as not paying the 16 billion back. One law for all.


                  And by the way, having only a tenuous connection to the debt that the NZ Government has incurred, who is going to pay? Unless you are saying that the printed money is in effect written off making the value of the bonds held by Treasury decrease or even almost worthless.

                  • Pat

                    Not one law for all….different rules for currency issuers, but you can try a rates strike if you think it will serve you well.

                    And whos going to pay?…who paid for the recent wage subsidy?…were our taxes hiked to pay for that?…no, the government determined it was important enough and they paid, just as they can determine if, when and how they wish to reduce that debt at some point in the future.

                    And yes there is always a risk that offshore investors may not consider the NZD a worthwhile investment but that risk exists already given the nature of our economy and currently theres not a lot of better options out there with everyone playing the same game.

          • Tricledrown

            [Deleted and this will continue until I get your attention – Incognito]

  2. Pat 2

    Yes, but as long as it is NZD debt and owed by Gov then it is not an issue (and as long as their is international demand for NZD)….outside of that circumstance and the story changes considerably.

    Robertson is already priming the voting public to accept such in an attempt to head off what will be a big issue at the next election.

  3. RedLogix 3

    Steven Keen has repeatedly made the point that most people make the mistake of thinking that a nation's economy must follow the same behaviour's and rules that a household economy must.

    A household economy must indeed pay it's debts, but a nation state is a far more complex actor that among many other things has the crucial role of creating money supply.

    I think we should be a little more forgiving of the monetarists; they were after all playing by an ancient set of rules around the honourable payment of debt. Accepting that the state has wider and different obligations has been not been an easy step for them to take.

    • Nic the NZer 3.1

      As a sovereign country operates the accounting system its not able to meaningfully save in financial form. This is why countries in all kinds of debt ratios are all performing fiscally in a similar manner. New Zealand gained no advantage from its starting point debt ratio being lower at the onset of the pandemic.

      A household operating a chore roster is in the same position and skimping on chores doesn't produce savings for that household, instead it leaves a build up of still to do chores.

  4. Incognito 4

    Excellent post, thank you!

    I hope you will follow up with another one addressing why this Government appears to behave fiscally restrained in a selective manner. In other words, why not take on (more) short-to-medium-term debt to tackle other major issues in and of our society? What is the ‘handbrake’ this time, if it is not the same one as before and has been for a long time?

    • Ad 4.1

      Their priorities and their prioritisation process is pretty well set out in their budget – so there's not much mystery to that one.

      I don't always agree with their priorities, but when you look across their projects they are not short on scope or ambition.

  5. Pat 5

    It is important to compare apples with apples (especially when examining historical events) and what is occurring outside NZ is every bit as important as what occurs here.

    Sadly we find ourselves with a set of circumstances that allow us to seize the opportunity but lack the capability (due to decades of offshoring) and political capacity (salespeople dont make good planners) to do so.

    Who knows how long this unique set of circumstances will remain but it is looking increasingly like opportunity lost

  6. gsays 6

    To whom is this debt owed?

    • Nic the NZer 6.1

      Since borrowing is a liquidity operation (it allows the RBNZ to run an above zero OCR) its directly owed to New Zealand banks, financial market investors and insurers. Indirectly its owed to people with savings and policies in those institutions.

      Plus the RBNZ owns a fit after it started doing QE, which is the govt owing itself.

      • Pat 6.1.1

        Not when its released to the secondary market…and that means money for nothing to institutional investors.

        Having noted that. there is a potential advantage to releasing it to the secondary market and either way theres no risk of default, though there is always risk that the market may be unimpressed.

  7. Nic the NZer 7

    Interesting discussion of research into the short and long term impacts of aggressively paying down government debt.


    TLDR causes low wages (even decades later) and hits the young hardest.

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