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Which Deficit?

Written By: - Date published: 4:08 pm, April 12th, 2015 - 64 comments
Categories: Economy - Tags:

So, the much-touted and long-awaited government surplus looks unlikely to arrive this year. Is that a surprise? No. Does it matter? Not much.

The only reason for sparing much time on the failure to eliminate the government deficit is that it relates to a target that the government itself identified as the crucial test of its ability to manage the economy. In doing so, it exploited the confusion in most people’s minds – and that includes the minds of many media commentators – as to what deficit we are really talking about.

Just a few days ago, in reporting the probability that the government would remain in deficit, Radio NZ news described it as “the country’s deficit” as though the two deficits were the same thing. Sadly, the government deficit, about which so much fuss is made, is only a minor factor in an economy which continues to remain in substantial deficit in its total operations.

Far from running the economy in a prudent fashion, the government presides over a New Zealand economy that continues to chalk up foreign payments deficits, year after year. We continue, in other words, to go on spending well beyond our means. We fill the gap by selling assets to foreigners and by borrowing at high interest rates to overseas lenders – a classic instance of a rake’s progress that makes a day of reckoning eventually inevitable.

That foreign payments deficit is about to get a lot worse, as the overvalued dollar (about which so much jingoistic celebration was enjoyed) makes it more and more difficult for us to pay our way. Those cheaper Aussie holidays today are bought at the cost of Kiwi jobs and living standards tomorrow.

So, let us be clear about the deficit we are talking about – the country’s deficit, the one that matters, the one that is getting worse all the time, or the government’s deficit, that simply defines how much the government takes in tax revenue from the rest of the economy by comparison with how much it spends.

Is there are any link between the two? Yes – the priority given by the government to its own deficit has almost certainly made the country’s deficit worse. This is because, in a recession, which by definition arises when people (that is, households and corporations) are earning and spending and investing less, the slow-down can only deepen if the other major sector – the government – also cuts its spending.

Our recession was longer and deeper than it should have been, in other words, because the government gave priority to balancing its own books, and ignored what was happening to the whole economy. An economy that went backwards for several years was even less able than usual to pay its way in the world when the world economy began to improve.

But surely, many will say, it must be a good thing for the government to tighten its belt when the economy slows down? That would be true if the government were a business, but running an economy is not the same as running a private business. The paradox is that the government’s preoccupation with its own finances has meant a more sluggish economy and reduced tax revenue so that it becomes more and more difficult for the government to balance its books.

This is the lesson taught by both history and recent experience. It is a lesson that has now been painfully learnt all over again by the world’s central banks, some of which – the European Central Bank, in particular – wasted six or seven year insisting on austerity as the proper response to recession. The people who paid the price for that mistake were Europe’s poor and unemployed; we were saved from worse only because our Australian-owned banks remained relatively stable and because our main export markets in Australia and China remained until recently reasonably buoyant.

If the government’s finances are only a small part of the picture, why have they attracted so much attention? It is worth noting in passing that, while the Labour government of 1999-2008 recorded a surplus in eight of its nine years, the current government has now chalked up six successive deficits. So why focus on this particular factor?

The answer is that focusing on the government deficit has been driven by political rather economic considerations. It has served the government very well as the justification for policies that come straight from the neo-liberal handbook. We can be sure that the next round of cuts in the level of public services will be misleadingly explained as “necessary to eliminate the deficit”.

In the end, in any case, facts cannot be denied. As any accountant will tell you, borrowings and lendings must, as a matter of accounting identities, match each other. Our perennial foreign payments deficit – what we need the rest of the world to lend to us – must be matched by the borrowings our economy makes in total. If the focus is entirely on achieving a government surplus, that makes it inevitable that the private sector (households and corporations) must borrow even more.

The truth is that, by looking only at the government deficit and ignoring the country’s deficit, we create an unbalanced and broken-backed economy that will survive only as long as overseas peddlers of “hot money” are willing to go on lending to us.

Bryan Gould

12 April 2015




64 comments on “Which Deficit? ”

  1. Colonial Rawshark 1

    Bryan Gould gets it. This analysis revolves around sectorial money balances. A government gets into “surplus” by taking more from the private sector – companies and households – than it spends back into the nation. Voila – the mysterious and much-sought after “surplus” is created.

    If you think that Government surpluses are a good thing, then you better think that forcing NZ’s private sector (households and businesses) into deficit is also a good thing. Because the two go together hand in glove in an environment where we are in constant deficit as a country overall to the foreign sector.

    • Draco T Bastard 1.1

      If you think that Government surpluses are a good thing, then you better think that forcing NZ’s private sector (households and businesses) into deficit is also a good thing.

      The few people who get rich from these destructive policies think it’s a great idea as they get to buy up a nations assets that it’s spent decades building on the cheap.

      • Colonial Rawshark 1.1.1

        Exactly. They cloak their narrow self interest in theoretical goobledegook trying to make out that these policies are in the general interest. Recent history has shown us that nothing could be further from the truth.

    • DH 1.2

      I don’t think you’re on the right track with this argument, you seem to be saying there’s a see-saw effect between private & public sector borrowing. That doesn’t add up for me. Most private sector debt is for capital purchases, ie housing, whereas the present Govt debt is largely to fund operating expenses.

      If the Govt were to pull more tax revenue out of the private sector, and reduce its own deficit & borrowing, that should reduce private sector debt because people would have less disposable income to pay off their loans.

  2. Pat 2

    “….The people who paid the price for that mistake were Europe’s poor and unemployed; we were saved from worse only because our Australian-owned banks remained relatively stable and because our main export markets in Australia and China remained until recently reasonably buoyant.”
    …..and dont forget the huge influx of reinsurance dollars these past 4 years and the economic activity associated with the Christchurch “rebuild”…..an economic stimulus forced on this cut mad administration by circumstance.

  3. Draco T Bastard 3

    Far from running the economy in a prudent fashion, the government presides over a New Zealand economy that continues to chalk up foreign payments deficits, year after year. We continue, in other words, to go on spending well beyond our means.

    And, boy, do the RWNJs really hate it when you point that out and that the NZ$ should be reflective of those accumulated deficits as the present economic free-trade theory calls for.

    The truth is that, by looking only at the government deficit and ignoring the country’s deficit, we create an unbalanced and broken-backed economy that will survive only as long as overseas peddlers of “hot money” are willing to go on lending to us.

    And there’s a hell of a lot of those as the large nations of the world engage in massive amounts of Quantitative Easing.

    • David H 3.1

      NZ is being run like a business. And ALL the valuables are being sold off, and the loose money and spoils are shared around the management. So the Business goes broke and the big wigs piss off overseas with all our money.

      Yep just like a badly run business.

  4. Incognito 4

    I believe that this is one of the “deficits” Brain Gould was referring to:


  5. fisiani 5

    I believe that Bill English knows more about economics than Bryan Gould

    • Paul 5.1


    • Draco T Bastard 5.2

      I believe that you’re a sycophantic idiot who hasn’t got a clue at all. You certainly don’t know anything about economics or reality.

    • KB 5.3

      You’re a dreamer!
      Unfortunately for New Zealand there’s room for dancing upstairs with regards to English .
      You’ve clearly bought the bullshit !

    • Macro 5.4

      You really are in fine form today fisi! I spilt my coffee on that one. lol

      Tell me Fisi have you been to the ‘Temple of the Hidden Hand’ today? – tell me you are a true believer.

    • les 5.5

      Bill English knows how to run deficits,that much we do know.

      • Weepus beard 5.5.1

        He knows about promoting tobacco lobbyists to parliament too. And he knows about ripping the taxpayer off with housing fraud. He’s a 10 kid farmer, not an economist.

    • In Vino 5.6

      I would have more confidence in Fisiani’s assessment if Bill English did not persistently speak like a plodding, semi-literate mutton-brain. He could not even work out what was fair to claim for his accommodation.

      • McFlock 5.6.1

        Mistaking a slow rural drawl for stupidity is a common mistake, and one that has resulted in many a surprise comeuppance.

        And, like his mismanagement of the economy, I suspect he could indeed work out what was a fair claim for accommodation, and also knew how much in addition to that he could rort and get away with scot-free.

        I reckon English fancies himself in the running for being the next PM when key gets knifed post-sabin revelations. He might well be able to sneak in between the other cabinet ministers whose incompetence has been a bit more obvious. He only needs it for a few months to do a Mike Moore and get a conservative sinecure to sit in for the remainder of his career.

        Basically, “placeholder pm” is about as high as he’ll get, career-wise.

    • b waghorn 5.7

      He might know more about it but it doesn’t mean he’s got it right ,
      When ever I see English on TV and this goes back to the run up to the election I see a man who ether knows he’s failed or has been over ridden and is just seeing his time out .

    • emergency mike 5.8

      “I believe that Bill English knows more about economics than Bryan Gould”

      Well this fizzy assurance certainly trumps any word thingies from Gould. Why dispute points rationally when you can just disagree on faith? Despite the fact that everything this govt has ever touched has turned to shit. They did crush that wrong car pretty good though.

    • Andrea 5.9

      fisiani: Your faith does you credit but it won’t get you credit…

      Mr English may know a little more – yet it is clearly insufficient for the purpose of restoring enough belief in his fellow New Zealanders to get their hands out of their pockets, clutching money, to expand enterprise and paid employment in this country.

    • logie97 5.10

      … Bryan Gould, the Rhodes Scholar and former deputy leader of the British Labour Party? Remind us what English’s pedigree is again Fisiani.

      • Draco T Bastard 5.10.1

        He’s from a farm in Southland, got raised by a private school in Wellington and has rorted the NZ taxpayers.

      • David H 5.10.2

        “He completed a Bachelor of Commerce degree at Otago University, followed by a Bachelor of Arts (Hons) in English Literature at Victoria University in Wellington”


        And he’s in charge of the country’s finances. More like Key tells him what to do And Key is even less skilled.

        He later studied accounting at the University of Canterbury, from which he graduated with a degree in commerce in 1983,


        All i can think of after looking that up is FFS incompetents everywhere.

    • Is that you Bill ?

  6. Brian Smith 6

    @fisianus- I believe that you believe anything that Bill English (or John Key) says. Moron!

  7. Lanthanide 7

    My only real question is – what is this supposed day of reckoning going to look like?

    Imagine a future which is business as usual, say the current conditions carry on more or less for 50 years. Will the day of reckoning come in those 50 years, and what will it look like?

    Now, lets face reality, where the world is likely to face oil shortages within 5 years and almost certainly within 10. Then throw in climate change and associated food shortages for good measure. Lets not even include a pandemic.

    Is our bad balance of payments history going to come back to haunt us in such a future? I’m not sure that it will.

    • Weepus beard 7.1

      And I’m not sure what you are talking about.

      Are you saying western civilised structure is going to collapse in the next 10 years and all government debt will be wiped?

      • Lanthanide 7.1.1

        It’s going to look very different in 10 years, but probably not collapsed completely.

        I suspect that pretty much all countries will be in recession / downwards spiral, so historical accounting won’t mean a lot.

        • Sacha

          When the global economy collapses, historic genuine willingness and ability to repay debt will count for an awful lot. Joyce, Key and English’s con game will be over. Good luck paying for those oil imports with a smile and a golf handicap.

          • Lanthanide

            Oil won’t be traded on the open market, instead trades will be done between countries.

            New Zealand grows more food than it needs to eat…

        • b waghorn

          Please excuse my financial illiteracy but what would happen if a govt just decided to cancel there foreign dedt obligations

  8. Weepus beard 8

    The enduring image I have of Bill English is the televised message he gave explaining to the nation that he’d just paid some hick-town SCF investors 700 million of our money in the dead of the night.

    That was a dark day in our history.

  9. Herodotus 9

    One day NZ will face the consequence of these continual current account deficits.
    Over the last few years the consequence of the cross rate on the nz$ Or interest rates has been reported from the position of winners losers. Such reporting is so short term. In the end 99.9% of kiwis will be losers.
    IMO very few realise what we face, perhaps it is better to be oblivious to it 🙂

  10. Reddelusion 10

    Bryan Gould is a lawyer I had a 33pc chance of guessing that with Bryan been an ex labour mp ( he could have been a teacher or a trade union offical) thus he has no claim to been and expert on economics over bill English. Bryan played a part in some pretty average labour governments in the uk in regard to economic performance thus hardly and oracle on these matters. Bill English in turn is an accountant so he can count ( unlike much of labour) and has led nz though the gfc and chc earthquake, achieved one of the highest growth rates in the oecd, with falling unemployment. I know who I would back and thankfully so did the nz electorates

  11. Nic the NZer 11

    While Brian Gould’s analysis of the government deficit is quite correct, concern about the current account deficit should largely be understood on the same basis.

    The fact that NZ records a current account deficit means that (in excess of our exports on the reverse basis) some overseas enterprise has traded their goods and services for NZ$ and retained those $ saved overseas. It provides no particular concern, or threat to NZ, that people overseas might be willing to trade their produce for our NZ$ and then hold onto them. At some point they might want to use them to buy goods and services from NZ, which will reduce the trade deficit, or might lead to a trade surplus.

    It should also be noted that the ‘borrowing’ NZ does from overseas is simply the by product of the fact people are holding funds overseas. This is like how the bank borrows funds off someone when they deposit them.

  12. Stuart Munro 12

    A seventh consecutive deficit is important because it demonstrates Bill English’s gross incompetence unequivocally.

    Six consecutive deficits apparently might be mistaken for bad luck – but seven is a confirmed statistical trend.

    English will NEVER get the books back to black – not even by the bizarrely selective criteria he pretends are meaningful.

    • Nic the NZer 12.1

      I am afraid English and co are far, far too bright for you. The goal of getting the books back in the black is, as Brian Gould says, entirely a political point scoring game it doesn’t have significant consequences for the country in and of itself. Never the less they managed to have this as the only economic game in town, so they can justify all kinds of cuts to the public sector, and sales of assets to bolster government books all in the name of political point scoring contest. And you just keep on asking and demanding it, where’s the surplus you promised, keep on going we want to see the surplus promised, it’s pathetic.

      • Stuart Munro 12.1.1

        Compliments already 🙂 – no, neo-con’s capacity for self delusion seems to be practically infinite – and it is important to remind them and less educated readers that they are not achieving their supposed goals.

        Yes, I want English to produce his promised surplus, but more importantly, journalists need to start asking him “If you’re such an economic rockstar, where the f**k is this surplus you’ve been promising?”

        Until they do Bill gets a free pass with the media. Seems he gets a free pass with you too…

        • b waghorn

          Key was on tv1 this morning burbling some shit about how realistically we only missed surplus by $5 if you compare it to Aussie s debt problems and it was all caused by labours unfunded programme’s any way.

          • Stuart Munro

            Yeah – he lies too easily – and economics actually is fairly important. His government has done nothing sensible, and the world economy is stalled in spite of massive middle eastern subsidies in the form of cheap oil and extra low interest rates. The next big piece of world economic news will be bad because no-one is generating healthy real growth – limits upside potential. If a real crisis develops NZ’s foreign lenders will be gone faster than you can say knife.

            • Draco T Bastard

              The next big piece of world economic news will be bad because no-one is generating healthy real growth

              That might be because a) there’s no such thing and b) we’ve hit physical limits to growth.

              • Stuart Munro

                I can’t agree – there will always be growth in some sectors as it is an expression of change.

                Under Key we’ve had growth in bankruptcy and corruption for example.

                Real measures to improve local economic performance, and a move away from non-contributing sectors like finance, gambling, and real estate would result in growth. We have abundant underemployment in New Zealand even a 1-2% improvement in that area would dwarf Bill English’s much touted air-guitar act.

                There is always a way to improve.

                • Draco T Bastard

                  IMO, the problem is partially, or even mostly, the use of the word ‘growth’. It has the implication of getting bigger and so growth in the economy is measured measured as GDP getting bigger and making more of the same is seen as good.

                  What we really need to do is development, where we, as productivity increases, produce different stuff.

        • Nic the NZer

          “Yes, I want English to produce his promised surplus”

          The cutting of government spending in an attempt to achieve surplus is a major causal factor in many of the economic problems NZ faces. These include but are not limited to,
          * Low levels of funding for public sector programs (education, health care, public transport infrastructure).
          * Income inequality (and low paying jobs, with poor rewards).
          * High levels of personal indebtedness (and of course low levels of personal savings, including retirement savings).
          * High levels of unemployment.
          * High house prices.
          Why on earth do you still want him to contribute to these problems?

          “and it is important to remind them and less educated readers that they are not achieving their supposed goals.”

          No, its important to explain to the less educated readers that their goals are destructive, on their own terms.

          “Seems he gets a free pass with you too…”

          Yep, accusing the finance minister of causing harm to the economy in order to engage in political point scoring, that’s obviously what we call a free pass.

          • Stuart Munro

            My object is not point scoring but removal.

            We’ve seen he doesn’t have a clue. A seven year record of non-performance is something the public can understand. Was Cullen a better finance minister? I’m inclined to think that he was, and that running surpluses did not invalidate his performance.

        • Draco T Bastard

          Want to know what would be a better question Blinglish and Key? Where’s the 170, 000 jobs that they promised?

  13. ropata 13

    Thank goodness we have luminaries like fisiani and re-delusional to provide informed academic critiques. :eyeroll:
    We need better tr0lls

  14. tricledrown 14

    Fishy and Blue Looney Double Dipper has had the luck of the Irish with record prices for Dairy a CH CH rebuild causing an immigration boom.
    Dairy prices are falling rapidly the property bubble is going to burst .
    Then double dipstick will be exposed.

  15. MrSmith 15

    Very good Brian.

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