By Bernard Hickey*
Opinion – New Zealand previously made the wrong call for a generation by being too restrictive with its debt limit – now it risks doing the same thing again.
After 30 years of living in a fiscal straitjacket that has reduced infrastructure spending to a $104 billion deficit, Labor Finance and Infrastructure Minister Grant Robertson is finally releasing some shackles so that the governments of the two releases can begin to catch up in the longer term.
The big question is whether Robertson’s new net public debt ceiling of 30% of GDP, which is effectively 30 percentage points higher than the old restrictive ceiling, is sufficient both to close the deficit and to deal with another 30 years of population growth in a way that improves housing affordability and reduces climate emissions.
In my opinion, the 30% of GDP limit is not high enough to achieve what is needed and there is no good reason why it could not be lifted. There is also the problem of whether politicians would choose to use it if they had it. Robertson chooses in the 2022 budget to no longer use this leeway to invest, because he fears adding fuel to the fire of inflation, as do several voters, opposition MPs and the governor of the Reserve Bank, Adrian Orr. The opposition has not yet accepted the new limit, but is making as much noise as possible for not wanting to use this budgetary margin.
In short, a higher public debt ceiling allows today’s politicians to use the government’s balance sheet to prepay for expensive infrastructure, then spread it out over decades so that the many generations who use it pay for it over these decades. The problem is that there are often short-term costs that today’s voters and asset owners don’t want to pay today, and those who would benefit in the long term don’t vote today. or have not even been conceived yet. And zygotes don’t vote either.
So how did we get here and what could happen next?
It’s all about choices, balances and deadlines
Politicians who run governments must make choices every day that they hope will improve the lot of most voters in the short and long term, and get them re-elected in the short term at least. The goal is to balance winners against losers in a way that makes re-election more likely. The holy grail is to make choices that create both short-term and long-term winning streaks.
Unfortunately, short-term winners and losers can become long-term losers and winners, respectively, but it is the collective pain and joy of the short-term winners and losers that usually decide who the political winners and losers are. for all time. Perverse incentives and outcomes abound from these policy choices and timeframes over which gains and losses are played out. A decision that inflicts pain on a group of voters in the short term may actually be better for them and everyone else in the long term. Or vice versa. Often there is a balance to be struck.
This framing of every policy decision around “finding a balance” is a clever way to end the complaining of losers and give the impression of neutrality separate from the settling of scores and the vested interests of party politics.
It’s a favorite tactic of Robertson, who is deputy premier as well as managing the budget and directing infrastructure spending. In his speech today, the word “balance” came up four times in his arguments for a higher debt limit and why he didn’t want to use it yet.
There are many balances to be found in creating and then working within this framework of debt ceiling and budget surplus rule, including:
First, the risk that overspending by the government in too short a time will excessively stimulate inflation and thus push interest rates higher than they otherwise would be;
Second, there is a risk that short-term underinvestment will create long-term costs and liabilities, as decisions not to invest in more housing infrastructure now result in higher housing costs, transport, health, education, justice and carbon in the long term;
Third, the risk that choosing to invest in public assets that create services for all in the long term comes at the expense of lowering taxes in the short term that helps some more than others; and,
Fourth, there is the risk that setting the debt ceiling too high will drive interest rates so high that they suffocate the life of the rest of the economy and force debt to a tipping point, which means service costs keep rising.
The real question to be answered is therefore: what is the right balance to be found with this new debt ceiling rule? It must be low enough to avoid spiraling interest rates. It must be high enough to allow investments in infrastructure that create a positive spiral of increased productivity, real wages, taxes and, ultimately, well-being.
The Treasury has recommended a cap on Crown net debt of 30% of GDP by a measure that is more broadly comparable to other countries. According to the latest IMF forecast (and not far off from the Treasury in the May 19 budget), New Zealand’s net debt is expected to peak at 21.3% of GDP next year, then fall back to 16.4%. % in 2027.
New Zealand’s peak will be half of Australia’s, one-third of Britain’s peak and one-fifth of America’s peak. We share the same AAA credit rating of these borrowers, but they are bigger so they can “get away with” more debt before it becomes a problem. But are we so much smaller, weaker and more vulnerable that we need an additional “buffer” of 30-40% of GDP.
The judgment calls the balances
Ultimately, it’s a judgment call on bond market sentiment, the political will of any government to cut spending or raise taxes to return to surplus and reduce debt, and at what speed our economy could grow.
The Treasury has recommended that Aotearoa-NZ can manage 90%, but it would be prudent to have a buffer of 40% to 50% (equivalent to 30% under the new definition).
Wrapped in this judgment or assessment of the right “balance”, there is an unknowable but very real risk: sacrificing the well-being of future generations by not investing enough. Even the Treasury recognizes this risk in its advice to Robertson:
“There are other costs associated with limiting spending, such as the lost opportunity to increase an economy’s productive capacity or improve living standards,” the Treasury wrote.
The problem is that these unknowable future generations have no ability to influence the balances established by politicians. Instead, they must hope that politicians have imagination and enough of a pay-it-pay-it approach to overcome the short-term demands of getting elected.
New Zealand made the wrong choice for a generation by being too restrictive with its debt limit. It risks doing the same thing again, given the opinion of the Infrastructure Commission that the existing deficit and future infrastructure needs will require more than $200 billion in investment over the next 30 years, which is more close to 60% of GDP than 30%.
Once again, young people who do not vote and those who have not yet been born have the short straw in all these political decisions on the “balances to be found” to be re-elected.
* Bernard Hickey’s public interest journalism is supported by thousands of individual subscribers to The Kaka, which is his subscription email newsletter and podcast.