By Bernard Hickey*
Opinion - New Zealand has previously made the wrong call for a generation by being too restrictive with its debt limit - now it risks doing the same again.
Photo: Unsplash / Thomas Coker
After 30 years of living in a budgetary straitjacket that squeezed infrastructure spending down into a $104 billion deficit, Labour's Finance and Infrastructure Minister Grant Robertson is finally releasing a few of the shackles so governments of both flavours can start catching up in the longer term.
The bigger question is whether Robertson's new net public debt ceiling of 30 percent of GDP, which is effectively 30 percentage points higher than that restrictive older one, is enough to both fill the deficit and deal with another 30 years of population growth in a way that improves housing affordability and reduces climate emissions.
My view is the 30 percent of GDP limit is not nearly high enough to achieve what's needed and there are no good reasons why it couldn't be lifted. There's also the problem of whether politicians would choose to use it if they had it. Robertson is choosing in Budget 2022 not to use any more of that headroom for investment because he is worried about adding fuel to the inflation fire, as are more than a few voters, Opposition MPs and Reserve Bank Governor Adrian Orr. The Opposition have yet to agree to the new limit, but are making as many noises as they can about not wanting to use that fiscal headroom.
In short, a higher public debt ceiling allows today's politicians to use the Government's balance sheet to pay for expensive infrastructure up front and then smear it out over decades so the many generations that use it pay for it over those decades. The trouble is there are often short run costs that today's voters and asset owners don't want to pay today, and those who would benefit in the long run either don't vote today or haven't even been conceived yet. And zygotes don't get to vote either.
So how did we get here, and what might happen next?
It's all about choices, balances and time-frames
Politicians running governments have to make choices every day that they hope will make most voters better off in the short and long runs, and will get them re-elected in the short run at least. The aim is to balance the winners off against the losers in ways that make re-election more likely. The holy grail is to make choices that create two sets of winners in both the short run and long run.
Sadly, the winners and losers in the short run can flip to being losers and winners in the long run respectively, but it is the collective pain and joy of the winners and losers in the short term that usually decide who are the political winners and losers for all time. Perverse incentives and results abound from these political choices and the timeframes over which the winning and losing plays out. A decision that imposes pain on one group of voters in the short run may actually be better for them and everyone else in the long run. Or vice versa. Often, there is a balance to be struck.
This framing of every political decision around 'striking a balance' is a clever way to shut down the complaints of the losers, and to give the impression of neutrality divorced from the score-settling and vested interests of party politics.
It is a favourite tactic of Robertson, who is deputy prime minister as well as running the Budget and setting the direction for infrastructure spending. In his speech today, the word 'balance' came up four times in his arguments for the higher debt ceiling and why he didn't want to use it yet.
Finance Minister Grant Robertson giving a pre-budget speech to a business audience in Wellington on 3 May 2022. Photo: RNZ / Angus Dreaver
There are plenty of balances to be struck in creating and then working within this framework of a debt ceiling and a budget surplus rule, including:
Firstly, the risk that over-spending by the government in too short a time might over-stimulate inflation and therefore boost interest rates higher than they otherwise would be;
Secondly, there's a risk that under-investing in the short run creates costs and liabilities in the longer run, such as decisions not to invest in more infrastructure for housing now creates higher housing, transport, health, education, justice and carbon costs in the long run;
Thirdly, the risk that choosing to invest in public assets that create services for all over the long run, come at the expense of lower taxes in the short run that help some more than others; and,
Fourthly, there's the risk that setting a debt ceiling too high might force up interest rates so high that they squeeze the life out of the rest of the economy and force the debt over a tipping point that means the servicing costs spiral ever higher.
The real question to answer therefore is: What is the right balance to strike with this new debt ceiling rule? It has to be low enough as to avoid an interest rates spiral. It has to be high enough to allow investment in infrastructure that creates a positive spiral of rising productivity, real wages, taxes and ultimately, wellbeing.
Treasury recommended a ceiling of net Crown debt of 30 percent of GDP under a measure that is more widely comparable with other countries. As of the latest forecasts from the IMF (and not far off those from Treasury in the May 19 Budget) New Zealand's net debt is due to peak at 21.3 percent of GDP next year, and then fall back to 16.4 percent in 2027.
New Zealand's peak will be half that of Australia's, a third of Britain's peak and a fifth of America's peak. We share the same AAA credit rating of these borrowers, but they are bigger and therefore can 'get away' with higher debt before it becomes a problem. But are we that much smaller, weaker and more vulnerable that we need an extra 'buffer' of 30-40 percent of GDP.
Judgement calls about balances
Ultimately, it is a judgement call about bond market sentiment, the political will of any government to cut spending or increase taxes to get back to surplus and reduce debt, and how fast our economy might grow.
Treasury recommended Aotearoa-NZ could handle 90 percent, but it would be prudent to have a 40 percent buffer back down to 50 percent (which is the same as 30 percent with the new definition).
Wrapped up in that judgement or assessment of the right 'balance' is one unknowable but very real risk: sacrificing the wellbeing of future generations by not investing enough. Even Treasury acknowledges that risk in its advice to Robertson:
"There are other costs of constraining spending, such as the lost opportunity to increase an economy's productive capacity or improve living standards," Treasury wrote.
The problem is those unknowable future generations don't have any ability to influence the balances struck by politicians. Instead, they have to hope the politicians have the imagination and enough of a 'pay it forward' approach to overcome the short-run demands of getting elected.
New Zealand made the wrong call for a generation by being too restrictive with its debt limit. It risks doing the same again, given the Infrastructure Commission's advice that the existing deficit and the future needs for infrastructure would require over $200b of investment over the next 30 years, which is closer to 60 percent of GDP than 30 percent.
Yet again, the non-voting young and the yet-to-be-born are getting the short straw in all these political decisions about 'striking balances' to get re-elected.
* Bernard Hickey's public interest journalism is supported by thousands of individual subscribers to The Kākā, which is his subscription email newsletter and podcast.
