Finance Minister Grant Robertson denies a higher debt position has become entrenched. Photo / Samuel Rillstone, RNZ
Covid-19 is making fewer headlines, but it’s still causing headaches for the Government.
The Government borrowed a seismic amount for the health and economic response to the pandemic.
The problem is the country can’t afford
to repay this debt. So, the Treasury is rolling it over, all the while issuing new debt to pay for new demands on the public purse.
Finance Minister Grant Robertson denies a higher debt position has become entrenched.
Speaking to the Herald, he also said you can’t click your fingers and slash spending quickly.
“I believe that the impact of that on New Zealanders would undo a lot of the good we did. So, we have to do this in a balanced way.”
But has Robertson struck the right balance, and what are the effects of the Government owing increasingly large sums of money to investors here and aboard?
The value of Government bonds and Treasury bills on issue hit $106 billion in the 11 months to May, according to the latest available set of accounts. This was 75 per cent more than in May 2019 – pre-Covid.
The uptick in bond issuance contributed towards core Crown borrowings more than doubling between 2019 and 2023 to $194b.
Another major contributor to this increase stems from the Reserve Bank’s “money printing” or Large-Scale Asset Purchase (LSAP) programme, which saw banks’ settlement accounts at the Reserve Bank balloon seven-fold between 2019 and 2023 to $49b.
All up, core Crown borrowings has been rising every year, from 32 per cent of gross domestic product (GDP) in May 2019 to 50 per cent in May 2023.
Interest costs match law and order expenditure
The provision of a lot of stimulus at a time when the movement of people and goods around the world was constrained helped create inflation around the world.
Central banks are trying to curb this inflation by hiking interest rates. The cost of servicing an enlarged bundle of government debt has soared accordingly.
Core Crown finance costs hit $5.9b in May – a similar sum to what is spent on law and order (Police, Corrections, Justice, Customs, etc) in a year.
“Yes, debt servicing costs are much higher than they were… [but] we did need to borrow that money,” Robertson said.
While interest rates fluctuate as economic conditions change, ANZ senior economist Miles Workman feared there was a risk the world was in an era of higher inflation and therefore higher interest rates.
He pointed to the rise of trade protectionism and geopolitical tensions, as well as climate change, which creates productivity shocks, and questioned whether governments would have to make more trade-offs on how they spent money if servicing debt remained costly.
Robertson noted that while credit rating agencies are worried about the fact New Zealand imports a lot more than it exports, they’re comfortable with the country’s debt-to-GDP profile.
No such thing as a free lunch
How well placed would New Zealand be, should it face another crisis this soon after Cyclone Gabrielle and the onset of Covid?
“The underlying fundamentals of the New Zealand economy are strong,” Robertson assured.
“We have a pathway to surplus within the Government’s books.”
But with the Crown’s tax take undershooting the Treasury’s expectations, Workman said there was a risk the books wouldn’t get back to surplus by 2026 as forecast.
Does this really matter? There is an acute need for investment in a range of public goods and services.
Association of Salaried Medical Specialists executive director Sarah Dalton was unequivocal – those in the health sector need to be paid more to prevent them from flocking to Australia, and more investment is needed in primary and preventative healthcare.
“Grant Robertson is trying to win the international gold medal for careful fiscal management,” she said.
“The cost of that to ordinary New Zealanders is pretty high. I don’t think that’s supposed to be the beating heart of a Labour government.”
Workman appreciated there were various demands on the public purse, but believed it was vital the books balanced, and the economy operated at equilibrium.
His view was that there had been a shift over the past decade towards policymakers focusing more on multiple aspects of government activity at the expense of getting the macroeconomic settings right.
“That’s almost a luxury,” he said.
“Macro must come first. Once you’ve locked that down, you can focus on more nuance.”
Are we getting bang for buck?
Another key question in the debt debate is, are we getting value for money?
Infrastructure New Zealand chief executive Nick Leggett believed not.
Despite all the talk about the need to establish a solid pipeline of infrastructure projects and build the workforce accordingly, Leggett said the sector still had a “stop-start nature”.
As for the funding of infrastructure, Leggett believed the Government’s balance sheet wasn’t big enough to do it all.
He wanted to see more public-private partnerships, road pricing and value capture – charging landowners who benefit from growth brought about by infrastructure investment.
In the health space, Dalton believed it was still early days in terms of seeing the effects of reforms undertaken by the Government.
As for the Government’s investment in mental health: “We just can’t see it.”
More generally speaking, Dalton made the point there were economic costs to underinvestment in health that weren’t being counted.
Growing and taxing our way out of debt
A way to get on top of debt without cutting expenditure is to grow the economy.
With milk powder, butter and cheese driving the 10.7 per cent increase in New Zealand exports in the year to March, Robertson recognised the primary sector continued to be important.
But he said New Zealand had to decarbonise.
The Government recently committed to investing up to $90 million in helping Fonterra cut its coal use.
Robertson said it was also important to use technology to add value within established sectors – food and beverage, forestry, fisheries, as well as newer areas – advanced manufacturing and gaming.
“Our economic plan is higher wages, lower emissions – and the two can go together.”
Inflation can also reduce government debt. As wages and the cost of goods and services rise, people end up paying more tax.
National is campaigning on adjusting income tax brackets for inflation, which would lower individuals’ tax bills.
“I understand the allure of it in the moment,” Robertson said.
“But actually, it would be very bad for New Zealand if public services are funded less as a result of giving those tax cuts.”
Labour is yet to release its tax policy.
Prime Minister Chris Hipkins poured cold water on a package put together by Robertson and former Revenue Minister David Parker, which would’ve cut income tax and introduced a wealth tax for the very wealthy.
Nation of debt
Monday: How much more do Kiwis owe?
Thursday: Government debt
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.