Pressure on Robertson to borrow more to stimulate the economy mounts, as debt gets cheaper, the effectiveness of interest rate cuts diminishes, and credit rating agencies remain happy

By Jenée Tibshraeny

Finance Minister Grant Robertson is under renewed pressure to borrow more to plug New Zealand’s infrastructure deficit, as the cost of borrowing continues to fall.

Government 10-year bond yields dropped to a record-low of 1.72% on March 28, following the Reserve Bank (RBNZ) the previous day changing its tune and announcing the next move of the Official Cash Rate (OCR) would most likely be down. They’ve now bounced back, somewhat, to 2.04% at the time of writing.

The International Monetary Fund’s (IMF) head and Kiwibank’s chief economist are among those who believe loosened monetary policy (central banks cutting interest rates) has done a lot to spur economic growth since the 2008 global financial crisis, and in some economies it’s time for fiscal policy (government spending) to do a bit more.

The credit rating agencies continue to say the Government can take out a lot more debt before its ratings are affected.

But Robertson remains fixated on flying his prudence flag and reducing government debt in line with his budget responsibility rules; Cabinet on Monday signing off on his 2019 budget, to be released on May 30.

He last week largely dodged a question in an RNZ interview about the IMF’s warnings around the effectiveness of cutting interest rates when they’re already at record lows.

“Monetary and fiscal policy do need to support each other,” Robertson said.

The limits of monetary policy

The IMF chief Christine Lagarde earlier in the month said countries that were in fiscal surplus should “certainly make use of it” and invest to grow their economies.

“Not enough has been done on that front,” she said.

The IMF’s Asia Pacific deputy director, Jonathan Ostry, also commented on New Zealand having “considerable policy space” to manage economic risks “both through monetary easing and providing further fiscal stimulus”.

He noted the infrastructure spending boost overseen by the Coalition Government “could come on-stream slower than we hope”.

Kiwibank chief economist, Jarrod Kerr, just over a week ago told interest.co.nz: “Normally when you see interest rates drop this low, governments come out and start building and expanding and taking over the reins and saying; 'Right if we are going to have a healthy, productive, high growing economy, we need to start building some stuff now for 10, 20 years down the track.'

“And we just haven't seen it.

“We're trying in New Zealand, but we haven't done enough. And I think that's the disappointment globally, is that monetary policy has done everything it can and fiscal policy hasn't done much."

In a separate interview, he talked about the diminishing returns delivered by each OCR cut from the low base it’s already at. He believed there was considerable fuel in the tank, but warned each cut would become relatively less effective.

He also questioned the extent to which a lower OCR would address the headwinds, especially around government policy-induced low business confidence, facing the New Zealand economy.

‘Ample room to pursue expansionary fiscal policy’

So how much could the Government borrow before the credit rating agencies start getting nervous?

Standard & Poor’s director of sovereign and international public finance, Anthony Walker, told interest.co.nz net Crown debt could technically increase to 30% of GDP, from where it’s at now at around 20%. But the effect this could have on credit ratings would depend on what else was happening in the economy.

“The debt levels aren’t our concern at the moment. There’s headroom there for them to borrow. It just depends how they do it,” he said.

“If the economy starts to slow, that lowers GDP per capita. That might also hit the Budget at the same time debt starts to rise, because it’s all intertwined."

Walker said there was more upside than downside to New Zealand’s ratings, with there being a one in three chance of an upgrade in the next two years.

Moody’s lead sovereign analyst for New Zealand, Matthew Circosta, said: “The government’s efforts over several years to preserve strong public finances gives the Government ample room to pursue expansionary fiscal policy to buffer the economy from any potential shock that may arise in the future.

“When we look at the fiscal profile of the New Zealand Government, we see very strong public finances and significant fiscal flexibility which provides the Government ample room to pursue expansionary fiscal policy, if required.” (Detail on NZ's sovereign credit ratings is here).

Risk of getting too loose

Looking at the issue from a different perspective, foreign exchange specialist and Barrington Treasury Services chair, Roger Kerr, is concerned about the RBNZ cutting interest rates as the Government spends more.

“It is a very brave (or mis-guided) central bank that would significantly loosen monetary policy at the same time fiscal policy is also very loose to stimulate economic activity, spending and investment,” he wrote in a column for interest.co.nz.

“Only major global economic catastrophes and crisis like the 2009 GFC (when world trade stopped) would justify the dual economic stimuli concurrently.

“We are certainly not in that same situation today with the NZ and global economy…

“The danger of loose/loose monetary and fiscal policies working in tandem is inflation running away as demand exceeds supply across the economy.”

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