National’s new Finance Spokesperson Amy Adams has wasted no time in getting stuck into the Government, picking-up and running with her predecessor’s “fiscal hole” baton.
Speaking to Interest.co.nz, Adams lambasts the Government for its lack of fiscal headroom and policies she says will increase Crown debt.
Although she wouldn’t give a number, such as former Finance Spokesman Steven Joyce’s $11.7 billion, Adams is adamant the Government does have a “significant” fiscal hole.
“What we have always said is that everything that Labour is promising, they cannot continue to front that along with the costs of running Government.”
She says the Government will not be able to cope with ongoing and additional costs, such as pay increases for teachers and nurses as well as inflation and demographic pressures, as well as paying for its big-ticket policy spends, such as free tertiary education and KiwiBuild.
“We have always said that they could not, with everything Labour has talked about, run government well with the numbers they have put out.
“It is for them now to show us how that is going to work.”
Grant Robertson has spent much of his tenure as Minister of Finance defending his Government’s books from allegations of a fiscal hole. When Joyce made the claim last year, Robertson was backed up by several leading economists.
He argued much of the so-called hole was already accounted for in allowances in health and education.
Expect more debt, Adams says
Before the election, Labour promised to keep Government spending at roughly 30% of GDP and to bring net debt down to 20% of GDP by 2021/22.
“I don’t have any confidence that it will get down to the level they have set, given the way they have started.”
Adams says the cost of the policies the Government has announced already, in addition to further initiatives such as light rail expansion in Auckland, will add billions more dollars to New Zealand’s debt levels.
In November last year, then ANZ chief economist Cameron Bagrie forecasted the policy initiatives would mean Crown debt, as a percentage of GDP, would be sitting at 23% by 2022 – 3% higher than what Labour promised.
On Wednesday, the Government’s financial statements showed net debt at the moment is a shade over $60 billion.
Adams says if debt is not reduced now when the economy is doing well – noting that National wanted to reduce debt to 10-15% of GDP by 2025 if it had won the election – it puts New Zealand in serious risk for future economic shocks.
“One thing New Zealand had learned is when you go through something like the GFC and the Canterbury earthquakes, it’s so imperative we have that debt headroom to go out and borrow what we needed to do to get through those shocks.”
Lower levels of sovereign debt mean a country is a better credit risk and its cost of debt is lower than it would be if it had higher public debt.
Despite Adams’ criticism, figures from Treasury gave Robertson’s plan to reduce net Crown debt to 20% of GDP in five years’ time the seal of approval.
Its numbers in the Half Yearly Economic and Fiscal Update (HYEFU), suggest net debt will fall to 19.3% by 2022.
47 Comments
The article is incorrect, economists say the numbers add up, which they do. However Joyce was correct in that Labor used incorrect accounting methodologies where the operating allowance was not cumulative. They excused this by saying that some of it is included in health and education. However if that is so then they have included inflation and wage rises in health and education but not in the other two dozen categories, which of course is nonsense.
The numbers add up, but they dont make any sense.
Labour's projections also required GDP growth rates >4% over their term, something that has to my knowledge only been achieved once since 1960's. Anyone want to bet that that is going to happen?
Labours numbers were/are garbage, and it is to the media's shame that they were so partisan that they didn't call them on it.
First thing this has been tried before and political parties seemed to have wizened up to such claims being thrown at them. So before jumping to conclusions maybe do some checking yourself? its known as Google and "growth projections nz treasury" as the look up term.
Everyone blames Treasury....I think they are only kept as wipping boys myself.
"Nominal GDP growth averages 5.1% per year over the forecast, with the level of nominal GDP a cumulative $23.9 billion higher than in the Half Year Update in the five years to June 2021, in part reflecting a higher starting point."
http://www.treasury.govt.nz/budget/forecasts
I think its laughable as I am sure you do, if for different reasons. However Labour can blame someone else by the look of it.
When I was young, I did the debt fuelled consumption thing and constantly sought pay increases to keep my head above water. Then I wised up, lived with in my means and became financially disciplined. The left is no different to my young self, except the scary part is that their income is potentially unlimited because they can increase taxes, and I expect almost certainly will, stealing from my children’s future to pay the electoral bribes of today. I hope Adams holds Taxinda to account at every step.
Well she has to start somewhere on something doesn’t she. We need a strong opposition in parliament. Labour did not provide that, far from it, over the last nine years. That allowed National too much latitude, far too much. As Winston offered, it has to be more than barking at cars. At first glance, not sure that this, let’s say new look, National lot have got the ticker either.
What did Jerry Brownlee know about the intimation tactics, and Steve Joyce?, re Southern Response.
National should be a strong Opposition. Any opposition ought to be. But this is going the other way for the time being. Labour is the one who has to open up the files and let the punters know exactly what the hell The Minister of Black Ops et al have been "up to".
It may mean they (public servants) would have to up their games, and do some heavy lifting, to get the government's policies inplemented? that would/will be hard work! Maybe some resisitance there!
That's not something they will have experienced or needed to do over past 9 years of cut, cut, cut,... do nothing.
Where to start with the public debt hysteria from both major parties!
1. NZ can never default on public debt in its own currency. Unless it runs out of computers with Excel on them and keyboards. It costs nothing to create NZ dollars other than printing them or typing them into a spreadsheet. Don't believe me, what was QE then?
2. There is no truth to the assertion that a low public debt ratio means a better real economy. Nigeria has a public debt to gdp of 18%, Russia 12.6%. Japan has a public debt of 250% of gdp. Now I know which country I'd prefer to live in for a decent standard of living. It is just an accounting artifact (the sum of cumulative government deficits) not a determinant of real economic performance.
3. Despite the protestations of the ratings agencies, low government debt does not determine interest rates the government pays on its debt in a nation with a sovereign currency. If you don't believe that look at 10 year Japanese bonds - public debt of 250% of gdp, bond yield 0.05% last I looked. Nigeria and Russia on the other hand with their lovely low public debt (what economic paradises they must be) pay 13% and 7%. New Zealand's public debt (24%) is much lower than the UK's (89%) but we pay 3% on 10 year bonds, whereas in the UK it is 1.5%.
4. Running continuous government surpluses in deflationary conditions with high underemployment, low aggregate demand, low investment and stagnant wages is madness. The only way to keep the (mediocre) growth show on the road is through ever increasing private debt (given a current account deficit). And households, unlike governments, are indeed households. They can default.
6. Surpluses suck money out of the economy. Which may be a good thing in times of high inflation and full employment. But right now it's like blood-letting. Leeching away the life-force of the real economy - a medicine that slowly kills the patient. And we see it in the miserable living standard of a large chunk of the NZ populace.
7. If there was another natural disaster tomorrow, the NZ government can fund any spending it needs to do without selling debt. Once again you say "oh but that is what banana republics do" - well it's essentially what Japan is doing right now to fund its deficits - with very low inflation please note.
8. We have a disaster right now! We have massive child poverty - working families who can't afford to feed, clothe and house their kids. It's time to learn to love the deficit. It's a functional thing the deficit, offsetting the current account deficit and the private sector's desire to save. It's either that, or facing down the pitchforks. Smart capitalists will choose the former.
I read this on r/economics, talking about trade deficits and particularly comparing small countries to the US. It seemed to make sense.
For a smaller country without a prominent currency, a trade deficit/GDP ratio the magnitude of the US’s could be catastrophic.
When a country runs a trade deficit, it gets a capital surplus - it will become a net borrower.
Because USD has so much strength around the world, this gives the US a few key advantages:
1) It can borrow at low rates because USD denominated assets are in high demand.
2) It can borrow in its own currency, meaning if worse comes to worse it can devalue it’s currency to pay back debt. It does not have to deplete foreign reserves.
Compared with a smaller country:
1) A capital surplus (lots of funds coming your way) is a good thing if you can conceivably pay it all back. If you can’t borrow at low rates like the US can, you’ll likely have to cut spending in other areas. This can slow down your economy and make it even harder to pay down debt — a so called debt spiral.
2) If you can’t borrow in your own currency then you’re dealing with exchange rate risk. So say you borrow in dollars and suddenly the dollar appreciates against your currency — your debt just got bigger. Not to mention, smaller countries who don’t have major currencies tend to peg their exchange rate to the dollar (or the Euro) so imports have stable prices. So a lot of the time these smaller countries will, as in the first point, cut spending in order to buy dollars, as well as buying their own currency back to keep it from depreciating.
So the question over whether deficits are bad are good isn’t a good question, it’s more a question of how well provisioned is the country to take on a deficit of various sizes.
That’s the international finance theory behind it anyway, there are also effects on labor markets -there’s potential negative effects for running a trade surplus as well. China is actually trying to shrink its surplus as its finding employment in its economy incredibly dependent on foreign demand.
Trade balances are a reciprocal relationship and the forces at play tend to even out in the long run given ample sustainability. A trade deficit will weaken a country’s currency but that makes its goods more competitive in international trade - inversely trade surpluses strengthen currency but make goods less competitive.
China and Germany are in a unique position regarding exchange rates but that’s a whole other discussion.
Surpluses suck money out of the economy. Which may be a good thing in times of high inflation and full employment. But right now it's like blood-letting. Leeching away the life-force of the real economy - a medicine that slowly kills the patient
I'd go further and call it immoral. You can't run a country like a business, especially when all the perks/profits get devolved to a tiny percentage of the population. Nineteenth century European history is really instructive on this point!
Your points one by one cs:
1. We can print money so don't have to worry about debt - this causes inflation which harms the economy and most people in it
2. Level of debt doesn't affect economic performance - try reading "This time it's different" by Reinhart and Rogoff. High levels of debt act as a drag on GDP and very high levels of debt causes country-level crises that can last very long periods of time
3. Levels of debt don't affect interest rates - yes they do. The more risk, the more return lenders ask for. Japan's case which you cite is because the debt is from domestic savers, which is not going to be the case in NZ as we have to borrow mostly from offshore.
4. Agree running surpluses with high under employment, low aggregate demand etc...is madness.
6. Surpluses suck money out of the economy - if they are given back as tax cuts or reinvested back in the economy medium to long-term they don't suck money out and can be a far better use of the money
7. We can print money to get over emergencies - see 1. above.
8. We need deficits now to fund things like child poverty reduction, working families without enough to feed or house themselves - I would argue we need to deflate the housing bubble. Housing is the single biggest cost in most people's household budgets (see Stats NZ household spending surveys). If we reduce housing costs, these people will have a lot more money in their pockets. Adding more benefits through deficits e.g. increasing accommodation supplements, only increases house prices further.
1. Overt monetary finance 'could' cause inflation - but not in conditions of high under-utilised capacity and high unemployment/underemployment. In those conditions more spending/money=higher demand= more output, not higher prices. Hyperinflation is caused by printing money when you have decimated supply side of your economy. See Zimbabwe. Now think Japan. Overt monetary finance - no inflation. In fact deflation mostly.
2. Reinhart and Rogoff's work has been thoroughly discredited - by a graduate student trying to replicate their data and finding numerous spreadsheet errors and statistical anomalies. They are a laughing stock on that research. Have you not read about it? There use of NZ statistics giving a high weight to 1951 (waterfront strike) in particular featured heavily in the critique funnily enough. It is quite a beautiful story of hubris being called out. Enjoy!
http://www.bbc.com/news/magazine-22223190
3. What about US debt? Low yields. Lots of offshore borrowers. As long as its in your own currency it doesn't matter whether it's the domestic or foreign sector parking its cash in your bonds.. But hell, do away with the debt. It is corporate welfare. The reserve bank can buy any debt that the primary dealers don't want. Or just do away with the accounting facade all together.
4. Yay we agree.
5. Surpluses aren't surpluses if they are spent back into the economy. See definition of a surplus G
Good comeback cs.
1. You're talking a mix of fiscal policy (higher spending) and monetary policy (money printing). Yes you want to spend more, fiscal, if underemployment etc..Money printing always leads to higher inflation. In the case of Japan, look at bond prices and equity prices, where printed money has landed. They're through the roof. Same with USA, as QE went into asset markets and it drove the asset prices to crazy levels. If printed money went to everyone, then you'd have CPI inflation.
2. Reinhart and Rogoffs work - this is a quote from the link you sent me. "They find that high levels of debt are still correlated with lower growth". Surely if you have higher debt and associated interest costs it will be a drag on future growth, as you have to pay off previous debt with future earnings.
3. US debt - low interest rates and offshore borrowing. This is the worlds reserve currency. Will have a different demand, risk/return formula than a small country like NZ
etc...
1. I am not talking monetary policy at all. I want fiscal policy. Government needs to spend directly - purchase school meals, pay teachers more, employ the underemployed, provide better services, build houses. That gets demand going. QE - buying bonds and giving reserves to banks and financial institutions will just raise asset prices without helping the real economy. Demand and the prospect of sales gets businesses investing however. Not increases in bank reserves or low interest rates. Whether the government 'funds' the spending via debt issuance or not is irrelevant. Debt issuance gives a nice risk free return to financial institutions. It's the spending that gets things going. Not the printing of money per se. That's why QE did so little.
2. Reinhart and Rogoff - the relationship between debt and growth is indeterminate. Remember correlation does not equal causation. You can have high public debt due to low growth causing the auto stabilisers to kick in (benefits - cyclical deficit etc). The causality is reversed. Expansionary fiscal contraction is not a reality. Quite the reverse. Even the IMF admit as much now. Surpluses can contract economy and increase deficits. Look at the medicine as it has been applied in Greece. Huge surpluses and debt repayment - nothing but misery.(remember Greece can't print euros). Expansionary fiscal contraction does cause some things though - Trump, Brexit, Movimento 5 Stelle and Lega Nord. Capitalists take note.
3. NZ does not need to issue debt to overseas holders of our currency to deficit spend. It can choose to as it does now. But it doesn't have to. Deficit spending via overt monetary finance may cause the exchange rate to lower. Which would have positive and negative effects.Whether or not we get hyperinflation depends on the productive capacity/employment level of the economy and not overdoing it! Note former Governor of bank of England, Adair Turner is pro overt monetary finance. It's no longer a radical idea. You see monetary policy doesn't work. Mostly deflation is today's problem. Not inflation. The 70s are over.
Now I must do some work! Good debate.
5. Surpluses aren't surpluses if they are spent back into the economy. See definition of a surplus G is less than T. Surpluses by definition are taxing out more than you put back my friend.
9. We do need to deflate housing bubble - via appropriate tax treatment of housing. Agreed. But we also need to increase wages to raise incomes to make debt burden smaller. And we do that by creating genuine full employment and increasing demand. Which won't happen if the surpluses are sucking the money away.
Good stuff CS. However, remember about Japan and its public debt: Japan is a creditor, not a debtor. Furthermore, public debt to GDP is large, but private debt is non-existent (relatively speaking). Finally, the country's industrial output and capacity ensures it can do what it does.
Japan has undergone debt deflation since 1990. Japanese businesses and householders massively paid down debt. The government's ongoing deficits have accommodated this desire to save and basically kept the show on the road. Without those deficits - whenever they tried spending cuts and austerity and tax increases, the economy shrunk. They've learnt the hard way that it is best to run a deficit. A functional deficit. Or, should we say "continual fiscal expansion". Yes they do run a current account surplus. But the whole world can't do that. And the answer is not internal devaluation through squeezing wages to make us competitive. Run fiscal policy to create full employment and let the floating exchange rate take care of trade imbalances.
Enough with the amateur accounting, chaps and chapesses. Let's just wait for the May budget, which I can guaranteee is causing long days, missed weekends, pursed lips and frowns right across Gubmint Dept C-class execs, right about now, as they finalise things.
I surveyed the unfunded promises here back in 2017, and there's been a few Gaia moments since then to fund.
The tertiary education intake will barely have settled by end of March, and that's a cool quarter of a billion for starters.
Possess thy souls in patience until then, because until that Budget document lands in the House, all is blather and gossip.
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