Just because you and I need to save more, who says the government needs to do the same? With cheap money around, how about we turn this whole austerity kick on its head and start talking about growth?

It's a lock. Ten out of ten. No room for doubt. Bill English is going to deliver a surplus a surplus in 2014/15 come hell or low tax take. That was the message from the Finance Minister on Q+A.

Well, sort of. There was a slight qualification, that “anything could happen” and “extreme events globally” could cause a “rethink” But at this stage it’s back in the black or bust. Or in English’s words, “the government’s determined to get to surplus”.

It’s a sound message to send to the markets, investors and ratings agencies. Politically, National has staked its credibility on it. Its message to voters is that ‘we are the party you can trust because we know how to balance the books’.

And why not? It's what Britain's doing and just about everyone in Europe is following suit. It's de rigueur. It's all anyone can talk about in the Republican primaries. The world hates debt, and for damned good reasons. Just look at Greece, right?

English talks about New Zealand’s government debt rising from $8 billion before the recession to $50 billion now and rising to $70 billion and how he’s determined to get on top of that. And on their own those figures suggest no other course. To New Zealanders nervous about their own debt levels, that sounds like sense. But is it?

The fact is that we’re borrowing significantly less these days. Last year National talked loudly and a lot about the fact we were borrowing $350 million a week (which actually peaked at $385 million) and it had the desired effect of shocking people into closing their wallets and voting for a government that promised cuts. But that was always a slightly mischievous figure, boosted by one-off costs such as the Christchurch earthquake and Treasury’s desire to borrow while the borrowing was good. But that number stuck in people’s head and many still quote it… even though it’s out of date.

We’re now borrowing about $110 million a week and that’s projected to fall to $20-something million a week next year. And what’s seldom mentioned is that our government debt, while it has gone up under National through the recession, is still low by historic standards. Only 20-odd years ago our government debt as a percentage of GDP was almost double what it is now.

We ain't Greece.

So perhaps government borrowing isn’t quite the terror we’ve been led to believe. What’s more, it’s never been cheaper for the government to borrow money. Although we’ve come up from the all-time low of 3.75% in December, the government can borrow money – by issuing bonds – at  4%. That’s real cheap. Which is why it’s interesting to ask whether National’s missing a trick and its commitment to austerity isn’t coming at the cost of potential investment and growth.

Because really, government debt isn't the problem; it may be an opportunity. You and I need to save more, that's unquestioned. But what the country needs from the government and business is some demand side growth – creating value-added products, wagier jobs, and more exports. National acts as if balancing the books will "rebalance" the economy. It won't. And it won't create jobs. It won't liberate business to stride purposefully into all those areas where the public sector has been stifling private growth like, er, foreign affairs and IT and PR services for government departments.

It'll just mean less money in our economy.

In a recent piece on Steve Jobs (members only), Time magazine’s Curious Capitalist columnist Rana Foroohar pointed out that Apple under Jobs ramped up its spending on R&D after the dotcom bubble burst and its competitors started cutting costs. Out of that recession came itunes, ipods and the like. She writes:

“The truth is that investing during a downturn is almost always good business. Samsung trumped Sony in the 1990s by investing more in R&D; China’s solar industry has leaped ahead of its competitors by piling on investment since the financial crisis”.

Couldn’t New Zealand Inc learn from that? Isn’t the bottom of the market the time to invest? Mightn’t the combination of cheap money and sever belt-tightening elsewhere be an opportunity for this country to invest in some growth engines of the economy and see us start to catch Australia?

And doesn’t the lack of investment risk stagnation, even a slump, if the private sector isn’t strong enough to start spending and hiring again? Late last year Nobel prize-winning economist Josepth Stiglitz gave a speech in Toronto in which he said austerity spending by governments around the globe is “effectively a suicide pact” for the international economy.

“The austerity that is going on in Europe, America and so forth is effectively a suicide pact for our economies… Greece does not have much scope, but the United States and Germany and a number of other countries do have considerable space for stimulating their economy, and it is absolutely essential that they do that.”

New Zealand could be one of those other countries. You might have better ideas that me as to where money could be spent, but some joint venture building houses for first home buyers has been suggested (which could be a way of using the low government debt to help lower our high household debt that the credit ratings agencies are so anxious about)… there’s rail… R&D incentives and more money for the CRIs… export drives... things that will pay off in the long run.

Yet this government is focused on cost-cutting. English’s priority seems merely to “keep a tight rein on public expenditure”, as if spending less will somehow create more. As Paul Holmes pointed out on Q+A, the Key speech last week was all about efficiencies. Shearer’s speech at least talked about ways, however vague, to stimulate the economy.

The question for National these days isn’t so much ‘where’s the plan?’ as ‘where’s the vision?’.

National will surely point to the Steven Joyce-led super ministry as its path to growth, and it does seem now that English has been left with the job of saying no and cutting here, there and everywhere, while Joyce has the task of getting the hamsters running faster. But is the former radio man's idea of growth going to be bold enough? Given the government’s commitment to austerity, it seems unlikely that he’ll be given the fiscal ammunition required to fire any serious shots.

A lot depends on Joyce and his ‘ministry of growth’, if I can call it that, both financially for New Zealand and politically for National. Because if there’s no growth, no sense of momentum, I’m not sure a mere return to surplus in two years will be the election winner National is assuming it will be.

Comments (15)

by Ian MacKay on March 18, 2012
Ian MacKay

Investment sounds better than Austerity.

And where does the partial Sale of Assets fit in?

by Tim Watkin on March 19, 2012
Tim Watkin

Well, Ian, that's another example of something maybe worth borrowing for. If we accept the government's claim that we need $5-7 billion (exactly what the assets on offer just happen to be worth – supposedly) for broadband, schools and the like, why not borrow at record low rates rather than selling well-performing assets?

by Simon on March 19, 2012

Good point Tim.

The real problem is NZ's private sector debt. It exceeds Govt debt by a factor of 5.

See this chart which seems to show that NZ's GDP growth seems to have been accompanied by (if not driven by) expansion of private sector debt.


by John Stroup on March 19, 2012
John Stroup

So, your saying that we can invest [spend] our way out of a lagging economy?

Indebetedness limits options, not increases options. 

by Jacob Toner on March 19, 2012
Jacob Toner

Government spending definitely has a strong influence on the overall vitality of our economy, but borrowing to spend only makes sense if the investments are things that will give us some return. Arguably, as you have pointed out Tim, investing in R&D or broadband could be a smart move because the return on investment is likely to be higher than the current low interest rate costs of borrowing. However, this is effectively a gamble with the public purse - can we select investments that actually increase NZ's productivity or open new markets for us? It is also a gamble that the Government has no mandate to pursue given they campaigned on implementing exactly the opposite.

by Tim Watkin on March 19, 2012
Tim Watkin

You got it John. As they did out of the Great Depression... or World War II... and so on. If debt really limits options, you'll have to explain that to the vast number of companies which have borrowed to expand. Isn't responsible borrowing one of capitalism's great strengths?

by XChequer on March 19, 2012

For christ's sake, Tim put the needle, lighter and spoon down, take the belt off your arm and back away slowly from the pen!

You make a great argument - no doubt. And at the periphery' some salient points - especially about R&D.

However, when you're hanging on by your fingernail, you don't go waving your arms and, despite the fact money is cheap, it still costs! And we do not have much money. In fact we are already borrowing. At what ever rate there is available to the tune of $250 million a month. And thats just to pay the bills.

Just because one can do something, doesn't mean that we should.

Stay off drugs!



by stuart munro on March 20, 2012
stuart munro

Of course the government is doing the politically prudent as well as the fiscally prudent thing, doing nothing. Nothing cannot screw up as graphically as action. Perhaps we should simply call it what it is: craven.

We get upset about unemployed people doing nothing so we should be furious with our politicians for doing no better. Unhappily we have several decades now of gormless directionless precedents, each government trying to cover their basic failure with the fragile veneer of personality. It gets ugly when it wears thin.

It'd be nice, just once, to have a government with a credible plan for growth. But then, like an MP with integrity, the very idea is arrant fantasy.

These are cull wethers, even without a better option it is time to dog tuckerize them. They eat too much grass.


by Scott Chris on March 20, 2012
Scott Chris

 With cheap money around, how about we turn this whole austerity kick on its head and start talking about growth?

Why borrow when you can <a href=”http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10788041 ”>print your own</a>

by Scott Chris on March 20, 2012
Scott Chris

Oops, this blog won't accept html code. I'll try again:

With cheap money around, how about we turn this whole austerity kick on its head and start talking about growth?

Why borrow when you can  print your own?


(BTW, why can't I edit or delete my comments?)


by Tim Watkin on March 20, 2012
Tim Watkin

Scott, try using the link function – select the words and insert the link.

XChequer, try again mate. We're not just clinging on by a fingernail to just pay the bills. Well, by definition all government spending is just paying the bills. And all borrowing and spending costs. You're just tossing out truisms. The question is how big you want those bills to be and whether you cut your cloth or invest to grow.

Of course we're already borrowing – unless you're China, that's how countries and companies expand in a market economy. And who says we don't have the money? As I wrote, the government is less in hock than at just about any time in our history. Commodity prices are at record highs, yet we can't rely on them forever. So maybe it'd be wise to invest in some of the other parts of the 'business', as it were.

Just because one can do something, doesn't mean that we should.

That's my favourite truism of all, because you can say exactly the same thing about cutting. It's not as if one is benign and the other malignant. Both have pros and cons, so it's always a matter of what and when – what you spend the money on and picking the right time to invest. What I'm saying is investing on the countrer-cyclical is often the best time to spend. Not so trippy really, is it?

by XChequer on March 21, 2012

Ok, Tim - trying again.

The question is how big you want those bills to be and whether you cut your cloth or invest to grow.

Thats been the argument the present lot has been wrestling with since they got in. Given that the global financial crisis which is, apparently, the worst that we've weathered and the fact that we haven't suffered the depredations of others bigger than ourselves, I can't really say we've come out too bad. If in fact we have "come out" yet. And thats despite borrowing what we have done over the past 4 years. 

Despite our situation, the figures coming out of the rest of the world prove no better. Greece continues to be a major headache, Ireland continues to slide towards another bankrupcy and Uncle Sam isn't performing so well either just now.

Against this back drop (and this is just a cursory look, I'll leave you to fill in the gaps of world instability), you're  advocating borrowing more money. Given how much we presently owe, allowing the bills to become bigger is nonsensical and would be irresponsible in the extreme given the onus of managing a nations wealth. People will want their money back, Tim and given the fact that we, by and large, can afford to pay it back right now doesn't mean we'll continue to. Our nations GDP is still made up of a little more than 46% agriculture and primary produce - that is the one and only part of our economy that is shining (or at least dully glowing). And on the strength of that one element, you suggest we should borrow more? 

No dice. It would be neither wise nor prudent at this time of global instability to go getting crazy when our situation is so precarious. Truism or not, if the shoe fits.....(heh).

Like I said above, you're argument is well crafted. The comment about counter-cyclical investmeant is very good. However you disregard my comment about hanging on with fingernails only by virtue of the fact that we're borrowing a lesser amount than most.

that's how countries and companies expand in a market economy

Don't think Keynes or Friedman would agree with you cause you are impinging on a critical piece of data - a stable supply of money. Which there isn't. As the world gets bigger (read population) and expectations rise (Friedmans sore point) more money is being created. By the nature of increasing populace and demand is the only think staving off an inflationary storm! And investment through artificial means is always gossamer-like in nature - liable to be blown away if the wind blows too much! And considering the way the global economy is whipping along at the moment, you could almost call it a gale!

It is a wonderful thing to be seen going against the grain of world affairs. I would love to see NZ do it. We are just not cash flush right now and any transient view on debt would do our country a grave disservice.

by Tim Watkin on March 21, 2012
Tim Watkin

XChequer, you're essentially arguing for caution, which I understand. And that would make more sense for, say, a household. But for a country? If we're going to grow out of this (and I agree, we may or may not be past the worst), then how are we going to do that with so much caution? As Stiglitz and others argue, if the world doesn't spend, then we'll get stuck in the mire for longer than necessary.

As you say, we've borrowed quite a bit during the global recession. And the world hasn't ended. So what makes you think now is the right time to pull that borrowed money out of the economy and let the private sector pick up the slack? I'm wary of that.

As for our reliance on primary production, isn't that an argument for investment in diversification?

As for the stable supply of money, I'm not sure where you're going with that. The govt mostly raises money by selling bonds. Do you mean demand could dry up?


by Peter Clareburt on March 22, 2012
Peter Clareburt

What pissed me off about cheap debt - was when I borrowed for the mortgage on my house a while back it was only around 6% - which was great. "Nek Minute" - it suddenly jumped up to over 10%, and that became a lot harder to pay. In fact wasn't one of the issues with Greece (and I do except we are not in the same boat as Greece) that now when loans that they have not/cannot repay needed to be rolled over the lenders wanted to impose much higher interest.

I  do think it is prudent to look at debt not only from the point of view of the current cost - but from the point of view of the future cost of debt that you might not have paid off. 

I got into debt in the 90's where I took my pay - put it into and then withdrew from sever credit cards to make the min payment before using it to pay the mortgage and other things. In the end I sold up left the country made some money returned and have been very carefull about how much debt I take on ever since - I err on the low side so I don't get caught by the loan rate hikes as many did. 

In fact I am now about to sell my one big asset and use the proceeds to diversify into other assets - rather than take on extra debt (which I don't want) to do so. I think the lending rates will go north again quite quickly in a few years.

by Tim Watkin on March 22, 2012
Tim Watkin

Now I'm getting into finance issues that may be beyond my ken, but my understanding Peter is that when a government sells a bond to borrow money, it's at a fixed rate. Whereas it sounds like you had a floating rate that, by defintion, floats around. We know that floating rates are at an all time low, so of course you should beware of them, because the only way they can go is up.

But the government doesn't borrowing on floating rates (I think).

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