The opportunity of debt

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 But that number stuck in people’s head and many still quote it… even though it’s out of date.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.