Distinguishing investment from consumption changes the way we think about and manage the economy.
The Treasury forecasts that the New Zealand economy will return to the per capita GDP level of the 2022/3 peak in 2027/8 (June years ending*). Had the economy grown at the rate of the decade up to the peak, it would have been 7 percent larger. That is a substantial reduction; imagine if everyone had 7 percent higher incomes and the government had 7 percent more to spend.
The comparable figures for the current year would be 6 percent. Now you know why the Coalition Government is struggling to look economically presentable. Just think if it had an extra 6 percent. It would not have to cut valued services, while benefits could be more supportive of the poor and income taxes lower.
The puzzle is why the poor performance. It is not quite a ‘long stagnation’ by the definition of taking seven years to return to the previous peak, but it is getting that way.
Four of the previous long stagnations – the Long Depression of the 1880s and 1890s; the Interwar Recession and Great Depression of the 1920s and 1930s; the Post-War Stagnation of the late 1940s and early 1950s; the Wool Price Crash from 1966 to the late 1970s – can be attributed to external impacts. (As could the shorter stagnation which followed the 2008 Global Financial Crash.)
There are no parallels here with the current situation. The world economy may not have been boiling but our exports have boomed and export prices have been good, so the external environment hasn’t had a major impact on the domestic economy.
The fifth long (Rogernomics-Ruthanasia) stagnation, which lasted from 1986 to 1995, cannot be explained by an external shock. The best explanation I have been able to find is the quality of the economic management of the day. (This scientist would love to have an alternative explanation, for comparison, but sadly those who supported the period’s management ignore the past. The unkindly might recall Talleyrand’s summary of the Bourbons – rulers of France for two centuries: ‘they have learned nothing and forgotten nothing’.)
Has it been economic management which has caused the current stagnation? Could a different one have avoided it or, at least, reduced its length? To make the assessment realistic I acknowledge that there are borrowing constraints on the New Zealand government. Yes, it borrows domestically, but in a small open economy any domestic borrowing interacts with the international monetary system, so that while domestic borrowing avoids exposing the New Zealand government to exchange rate fluctuations, it is still impacted by international interest rates. (If it tried to suppress domestic interest rates, private investors would shift their money offshore.)
The subjection to the international market is summarised by the global credit rating agencies’ assessment of our credit standing (which is currently high). Current economic management is based on the assumption that if we were to borrow more, the rating would fall, foreign investors would be less willing to lend to us, they would require a higher return, which would flow into higher domestic rates which would impact unfavourably on businesses, housing mortgage borrowers and the government’s finances.
I accept the analysis that debtors must take into consideration what their lenders think but I make one modification. Potential lenders want to lend. They look for safe borrowers who will service their loans on time and without too much bother. What the borrowers do with the loans matters. Lenders, reflected by the credit agency assessments, are very uneasy when their loans are used for consumption.
In the nine years from 2018/9, the New Zealand Government is expected to borrow almost $100 billion for consumption as measured by OBEGAL. (It either spends the money itself or gives it away by tax cuts and benefit hikes to the private sector for consumption.) That amounts to 2.5 percent of GDP in an average year. One can well understand those lending to New Zealand being concerned.
New Zealand’s record is not unique. There is increasing concern that many countries are borrowing for consumption. The IMF reported that the current average government gross debt among advanced economies is around 110% of annual GDP. (New Zealand’s figure is nearer 50 percent. The figure which is usually quoted is ‘net core Crown debt’. Excluding the NZ Super Fund it is around 42%.)
Moreover, to international lenders’ concern, the advanced countries’ debt is rising as a proportion of annual GDP. That rise is not just the US debt, which is at 125%. There is currently much focus on the French level, which is also over 100% and rising. The particular concern is because France’s political situation – for a lender that means ability to service its debt – does not appear too stable.
Most of those increases have been because the countries have been borrowing for consumption, just as we have been doing. Does this rise threaten the stability of the world economy? The serious commentary is just beginning to turn its mind to the possibility; I’ll report on it in a later column. Here I consider the implications of this analysis for New Zealand’s economic and fiscal management.
The logic of the analysis might suggest that the New Zealand government has had little option but to pursue the policy regime it has – or even that it would have been more prudent to have stopped the borrowing for consumption altogether. However, I have slipped into the analysis a distinction which has not been prominent in the New Zealand discussion.
It is such a routine distinction – between consumption and investment – in economists’ thinking that I did not notice its absence at first. In practice there is a fuzzy margin between the two notions. Here I am going to look only at investment which leaves future generations with something tangible.
That tangible definition is much the way that lenders think. Go to them and say ‘I want to borrow to sustain consumption’; they will look at you a bit askance. Say that ‘I want to borrow to build up assets like houses, waterworks and roading’ and they will be more responsive. They will be concerned about vanity projects or if there is the possibility of corruption (not particularly likely here). They would be especially interested in projects where the debt servicing is connected to payments related to the project (like rental housing).
Why did we not do that? It seems to be how we think. We don’t make the distinction. We are so focussed on the level of debt that we ignore any offsetting assets. Ironically so, because that means we borrow for consumption.
Essentially, by downplaying public investments and asset ownership, we have got ourselves into a paradox. When the economy contracts, we cut government spending in order to limit borrowing, thereby further contracting the economy, reinforcing the downward spiral. Borrowing for consumption softens the contraction but does nothing for boosting the economy by adding to confidence and productive capacity.
You may see parallels with the Great Depression, where the contraction from the international shock was reinforced by domestic austerity. (Keynes is sometimes summarised as ‘by balancing the books one ends up flat on your back’. But he did not go on to argue for excessive stimulating consumption; traditional Keynesianism focussed on investment.)
However, there is a difference. Then we wanted to borrow, but there were not the willing lenders because everyone was pursuing the same wretched policies. Today lenders want to keep away from the Frances of the world.
The switch to the different policy approach that this analysis suggests must be done in a way which lenders think is prudent. But unless we think more carefully about consumption and investment we will end up with an even longer stagnation. As in other countries, that means a more alienated polity, especially among the young. Sure, we can buy off the short-term economic pressures by borrowing but the lack of tangible assets offers little prospect for the future. The political instability evident here and elsewhere is hardly surprising.
* The New Zealand data used in this column is based on Treasury’s Pre-election Economic and Fiscal Update 2026.