The following is taken from the National Party website. They are talking about the virtues of running a goverment surplus. Often politicians will make claims with little or no justification, so I invite you to give me an explanation: tell me why the underlined statements are true and necessarily follow from running a surplus. Or, if you don't agree, explain why you think they've got it wrong.
Thanks in advance!
Why a surplus matters
Operating in surplus is important for our future. It will help us keep interest rates lower for longer, which is the single biggest cost to most households, and it helps take the pressure off our exchange rate, which is good for our exporters.Getting our books in order means we will owe less to overseas lenders, which will help ensure our economy is stronger and in a better position to handle future economic shocks. This is important because the global economic outlook remains uncertain.Operating in surplus also means we can invest in other areas that matter to Kiwi families.
A sovereign state which can issue its own currency has no reason to run a surplus -- in fact, the balance retained corresponds with a deficit in the private sector and means that economic potential is being damped. This is a naive and dangerously simplistic mindset, and ignores the ability of a government to spend money directly into circulation to achieve the same outcomes as the "investment" canard mentioned in the example above.
ReplyDeleteThanks Phil. Do you have any comment on the specific claims that running a surplus 1) helps to keeping interest rates lower for longer; 2) takes the pressure of the FX rate; or 3) puts NZ in a better position to handle future shocks?
Delete1) a surplus means the govt has to borrow less, so doesn't have to offer as high interest rates. 2) foreign investors will not be seeking as many NZD (used to buy NZ debt), so the exchange rate will weaken 3) if we are less indebted, we have room to borrow more in future during bad times.
DeleteOr so the thinking goes. (Regards, Tat Loo).
Does the act of the government borrowing less necessarily lead to lower yields on government bonds in the market? Scott Fullwiler from UMKC seems to be one of the best around for showing how this argument doesn't really stand up for a sovereign currency issuer (such as New Zealand).
DeleteWell the evidence shows that bond yields can stay very low for a very long time even as it is clear that a government's financial position is deteriorating. And then literally within a week, the whole bond structure/interest rates can go to hell.
Deletehttp://modernmoney.wordpress.com/2014/02/03/mmt-and-ideology/ - sums it up?
DeleteHmm. It rather depends on the circumstances.
ReplyDeleteFor a heavily-indebted sovereign, or one which has a history of economic problems that threaten the probity of its debt, running a surplus helps to instill market confidence that future debt commitments will be honoured, which does indeed take the pressure off interest rates. But actually, running a fiscal surplus in order to reduce debt over time tends to put upwards pressure on the currency, not downwards - obviously, since confidence in the currency increases as debt becomes more sustainable and the risk of distressed monetization recedes - so I'm not entirely sure where the author gets the idea that the currency would depreciate in the presence of a fiscal surplus. A depressed currency may help exports, but it tends to raise inflation expectations and therefore put upwards (not downwards) pressure on interest rates.
It may be that the author is confusing fiscal and current account surpluses. Current account surpluses tend to accumulate when the currency is under-valued relative to rivals, so maybe that's where the idea of surpluses "helping exporters" comes from, though I would suggest causation is the wrong way round. But if the currency is floating freely then we would expect it to appreciate in the present of a current account surplus just as it does in the presence of a fiscal surplus, and this currency appreciation would over time eliminate the current account surplus. Running both a sustained current account surplus and a fiscal surplus is usually only possible when there is systematic interference with the exchange rate, such as a currency peg (China) or membership of a currency union where other members are fiscally weaker and running current account deficits (Germany). If the currency is floating freely, then it will appreciate, not depreciate.
If a country that is NOT highly indebted runs a sustained fiscal surplus, it is (arguably) taxing its population excessively. A fiscal surplus is by definition taken from the saving of the private sector and therefore to some extent crowds out private sector investment. I question therefore whether there is any justification whatsoever for running a sustained fiscal surplus unless debt is excessive. Generally speaking, private sector investment is more efficient than government investment. If government debt is sustainable and borrowing costs are low, surely that saving would be better used for private sector investment.
Thanks Francis. Great post. One issue I have: just what is heavily-indebted? Surely we would put Japan in this category? And yet their interest rates are very low. Where is the pressure on interest rates?
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