It's not just about the government!

Another issue of the Listener, and yet another article full of supposed truths about government debt  ("Another day older & deeper in debt", Money, June 28). As I've stated before, a government with a free-floating, non-convertible currency is nothing like a household or a business. The New Zealand Government does not have to balance its books. It doesn't have to save for a "rainy day". Ever. End of story. But even if we ignore this fact, by only focusing on the government books, the author of the aforementioned article is ignoring the rest of us out here in non-government land. 

The New Zealand economy can be seen as having three distinct sectors. The first two sectors, the public sector (government) and the domestic private sector (NZ households and firms), make up what is commonly called "New Zealand Inc.". The third sector is the foreign sector (the rest of the world). 

The first thing to realise is that this is a closed system: the combined cash-flows of these sectors must net to zero over any time period. In other words, if any of these sectors run a surplus, then at least one of the other sectors must run a deficit. This is basic accounting.

Currently we - the domestic private sector - spend more NZ dollars than we earn. Consequently, we collectively run a deficit that must be funded by the other two sectors. Now here's the key point: if the government runs a surplus, then the domestic private sector must fund its deficit entirely by borrowing NZ dollars from the foreign sector. This means NZ banks borrow more from off shore, and we borrow more from NZ banks. On the other hand, when the government runs a deficit, we in the domestic private sector don't have to borrow so much from the foreign sector as almost all government spending goes to the domestic private sector, and therefore reduces our borrowing needs.

Simply put, when the public sector (the government) restricts spending, it forces the domestic private sector (that's us) to borrow more from the foreign sector. Any decent analysis of the New Zealand economy should take this into account...