Paul Goldsmith: Why is it important that the Government gets back to surplus and starts repaying debt?
Hon BILL ENGLISH: Although the level of Government debt is well below that of many other Governments that we compare ourselves with, it is important that we keep Government debt low in order to offset very high household debt and to ensure that we can manage through another recession. Net Government debt is still rising today by around $130 million a week and will reach $70 billion in 2016-17, up from around $10 billion just 5 years ago. That is the equivalent of around $15,000 for each and every New Zealander. We simply believe that it would be prudent to return Government debt to lower levels so that we are better able to reduce the pressure on interest rates rising sooner than they otherwise would, and reduce pressure on an exchange rate that is already higher than is comfortable for us.
Economists will always remind you that there are trade-offs to be considered when making choices - in order to get more of something, we have to accept having less of something else. Now in this case, Mr. English "simply believes" it's better to make loads of spending cuts* that are actually depressing economic growth, affecting the lives of our most vulnerable citizens, and increasing unemployment (these are the trade-offs), in order to keep interest and exchange rates down for longer**.
Is he really considering the trade-offs here? What are the real benefits of keeping interest rates down for longer? And even then, how much influence does government spending actually have on interest rates anyway? Looking at the chart below, there doesn't seem to be any such link between interest rates, inflation, and government spending over the last 15 years. In fact, interest rates came down at the same time as government spending spiked following the global financial crisis in 2008. You make up your own mind...
* For those of you that doubt the size of cuts that the National government has made over the past few years, my next post will show you how extensive they are.
** Incidentally, Mr. English has laughed off intervention in the exchange rate as proposed by opposition parties, but here he is implying that this is part of the reason for targeting surplus!
Hi
ReplyDeleteGovernment and the central bank (Reserve Bank of New Zealand) sets the interest rate. New Zealand has a floating sovereign currency. The government cannot default on any debt, either here or abroad, which it has made that is denominated in its own currency.
New Zealand government does not need to borrow in order to spend, and it can spend on whatever public purpose its policy dictates. Government may try to pass off fiscal policy freedom by describing the RBNZ as independent, but government is in charge of policy and effectively tells the RBNZ to spend on its behalf. However, New Zealand is economically stagnant with high levels of unemployment and under-employment. Stagnation is caused because government has cut back on using the powerful force of its own economic spending.
New Zealand in fact is stagnating through lack of economic demand, which the private sector can't create because of high private debt. The private sector including households is not spending because it must service private debt. Lenders, the banks themselves, are also perilously in debt, and need private sector debt-service income to service their own debt and increasing capital needs.
Fortunately, there is a remedy because government creates new economic demand when it spends. Governent spending is counter-cyclical and works against demand lost to private sector debt repayment. Unlike the private sector, government can't default on government spending because it spends using its own currency - the NZ$. It certainly doesn't have to borrow to spend. Nonetheless government can, like the private sector, create demand by offering work to people. Newly employed people will consume their wages and this consumption will create the demand that is missing from the private sector in the economy.
In this way government spending will bring into productive use people who want a job because e.g. they are unemployed or under employed, and government can employ people who are not in the workforce but who want to take up work. The government can use this capacity to the point that it has created full employment. Government spending will pass on through into the private sector, and there is a multiplier created by government spending - stimulation of the private sector will itself create additional economic activity. These combined economic forces will create the demand that New Zealand needs.
Hi Jim,
DeleteYes yes yes, and yes!
The RBNZ sets interest rates in-line with it's inflation target. To that extent, demand in the economy does affect interest rates - but the point is that right now we need the demand - that seems pretty obvious right? To me, Bill's justification for targeting surplus is a red herring.
With regards to government "borrowing", yes unfortunately we've got these silly self-constraints that are still in place from a time when we were pegged to the USD, which was in-turn convertible to gold. Of course the government doesn't actually borrow - the treasury and RBNZ co-ordinate such that there is ALWAYS buyers of government debt, and like you say the government sets the OCR, and creates expectations of OCR in the future - and all interest rates on the yield curve are influenced by this.
My previous post "Thought experiment" imagines a world where the Treasury's Crown settlement account is actually an overdraft (with no limit), thereby getting rid of the need to issue government debt at all...