Thought experiment

Imagine that the Treasury of the New Zealand government had an overdraft facility on its existing account (called the Crown account) with the Reserve Bank of New Zealand (RBNZ). This would mean that when the government wanted to spend, it would debit the Crown account, as it does currently, but would not have to worry about whether or not there was a positive balance in that account. In other words, the government wouldn't have to issue debt (sell government bonds) in order to cover the shortfall between what it receives in taxes and what it wants to spend. In case you didn't know, this shortfall is the deficit. 

And then imagine that the RBNZ takes on the roll of issuing "debt" into the market (instead of the government) - not because it has to, but because it needs to replace the role that the Treasury would usually have as part of the RBNZ's monetary policy. 

The key thing to note here is that as far as the non-government sector is concerned (that's us), nothing has changed. The market can still purchase "risk-free" assets, but those will consist of bonds and bills issued by the RBNZ instead of the Treasury. However, the big change for the government is that it wouldn't have to "borrow" money from the non-government sector; we would no longer have to be concerned with rising government debt.

Anyway, getting back to the overdraft on the Crown account: since the overdraft is provided by the RBNZ, the Treasury never has to worry about repaying it. Why would it? The RBNZ doesn't need the money back - it created the overdraft out of nothing in the first place - it's all just numbers in a computer! And if that's the case then it wouldn't matter if the government spent more than it received from taxes (a deficit) or spent less (a surplus). So any government policy that explicitly targeted "reaching surplus" would be pointless. Therefore, targeting budget outcomes along these lines would be completely arbitrary. 

Now as it turns out, when we take a consolidated view of the way the Treasury and the RBNZ operate, we see that it actually works the same way as the system I've laid out above, with the exception being that the "debt" is recorded on the Treasury's balance sheet under the current system (this is the government debt) as opposed to the RBNZ's balance sheet. But it's really just the same thing. 

The whole point of this post is to show you that trying to reach surplus has no relevance to, well, anything really! So the next time you hear Bill English talking about how the government expects to reach surplus by [insert date here], then remember that it just doesn't matter. And if he tells you that we need to reach surplus in order to build up a "buffer" against the next financial crisis, remember that the government can always spend when it needs to - and so again, it just doesn't matter! 

To be fair, I'm not just picking on National here - the opposition parties also think that it's important to reach surplus. So why do they all think this? It's probably a mixture of 1) not understanding the monetary system properly; and 2) knowing that voters are (mistakenly) worried about government debt. 

But now you know, it's nothing to worry about...