Tuesday, 2 June 2020

Well, I haven't stopped worrying

Justin Giovannetti over at The Spinoff has a column titled "How New Zealand learned to stop worrying and love government debt." 

I'm quoted in it, but I haven't stopped worrying or started loving government debt. 

Taking on debt during a crisis is necessary when that's needed for crisis response. Its being necessary doesn't mean you have to love it. 

But the government has gone rather past that, piling in lots of additional spending unrelated to the pandemic. 

I suppose folks who think tax is love recognise that more debt is more future taxes, and so figure that debt is also love. 

I agree with Cameron Bagrie's concerns about paying the thing off - especially when the debt is larger than it needs to be because the government has not kept other spending in check, and when that extra spending comes with ongoing commitments that will take up room in future budgets that could have been used for debt repayment. 
Eric Crampton, chief economist at the free-market think tank the New Zealand Initiative, said while he shares some of the opposition’s concerns about new spending, the country is entering this economic crisis from a good position.

“The rest of the world has gone absolutely crazy and either we’re sane or staying sane longer than anyone else,” he told The Spinoff.

“Throughout all of New Zealand’s recent history all governments have maintained reasonable debt levels. There have been problems like the Christchurch earthquake, they run up a deficit and then they get it back in line. You don’t have those big structural deficits that are hard to fix,” he said.

Crampton said the government’s current plans, for a debt half the size of the country’s economy, is about as large as New Zealand should go. Anything bigger risks possible trouble in case the economic situation worsens or natural disaster strikes.

Cameron Bagrie, the former chief economist at ANZ, said that New Zealand needs to keep a “squeaky clean public debt” because of the country’s small size and high private debt levels. However, he says the response to Covid-19 was the right one.

“The government needed to go big, leaning on the government balance sheet is the best response in the near-term. I have two concerns. I don’t think we have a well thought out economic plan on the other side and I think people will get increasingly concerned about how we’ll get debt down,” he said.

According to Bagrie, his biggest concern is that taxes will need to go up to finance debt repayment in the future. It could be a defining question for the coming election. National under Muller will promise to do a better job of managing the books and keeping taxes low. It’ll be difficult for Labour to promise the same spending restraint, which could mean less infrastructure investment in the coming years, he said.
Meanwhile, Shamubeel is happy for there to be even more borrowing. He used to care about the quality of expenditure; perhaps that part didn't make it into print? 
Shamubeel Eaqub, an economist who is respected by many on the political left, said Crampton and Bagrie are just wrong. New Zealand doesn’t have a debt problem, he argues.

“Not only can we handle the debt that we’re planning to borrow, but we can take on a lot more if we need to. I’m not sure where this idea comes form that we’re so small we can’t borrow money. Some people are stuck in the 1980s when it comes to interest rates and borrowing,” he said.

Countries like Belgium and Portugal went into this economic crisis with public debts larger than 100% of GDP and are looking to borrow more, he said. Nearly any ranking of advanced economies has New Zealand as one of the least indebted countries in the world for decades to come.

Don’t look at charts that show debt approaching the same level as 1992 and freak out, according to  Eaqub. “The world is different now,” he said. “Banks will look at us and see a debt to GDP ratio of 55% while Belgium is at 150%. Who do you think they’ll want to borrow to?”
Belgium and Portugal have the ECB to bail them out if it came to it, and no opportunity to inflate or devalue their way out of debt. Their debt is then less risky. 

New Zealand's currency can devalue in a really big hurry if things go badly - which would also worry investors looking at New Zealand government debt. New Zealand bonds paying off in New Zealand dollars could suddenly have a rather poor return if the dollar crashed in a crisis. 

Shamubeel would have us in a perilous position come the Big Earthquake. 

Bottom line: it makes perfect sense to spread the costs of a massive pandemic over time by using debt. Adding to that debt to fund additional baseline activities is a bad idea. 

But hey, if you figure I'm just some 'stuck in the 1980s' dinosaur, here's Prof Gemmell, Vic's Chair of Public Finance. He's saying the same thing I did, which is a good thing because it's based on the same principles that I taught when I lectured Public Finance at Vic. Fine to increase debt to deal with the pandemic; we have capacity for it. But we need to get back to prudence rather than aim to be freaking Portugal. 
Secondly, plan a future debt trajectory. Much current debate surrounds the eventual taxpayer cost of massive public debt increases, perhaps rising from 20-50% of GDP. As with the post-WWII debt response, this will need to be brought back down, but more slowly than after the GFC, for example.

Public debt increases are global, and New Zealand will not look like a bad international credit risk for the foreseeable future. Plus, with interest rates almost certain to remain low for years, the government’s debt servicing costs have never looked better. Nevertheless, a credible plan towards lower debt is essential if we are to be well prepared for the next crisis – as we were for this one. 
Is it kind to bequeath debt to your children?

The theme of New Zealand’s approach to the pandemic Covid-19 is “be kind”.

It motivated a prolonged lockdown requiring $22 bln of government spending commitments and a further contingency of $39.3 bln. Since borrowing is a core part of this policy, it is reasonable to ask if kindness will determine how we deal with the debts the policy creates?
From a healthy Crown net worth of 43 percent of GDP at the time of last year’s Budget, this FSR forecasts net worth at 34 percent in 2020. Fair enough – we are coping with extra crisis spending and lower revenues. But, following the Budget, Crown net worth is projected to drop to just 9 percent of GDP by 2024 and only get back to 12 percent by 2030. In other words, a decade from now, during which time another serious crisis could easily have hit us, the Government’s plans for net worth are so diminished that we would be woefully unprepared financially for another fiscal bail-out of the economy.

Let’s be clear. New Zealand economists are not calling for future ‘austerity’ to get the Government’s books back into balance within a few years. Instead, there is widespread support for suitable, not profligate, spending to assist faster growth of the economy to reduce the debt burden to previous levels over, say, a decade or more.

But the Crown’s projected financial vulnerability a decade on reflects Robertson’s failure to offer any credible plan to raise net worth through fiscal prudence down the line. This is despite official forecasts of quick economic improvement: real GDP growth is forecast to be massively positive at 8.6 percent in 2022, and 4.6 percent in 2023.

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