Finance Minister Grant Robertson. Photo / Mark Mitchell
The politicised issue of government debt continues to make headlines.
In the wake of the 2010/11 Canterbury earthquakes, both blue and red governments were focused on lowering government debt relative to economic activity.
But the 2020/21 Covid era saw a complete reversal of this downward trend – at pace – as the Government injected a seismic amount of support into the economy.
We're now faced with the challenge of paying down this debt, at the same time that we're borrowing more to soften the pain of inflation and forge ahead with longer-term structural reforms.
The pinch is, inflation means the Government needs to borrow more to simply maintain the status quo. Meanwhile, rising interest rates are increasing its debt servicing costs.
Net core Crown debt as a percentage of gross domestic product (GDP) has risen from 18.6 per cent in the year to June 2019, to 29.8 per cent in 2021.
At the May Budget, the Treasury forecast debt to GDP would continue to rise over the next couple of years, peaking at 41.2 per cent in 2024.
Let's rewind to just before Covid-19. Back then, government expenditure in the tens of millions was enough to capture people's attention. The $3 billion allocated to the Provincial Growth Fund and $2b for KiwiBuild were seen to be major investments.
Come 2021, and the Government had dished out tens of billions of dollars to businesses in wage subsidies and Covid-19 relief payments to help them retain their staff.
It allocated billions towards infrastructure projects and schemes aimed at creating jobs, taking a counter-cyclical approach to keeping the pipeline of building activity going and keeping people employed.
All up, the Government allocated $62b to the Covid-19 response. Some of these funds ended up being used for schemes tangential to the actual pandemic.
As a percentage of GDP, this bundle of cash was high by international standards.
Analysis by the International Monetary Fund put this portion at 19.3 per cent of GDP, which was above most comparable countries other than the United States (25.4 per cent).
Australia's Covid-19 spend was equivalent to 18.4 per cent of GDP, the United Kingdom's was 16.2 per cent, and Korea's, 4.5 per cent – just to pick a few examples.
There was a time in 2020 when the machinery of government was so frantic, Parliament accidentally passed the wrong bill.
A parliamentary staffer accidentally put the wrong version of a tax bill into the computer system; a version that included clauses empowering the Government to write businesses loans. This resulted in Parliament enacting a different bill to the one it thought it was passing.
Fortunately, the Government was planning to create a Small Business Cashflow Loan Scheme anyway, through a different piece of legislation.
But the saga, which prompted a late-night Cabinet meeting, encapsulated the high-pressure environment in which the public sector was operating.
The risks associated with responding to the crisis too slowly were at times seen to be greater than the risks associated with imperfection.
Inflation has reared its head, with the annual reading coming in at 7.3 per cent in the June quarter, as people demand more than the economy can supply.
All the government support helped the vast bulk of people keep their jobs and keep spending domestically. But the economy is at capacity.
Much of this heightened demand also comes off the back of the Reserve Bank of New Zealand (RBNZ) throwing the kitchen sink at the pandemic in 2020 and early 2021 by lowering interest rates and creating money.
Meanwhile the war in Ukraine, supply chain hold-ups caused by Covid-19 and a slowdown in immigration are further constraining supply.
Now the RBNZ is aggressively lifting interest rates to cool economic demand, to go some way to reducing inflation.
The downside of this, when it comes to the government's books, is that it's hiking the cost of servicing debt.
In May, the Treasury forecast that core Crown finance costs would rise from $1.9b in the year to June 2021 to $2.8b in 2022, before peaking at $4.9b in 2025.
The situation is so dynamic that in May the Treasury lifted its December 2021 finance cost forecasts for 2022-26 by $5.2b.
But, to the benefit of the Crown's finances, higher prices can result in people paying more GST. Meanwhile, wage and salary hikes can increase the Crown's income tax take. More revenue helps pay off debt.
Indeed, core Crown tax revenue has consistently been overshooting expectations and is expected to keep rising, both in nominal terms and as a percentage of GDP.
While rising prices mean debt can be "inflated away", that requires people to keep their jobs and keep spending to keep the tax take elevated.
Inflation also means the Government needs to pay more to deliver the same level of public services.
In May the Treasury estimated that departments' baseline expenses will need to increase by $3.5b in next year's Budget just to maintain the existing level of services.
It warned that the Government would either need to increase taxes, reprioritise spending or increase the Budget 2023 operating allowance to absorb these costs, while funding new initiatives that have already been committed to.
It's never as simple as paying down debt in the good times and accumulating it in the bad times.
Our health system, water services, transport infrastructure and government housing stock all need serious investment.
There are hefty costs associated with making the change to a lower-carbon economy and future-proofing existing infrastructure threatened by rising sea levels and more frequent severe weather.
We also have an ageing population which will send already-high healthcare and superannuation costs further north.
The difficulty is, there's no point throwing money at worthy investments if the economy is at capacity. Having more money chase a limited number of resources is what causes inflation.
The only way to get around this is to increase productivity - boost skills and/or use technology to achieve the same output with less.
Again, the catch-22 is that this can take further government borrowing and investing.
As Finance Minister Grant Robertson repeatedly says, it's about striking the right balance.
Exactly what this balance should look like is the multibillion-dollar question. The way it's answered will depend on one's world view and political position.
The thing most people will agree on is that the quality of government spending should be front and centre.
This is a point the chief economist of the business-funded NZ Initiative think tank, Eric Crampton, and Kiwibank chief economist Jarrod Kerr make: is society getting a good return on investment?
The thing people will disagree on, is how much emphasis should be put on the amount of borrowing and spending?
Should you work towards a certain debt-to-GDP target at virtually all costs? Or should you borrow and spend as much as is required to the extent that the investment can be absorbed, credit rating agencies are happy, debt markets are functional and growth is sustainable?
Both Kerr and Crampton note that while the Crown currently has a high level of debt by historic standards, it's manageable and low compared to other countries.
Data collated by the International Monetary Fund, which uses a different measure of debt to the one mentioned above, illustrates this.
Credit rating agencies are also happy with the Crown's debt profile and there continues to be high demand from investors for New Zealand Government Bonds.
But Kerr believes New Zealand's debt profile doesn't look so good when very high levels of housing debt ($339.4b) are added to government debt.
He says ensuring housing debt is sustainable is a job for the retail banks and their regulator, the RBNZ – not government.
On the issue of the amount of debt, Kerr is adamant: "We have very low levels of debt because we neglected our infrastructure for decades. It's an absolute national disgrace that we have not kept up with our population for decades."
He notes capacity constraints are what is holding us back, not access to money or the ability to pay it back.
The timing of borrowing and spending is another factor that will elicit a range of views.
Should the Government be forging ahead with costly reform programmes, like its health reforms, Three Waters and introducing an income insurance scheme, when the economy is constrained and inflation is high?
Will this expenditure simply bid up wages and pull resources from other productive parts of the economy? Or should the Government get on with its work programme in the potentially limited time it has in power, as it's never a good time to address thorny structural issues?
This is a matter Crampton feels strongly about.
He believes the Government should have pulled back on its massive spending programme in late 2020, once it saw that the wage subsidy and monetary stimulus provided by the RBNZ were keeping people employed and there were actually risks of a labour shortage being created.
Specifically, he believes that funding allocated to "shovel-ready" projects and the Jobs for Nature programme should have been curbed.
He believes the Government should have retracted funding allocated to projects that had not yet got off the ground.
Crampton recognises that government programmes aimed at creating jobs made sense when we thought unemployment would rise into the double digits.
But now that we have a labour shortage, when the Government funds projects "that simply make no sense" it is only adding to inflationary pressures which the RBNZ needs to fight.
As for spending on policies aimed at soothing the pain of inflation, like the temporary fuel tax cut and Cost of Living Payment, neither Crampton nor Kerr find these particularly impressive.
Crampton maintains the support is "unnecessary".
Kerr highlights the opportunity cost, asking what else those funds could have been spent on.
"It's about making our economy stronger, faster, better equipped for the modern world; a very different world to what we grew up in. I don't think we're preparing ourselves for what's coming," he says.
NATION OF DEBT:
• Monday: How much do we owe?
• Tuesday: Can we afford the rising cost of housing debt?
• Wednesday: High dairy price drives sharp fall in farm debt
• Thursday: Banks need to do better on business lending - economist
• Thursday: Consumer debt falling by billions but missed payments on the rise
By the numbers:
• That big ugly number in our graphic ($772b) is New Zealand's total gross debt.
• It combines the latest Reserve Bank figures for private debt with Treasury numbers for Crown debt and Local Government Funding Agency data on council debt.
• The Reserve Bank figures include housing debt, consumer debt, business debt and agricultural debt to June 30. These are updated monthly by the central bank as part of its brief to monitor and maintain financial stability.
• The Crown debt figure is taken from Treasury's Interim Financial Statements to May 31 and is the figure for Core Crown Borrowings.
• This is different to the Net Core Crown Debt figure often used by politicians when they talk about debt-to-GDP ratios.
• We use this (on Treasury's advice) as it is a gross debt figure but excludes debt held by state-owned enterprises which would have been covered off in the Reserve Bank statistics.
• Finally, the debt figure supplied by the Local Government Funding Agency is gross debt for the year to June 30, 2022.
• It captures all core council activities (Watercare, Auckland Transport etc) but excludes some commercial activities (e.g. Christchurch City Council's Orion lines company, Port of Lyttelton, Christchurch Airport) as these would also be included in RBNZ data.
New employment data this week will reveal the impact on jobs.