The biggest missed opportunity in a generation
Grant Robertson's first Budget did exactly what he said it would on the tin, but it was also the biggest missed opportunity in a generation, Bernard Hickey argues.
It's hard to accuse politicians of wrongdoing when they deliver exactly what they promised to the letter and the number. The new Labour-led Government promised billions in catch-up spending on hospital spending, new teachers and thousands of new state houses, while at the same time running Budget surpluses and reducing net debt. Budget 2018 ticked those boxes easily.
The trouble is when they could have done so much better if they had only chosen to ignore the fear of a ghost and broken one promise to properly achieve a transformation that is desperately needed and often talked about by this same Government.
New Zealand has an infrastructure deficit caused by a surprise population shock that is costing our economy billions in lost time, holding back the growth plans of businesses and families and crippling another generation of poor kids in cold, mouldy and ruinously expensive private rentals.
The new Government is delivering on the letter of its transformational plans, but not its spirit. It parrots the fears of the previous Government about needing a pristine balance sheet just in case there's a new Global Financial Crisis or earthquake. It has been captured by the view that prevailed correctly through the 1990s and early 2000s that New Zealand was indebted and weak, and that the bond vigilantes would punish all New Zealand borrowers with much higher interest rates if we stepped out of line and borrowed more.
Jacinda Ardern and Grant Robertson were bought up politically by their godmother (Helen Clark) and godfather (Michael Cullen) as part of centre-left parties around the world that thought, in the 1990s and early 2000s, that the only way to win elections and retain power was to be fiscally responsible and repay debt. They took their cues from Bill Clinton and Tony Blair. Clinton's key adviser, James Carville, famously helped Clinton win by drilling the slogan, 'It's the economy, stupid', into Clinton and his campaigners.
Carville, also known as the 'Ragin' Cajun', just as famously said in 1993: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."
He was referring to the power of the wisdom of the financial crowds in the global bond markets to put up interest rates if they believed a Government was being profligate. New Zealand's politicians have this belief ingrained into their souls.
It is this unspoken fear of the bond vigilantes that is behind every comment about saving for a rainy day or keeping Government debt low. They argue that New Zealand's foreign debt is precariously high because of high household debt and the best thing a Government can do is keep its own debt low so as to keep the vigilantes off our backs.
But times change, and so do the needs of a country.
The bond vigilantes have long since been euthanised by the Global Financial Crisis and painfully low inflation. The best measure of the ghosts of the bond vigilantes is in the price set by the same wisdom of the crowds. New Zealand's 10 year government bond yield was 2.83 percent shortly after the delivery of the budget. That is below the 3.09 percent for US 10 year Treasuries.
Think about that for a second
Bond investors are more willing to put their money into New Zealand Government bonds than US Government bonds. America is the world's largest economy. It is growing strongly and has the most powerful military in the world. By any financial market convention, our bonds should offer a higher interest rate than America's, but they don't. It's true Donald Trump is an outlier who has unleased US$1 trillion a year of deficit spending through tax cuts for the rich and more military spending, but even so, New Zealand being more attractive to lend to than America is exceptional.
This moment won't last forever. It's an opportunity to borrow, for example, $20 billion to fix the housing and transport crises in New Zealand's biggest cities within the next decade. Bond investors are awash with freshly minted money. Central banks in Japan and Europe are still inventing money to buy Japanese and European bonds off these investors. They are cashed up and old. That means they are desperate to invest in safe, fast-growing and stable economies they can trust: they would lend us the money in the blink of an eye at around that three percent level.
Instead, the Government is faffing around inventing infrastructure bonds, using the NZ Super Fund, writing new legislation and herding the infrastructure capital cats to get around the much simpler option of just borrowing the money. It also seems set on a path to argue the case to drop the debt target anchor/millstone from the next election. That means another two or three years of chronic congestion, rising homelessness, squeezed and leaky hospitals and schools, and anemic productivity growth.
It will be the biggest opportunity in a generation wasted because of an unjustified fear.
America's President Roosevelt spoke in his 1932 inaugural address about the need to get past fear when addressing a crisis.
"The only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance," he wrote.
He went on to transform America's economy, lifting it off its knees with radical public spending on dams, public works and job creation schemes. He closed the nations' banks for weeks and compulsorily bought all the gold in the country to move money out into the real economy.
Down at the other end of the planet shortly afterwards, the first Labour Prime Minister Michael Joseph Savage took equally radical measures to deal with a crisis. He borrowed money from his own central bank to create New Zealand's first state houses.
The ghost threat they fear is a backlash from bond vigilantes if the Government breaks its pledge to get down below 20 percent of GDP, or if there is some sort of natural or global financial crisis.
Sadly, the bond vigilantes are not a real thing and the 20 percent level is no trigger at all. Bond markets could not give a toss. In fact, they'd love to help New Zealand solve an infrastructure crisis caused by decades of under-investment by both flavours of Government and a population shock that none expected or wanted.
The wisdom of the crowds in the global bond markets are saying they love New Zealand Government debt, even more than than the love the debt of the world's most powerful country. New Zealand's 10 year Government bond yield was just 2.83 percent after the release of the Labour-led Government's first budget. Meanwhile, the debt guaranteed by the United States Government was trading at 3.09 percent.
The Labour-led coalition delivered its first Budget on Thursday by ticking all the boxes on extra operational spending in health, education and housing. It increased its state house building plans by 600 homes a year. But it also put off expensive plans to build a new prison and replace its half-century old fleet of Orions.
This Budget spending is a mere drop in the bucket compared to the actual needs of the biggest cities for truly transformative infrastructure spending on transport, housing, health and education. Our house building and development sector needs to be completely re-engineered to be permanently producing 50,000 houses a year from large scale factories that can be put into planned communities. The tyranny of the building cycle needs to be eradicated from the minds and spreadsheets of the people building their industry.
This Budget needed to be more ambitious and less fearful.
Robertson and Ardern may yet let their fears drop and make the case to remove the 20 percent debt target for the 2020 election. But that's at least three years away, and by then the bond vigilantes may be re-awakening.
This is a moment in time gone begging.