Comment

Invest to close the wellbeing deficits

Bernard Hickey argues the Government should use its strong balance sheet revealed today to borrow and invest just like any other over-crowded household with a high income, very little debt and very friendly bankers would do.

Just imagine what you would do if you looked closely at your household finances and discovered you actually were wealthier than you thought, and could get even wealthier by borrowing and investing in your own future.

Would you manage your household differently?

That's the question the Government should be asking itself, but isn't, and should. It is overly worried about future and vague risks, and ignoring the very clear and present day risks and costs in our homelessness, mental health, congestion, youth skills, obesity and climate change crises.

Even the Government's bankers and bond investors are saying the Government is being too cautious about borrowing to invest. Instead, the Government is sticking to a promise it made when it didn't think it would be in Government to live with it and before it knew the scale of the various infrastructure crises caused in part by a 10 percent population shock in the last five years.

Today's Crown accounts presented the Government with the opportunity of its lifetime. Unfortunately, it's a window of opportunity that may close before the Government has the confidence to jump through it.

Let me explain.

Just imagine your household's net worth had grown by $19.1 billion to $129.6 billion or 44.8 percent of your income in the last year. That's the Government's position in the year ended June 30, its Crown accounts showed. That means your assets, including the value of your house and car and pension, are worth nearly 44.8 percent of your income.

The average household income in New Zealand is around $106,000. If someone on that average income had financial news equally as good as the Government revealed today, that would mean their equity was worth $47,000, up from 40.3 percent of income or $40,341 last year.

And, on top of that, imagine that just about everyone in your household who could work is in a good job and your combined incomes are rising around 5.5 percent per year. Your debt servicing costs are 1.25 percent of income, or $1,325 a year. Put that all together and you have a household with $44,000 in assets a banker could rely on, an annual household income of $106,000 and rising, and borrowing costs of $1,325. That is a fantastic position to be in.

But you have a big problem. Just imagine your family's size had unexpectedly increased by 10 percent in five years and you hadn't planned for it by building a bigger house and getting a bigger car and getting them places in the local schools and hospitals. Unfortunately, because your family hadn't planned for it, your housing costs and commuting times have blown out. It's making your family less productive and making them sicker. They're learning less and having less fun. You're rich in assets and have hardly any interest costs, but poor in wellbeing.

Now, just imagine your bankers were begging you to borrow money at 2.8 percent to build a bigger, healthier house; buy a newer, safer and cleaner car; and be healthier, happier and have more fun.

Your bankers cannot quite believe that you don't believe in yourself enough to go ahead and borrow the money to build that house and buy that new lifestyle. They are so befuddled that they're willing to lend you the money at a cheaper rate than the biggest and richest family on the block. This has never happened before.

So what do you do?

In household terms this would be a no-brainer. In banking terms it is a no-brainer. In Government terms it is a no brainer.

So why isn't the Government investing much more heavily in housing and transport infrastructure, hospitals, schools and all the skilled staff to run these facilities?

Strong balance sheet and no hole

Finance Minister Grant Robertson told the media today that he was more worried about the risks to New Zealand from the global economy, biosecurity and natural disasters.

"It's important that we put money aside for a rainy day," Robertson said after presenting a set of Crown Accounts with a bigger than expected surplus, a larger cash surplus and lower net debt.

The budget surplus of $5.5 billion was $2.4 billion higher than forecast in May, and was $1.8 billion better than expected in underlying terms. The Government's net debt track improved to 19.9 percent of GDP. It has achieved its debt target with four years to spare of its five year plan.

Net debt was $2.2 billion less than forecast at $57.5 billion.

However, that measure doesn't take into account the Government's assets, including its land, highways, buildings and the assets in the New Zealand Superannuation Fund. This net worth measure rose to 44.8 percent of GDP.

Treasury and the Government might argue the Government couldn't sell these assets in a hurry if it had to (although the NZ Super Fund's assets are reasonably liquid) and therefore it's not the same as a usual measure of net worth.

The bankers are dead keen

But the bankers don't see it that way. In the case of a Government, it doesn't have a single bank like a normal household. The bond markets and ratings agencies are effectively the Government's 'banker' and they make judgments every day about the New Zealand Government's credit worthiness and their demand for our debt by trading our bonds.

The 10-year Government bond yield is in effect the 'wisdom of the crowds' in the markets about how much demand there is for our debt.

Right now, the 10-year is yielding 2.64 percent. That's 60 basis points below the 3.24 percent it costs Donald Trump's government to borrow for 10 years. This is unprecedented. New Zealand is generally seen as a riskier proposition than the world's biggest and richest economy. But not any more. That shows how keen global investors are to lend to us.

Using freshly minted money to build

Part of the reason for that is the European Central Bank and the Bank of Japan are still inventing money to buy their own Governments' bonds. The fund managers they buy them off in London, Tokyo and New York then have to use that cash to buy other Government bonds because they are often forced by their rules to buy Government bonds. So they are looking around the world for safe Government bonds in growth areas where there are stable politics and good prospects.

That is New Zealand.

We could be using that freshly invented money to build our rail lines, hospitals and schools. That would in turn improve the productivity of our workforce and in turn generate more tax revenues. That growth boost would easily pay for the interest costs of that extra debt.

Monetary policy needs mates too

One argument used to push back at the idea of a debt-funded infrastructure binge is that there is not the capacity in the economy and that it would generate inflation.

The latest data shows the economy does appear to be slowing. The Reserve Bank has even forecast that it may have to cut interest rates by another 100 basis points to 0.75 percent to ensure inflation gets back up to its 2.0 percent midpoint from around 1.6 percent now.

That would leave very little buffer to deal with a real shock down the track.

That's another reason why Grant Robertson should use the $12.5 billion of borrowing headroom within his existing 20 percent net debt track target to announce new infrastructure projects when he presents his half-yearly Budget statement in December.

In reality, the Government could easily borrow another $50 billion over the next five years to underwrite future growth and our bankers would not blink.

The only thing stopping it is a lack of confidence and a blind adherence to an arbitrary target that financial markets and voters are not worried about.

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