He’s loosened the straitjacket, now escape the asylum
After finally signalling a much-needed loosening of debt rules, Grant Robertson should look to go further and end New Zealand's infrastructure drought.
Grant Robertson has finally announced his much-ridiculed goal of reducing net core crown debt to 20 percent of GDP by 2021/22 will be replaced by a new debt envelope of 15 to 25 percent.
It’s not a climb down. The new target range will only kick in after 2021/22, after the original target has been achieved, but it’s an indication the Government is starting to see sense by moving to plug the gaping infrastructure infrastructure deficit.
Economist Shamubeel Eaqub has called the rules a “fiscal straitjacket”, and celebrated the debt target being loosened. But Robertson’s new target is little better, committing the Government to maintaining debt at punitively low levels, while the country’s infrastructure deficit goes unfilled.
New Zealand has a massive infrastructure deficit. Our roads, rail, ports — everything — is lagging behind what it should be, both in terms of quality and quantity. This is compounded by the fact that our population is growing.
An ANZ report from last year showed new capital spending for each 1,000 additional people has fallen from $142 million in 2011/12 to just $37 million in 2016/17. Simply put, that equates to not enough money being spent when it should have been on the essential infrastructure.
It slows New Zealand’s economy, keeps us stuck in traffic when we should be at work, stymies the movement of goods around the country and chokes our productivity. It’s one of the reasons why incomes here are so much lower than in Australia.
New Zealand has pursued a programme of absurdly low debt following a massive blow-out during the Muldoon and Lange years. After reducing net debt to an historic low of just 5 percent of GDP in 1974 Muldoon’s economic mismanagement and the reform of the Lange years saw debt blow out to 52 percent of GDP in 1992.
Two pieces of legislation, the Public Finance Act and the Fiscal Responsibility Act, were designed to rein this in, forcing the Government to commit to publishing a fiscal policy that would commit it to paying down debt and keep debt at “prudent” levels thereafter.
At the time, Labour MP Paul Swain said the Fiscal Responsibility rules were a legislative “strait-jacket” on fiscal policy — a definition which has stuck. And while the legislation has been effective at pushing debt down to some of the lowest levels in the OECD, it has also meant that essential infrastructure projects have gone wanting, leaving New Zealanders poorer and less productive.
KiwiBank chief economist Jarrod Kerr said the change just announced was positive, but believes the target should be scrapped altogether.
This would seem to be a good idea. If the debt target is a fiscal straitjacket, the Public Finance Act is the asylum.
Loosening the straitjacket is one thing, but the Government is still trapped by the way of thinking that has hampered its infrastructure spending for too long.
After speaking to rating agencies last year, I was told New Zealand could allow its debt to head to 30 percent of GDP — roughly $35 billion dollars higher than the current target — before they would even bat an eyelid.
Think about that in the context of the $1.4 billion Waterview tunnel or the $6 billion estimated cost of Auckland’s light rail. Up and down the country there are scores of similar projects that would help New Zealanders into the world of high productivity. You could start with the infrastructure we’ll need as the harmful effects of climate change start to bite.
Robertson this morning raised the fair objection that simply saying ‘yes’ to a long list of projects is impossible, given the construction industry is currently at capacity.
This is a fair point. The Australian government faced a similar issue in the last decade when it decided to green light years' worth of infrastructure projects at once, leading to massive cost blow-outs as construction costs skyrocketed upwards.
This problem should be solved, as Kerr has suggested, by keeping the door open to skilled migration. Yes, migrants will themselves place pressure on infrastructure, but over time they contribute far more than they take out.
But the main problem is the one imposed by the Public Finance Act, which commits the Government to low debt, but doesn’t balance this against the risks of hollowing out New Zealand’s infrastructure, which leaves the country poorer in the long term.