Week in Review

Inside a $200b ‘rolling maul’ of debt

Treasury is forecasting the Government’s ongoing “rolling maul” of Covid-19 response spending will increase net debt by $140b to $200b in the next four years, but Grant Robertson argues younger taxpayers shouldn’t worry too much. Bernard Hickey analyses the biggest spending Budget in history and sees much, much more borrowing to come, but that’s OK. 

They have a gift for communications and are being forced to invent some big-spending tactics their predecessors could only have dreamed of. Now they have to convince New Zealand’s ‘team of five million’ to play the governmental and political game in a way at least two generations of voters have never seen before. 

Finance Minister Grant Robertson is Sports Minister in his spare time and is fond of using the language of rugby to explain a complicated and politically charged issue to a sceptical public in a way that resonates. So is his political and bubble partner, Prime Minister Ardern. It’s a communications tactic that has worked well for them in this Covid-19 crisis and was on show again in their ‘Rebuilding Together’ Budget.

Their Government ‘went hard and early’ in response to Covid-19, a tactic which has left them well ahead at half-time in a public health crisis where most other developed world democracies were clueless and cautious when the coronavirus whistle blew.

It was an idea that made sense to an All Black-loving public used to seeing a ferocious start and their team trotting into the sheds at half time with a big lead, knowing that second-half comebacks to win a game are a rare thing. 

So far the strategy has worked in a public health sense and the Government hopes it will work for both the economy and the Budget.

“I’m not a fan of austerity,” he said.

Robertson unveiled a Budget with a Covid-fighting fund with an extra $50 billion, on top of the $12.1 billion already announced on March 17, when he declared it was time for the Government to use its ‘rainy day’ fund to rescue the economy from a once-in-a-century catastrophe. He signaled then there would be much more to come and he did the same again with this budget, repeating the line that the Government was still adding to its spending as it responded to the Covid-19 crisis in a “rolling maul” of action.

“This is the rainy day, so we put the umbrella up,” Robertson told a Covid-19-thinned pre-Budget lockup of journalists and analysts. 

At least $20b of that extra $50b has yet to be specified, planned or announced, but it’s there. Robertson indicated some of it would go in health spending. He also said the Government was looking at more spending to support incomes of the most stressed, potentially including ‘helicopter payments’ of direct payments to broad groups of citizens.

“I’m not a fan of austerity,” he said.

Treasury’s forecasts show that is definitely the case. They show net new borrowing of $163.6b over the next five years, including the yet-to-be completed 2020/21 financial year to June 30. That will lift total net core crown debt to $200.8b or 53.6 percent of GDP by the end of June 2024. That’s up from 19 percent of GDP or $57.7b just 11 months ago.

Robertson said the $62b of spending promises in the last three months and in Budget 2020 would be just the beginning, just as the eventual $50b of spending on Canterbury Earthquake recovery work was more than five times the $8.8b estimated by then-Finance Minister Bill English in May 2011.

A 30 percent of GDP rise in our debt to GDP ratio in four years is off our historic charts.

For most New Zealanders older than 40, that type of debt explosion would be a terrifying prospect bound to be an extinction-level event for any finance minister and Government. Anyone watching politics and economics in New Zealand since the 1970s have developed an amygdula-level aversion to Government debt. It has underpinned every political debate, every fight over tax, and increasingly the very nature of Government ever since Robert Muldoon took the nation to the brink of economic collapse under massive foreign debts 36 years ago.

The ingrained assumption was that such a big spike in public debt in such a short period of time meant inevitably being overwhelmed by a spike in debt servicing costs and a currency collapse that would unleash the howls of bond market vigilantes and an eventually humiliating prostration in front of the International Monetary Fund and World Bank. 

This time is different

But that was then and this is now.

Back in the 1970s, 1980s and 1990s, the assumption was that double digit interest rates on Government debt, often denominated in foreign currencies, would quickly overwhelm any spending plan or tax cuts that implied a 30 percent rise in debt to GDP ratios.

Today, the Government’s 10 year bond yield is less than 1.0 percent, and could easily be closer to zero percent than two percent over the next five years. Deflation is a much bigger risk, and the Reserve Bank has effectively said it will do whatever it can to keep longer term interest rates low to support an economy in Wile E. Coyote mode and about to fall into price-and-wage reduction territory not seen since the 1930s.

All this means that the forecast borrowing costs barely rise in nominal terms beyond $4b from under $3b, and will be barely one percent of GDP by the middle of this decade.

Robertson pointed to low interest rates as the saving grace for any younger or older voters worried about ‘decades of debt’ being lumbered onto future generations. Numbers can appear larger than they are when they appear in the wing mirrors. The forecast $200b of debt is easily sustainable, even with a forecast 10 year bond yield of 2.2 percent by 2024.

So who will lend us the money?

The extra $160b in borrowing appears enormous in those wing mirrors too, but a closer look at what is expected to happen to interest rates here and overseas shows that number is much smaller. Central banks in Europe, America and Japan are printing trillions of dollars in cash to buy their own government bonds.

That frees up pension funds to invest that cash in other sovereign debt around the world, and particularly places less affected by Covid-19 and with proportionally lower net debt than other borrowers.

Then there’s also demand from our own Reserve Bank for those bonds. It has just nearly doubled its appetite to $60b inside two months, and has said it would be able to borrow up to 50 percent of Government bonds on issue.

That implies that the Reserve Bank still has room to increase its Quantitative Easing programme by another $40b to at least $100b. That would leave around $40b to be lent by overseas and local investors. 

At the current rate of printing in the northern hemisphere, that is just a week or two worth of central bank buying. 

The younger generations of voters are entering a world their parents would not recognise. Debt is one worry they can relegate behind the others, including housing affordability, climate change, geo-political tensions and their own health. 

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