The Government’s focus on deficit and public debt reduction isn’t working to grow the economy this time around because households are too indebted and businesses are too worried to step up and power that growth by investing and spending. The National-led coalition’s fear of public debt is misplaced and its strategy of repressing the size of Government and relying on the rest of the economy to grow can’t work without another housing boom, which no one is predicting or say they want.
Instead, New Zealand’s economy is stuck in a self-reinforcing stagnation, frozen in a fog of fear of job losses, house price falls and shrinking public services. The only balance sheet strong enough and accessible enough to break the investment deadlock is the Government’s. The trouble is National’s fear of borrowing to invest in ramping up productivity is infecting the rest of the economy.
US President Franklin Delano Roosevelt identified something axiomatic about how economies work when he said in his 1933 inaugural address at the pit of a depression that: “The only thing we have to fear is...fear itself — nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance.”
In my view, the Government’s irrational fear of public debt has paralysed our political economy. I detail below and in the video/podcast above why that fear is unjustified and why public investment is needed this time around. That’s because in previous recoveries, households and businesses were much less indebted, were able to borrow from banks more easily, and there was much more confidence investment would pay off through another house price boom.
Elsewhere in the news around Aotearoa’s political economy of housing, climate and poverty this morning:
* The Climate Commission has warned the Government it would need to double Aotearoa’s rate of emissions reduction to meet its legislated targets. PM Christopher Luxon said he still thought New Zealand would achieve net zero by 2050, and may even do it a few years earlier;
* New Zealand First is considering an election policy to help first home buyers by having the Government jointly buy their homes with a Crown guarantee to lower mortgage costs. Ella Somers reported for Interest yesterday from an interview with Shane Jones that: “Within defined areas, if you wanted to facilitate New Zealand families owning a home, then the Crown would own the home with you. And to lessen the burden of the full acquisition cost, qualifying households would become joint owners with the Crown, which over time would either sell down its equity or wait until the house was actually sold, and the Crown would take out the portion of the value of the property at the point of disposal.”;
* In local economic and poverty news: Kiwibank published its third annual State of Savings Index survey by Talbot Mills this morning, showing 40% of New Zealanders had borrowed to cover living costs and 32% were not able to cope with an unexpected bill of $500;
* In global economic news: Oil prices rose over US$95/barrel overnight after Iranian allies in Yemen forced four Saudi oil tankers to turn back from transiting out of the Red Sea through the Bab el Mandeb Strait, and Donald Trump threatened to bomb Iranian power plants;
* In solutions news: the Public Health Communications Centre has proposed a nationwide universal vaccination programme to prevent RSV and free up room in hospitals; and,
* In today’s scoops: Joanne Naish reports this morning for The Press-$ that Christchurch Hospital’s Emergency Department is bursting at the seams, while Michael Morrah reports for NZ Herald on the case of a patient who suffered a spinal fracture as nurses warn of unsafe staffing levels.
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The only thing NZ has to fear is the fear of (Govt) debt itself
For a PM who professes confidence about the country’s future and is eager for ‘growth, growth, growth’, Christopher Luxon is remarkably fearful about using the tools at his disposal to generate that growth.
The National-led Government’s entire strategy is focused on budget deficit and public debt reduction, which Luxon says will repair a ‘budget hole’ and reduce inflation and mortgage rates, in order to boost growth and jobs. But none of that is happening. Government debt is growing by $450 million a week, inflation is 4.1%, mortgage rates are rising, income per capita has fallen 2.7% in the last three years and unemployment is much higher than Treasury expected.
In my view, the strategy isn’t working because the National-led Coalition’s ‘North Star’ of crunching down the size of Government to under 30% of GDP with a sinking lid on new spending can only work to grow the economy when households and businesses and farmers borrow more to invest and spend at the same time. They aren’t, and they can’t, because households already have too much debt and the Reserve Bank won’t let banks increase lending to them fast enough to offset a contracting Government. Also, those who could afford to borrow — landlords, farmers and businesses — aren’t confident enough to borrow and banks aren’t interested enough to lend to them because the housing market is depressed and so is consumer spending.
New Zealand’s economy was never in the public debt spiral pointed to by Luxon and isn’t now. But it is now in a self-reinforcing confidence and spending stagnation, which has fed on itself for most of the last two years. It has been worsened by the latest energy price shock, but that’s not the main problem. Luxon believes all he needs to do is hold back the Government and businesses and households will step forward with higher export earnings, consumption and investment. He and Treasury think that because that worked in the past when Governments repressed spending after crisis responses in the early 1990s after Ruth Richardson’s budget cuts, the early 2000s after the Dotcom bubble burst, the late 2000s after the GFC, and then after the Christchurch quakes in the early 2010s.
The trouble is those recoveries relied on house price and mortgage lending booms, influxes of foreign capital after the quakes, along with little bits of help from higher tourism and farming exports. Those rebounds happened without Reserve Bank lending restrictions, before households were full up with debt, were turbo-charged by housing booms, and happened at a time when banks lent to farmers and businesses. There has been no net new lending to (non property) businesses and farmers since Covid. Luxon believes we have a real economy that can export and invest its way to growth.
Actually, we’re still a housing market with bits tacked on. Luxon, Treasury, and the rest of the economy are waking up to the truth our economy doesn’t work without housing booms. He may argue we just need more time and get luckier by avoiding more Trump-triggered trade and energy hiccups. But serious growth from exports simply isn’t enough in a mathematical sense. Our export sector is now worth just 25% of GDP, down from 35% of GDP 25 years ago.
Growing our economy substantially through exports alone would require imports to be flat, which is not possible with higher fuel prices, and for the export growth to be multiple times higher than is possible or being seen. Our economy is based on domestic services and construction, all of which are either Government-run or depend on Government investment in infrastructure before growth begins.
No, PM, we don’t have a public debt problem or a ‘fiscal hole’
Luxon restated his Government’s strategy succinctly and pithily in an interview last week with the Financial Times, arguing against the ‘sugar rush economics’ of the Jacinda Ardern era and that the country’s finances were “in bad shape” when he was elected in 2023.
“We’ve had to make the tough decision and say, look, we’re coming off the sugar-rush economics that’s caused so much pain and suffering,” he said, arguing that Labour had abandoned fiscal discipline during the pandemic. Luxon blamed higher spending under Ardern for driving up inflation, necessitating rapid interest rate rises that tipped the country into recession. Labour has argued that inflation — which rose as high as 7.3 per cent — was a reflection of global economic trends.
“What we learnt through their Covid response was that actually just getting the cash bazooka out and firing cash around might have given a lot of short-term gain, but it created a lot of long-term pain.
“It’s been a tough and challenging time as we’ve had to dig ourselves out of that hole and repair, but [New Zealanders] understand that the financial discipline and having the adults in the room running the show has been actually very good to set New Zealand up for the long term.”
It’s worth challenging Luxon’s comments about fiscal holes. The OECD’s survey in May showed its measure of New Zealand Central Government net debt was 13.6% of GDP in 2024, while its Gross measure was 57%. That compares with US net public debt of 96% and UK net public debt of 74%.
That net debt figure also doesn’t take into account the Government’s assets, or its very liquid New Zealand Superannuation Fund. The Government’s net equity position was $187 billion or 40.2% of GDP at the end of May. That’s also more than 110% of the Government’s annual revenues.
The Government’s net interest expense after receiving interest on assets and dividends on assets was $2.6 billion in the 11 months to the end of May, which represents just 1.7% of total Government revenues.
So when Luxon says the Government’s finances were in a mess, that would be like a renting family saying it couldn’t afford to borrow to buy a house because its rent costs 1.7% of its income and it ‘only’ had equity worth 110% of its annual income.
Instead, Luxon is saying he’d prefer households borrow more to spend and invest, even though households collectively have mortgages worth 160% of their disposable income and their interest costs are worth 8% of disposable income. In context, that means the household sector is at least four times more indebted than the Government, relative to income, and household interest costs are at least four times higher than the Government’s.
New Zealand does not have a public debt or interest problem. It has a household debt and interest problem. Relying on households to grow the economy is a fools errand.
My Top Pick n’ Mix Six
* Interview with Abuse in Care survivor Keith Wiffin by Lyric Waiwiri-Smith for The Spinoff:’Two years on from the inquiry, I’m despondent’ ‘I don’t see meaningful compensation ever being made with this government, but that doesn’t mean to say that it can’t happen in the future.’
* Scoop by Andrea Vance for The Post-$: The mystery of the missing Navy journal that criticises Trump and ‘irresponsible’ US
* Deep-dive by Chelsea Daniels and Katie Bradford for NZ Herald Front Page: Who will really end up paying for fast-tracked projects?; NZ Herald Video: Is the Fast-track Act delivering growth or creating problems?
* Deep-dive by Hayden Donnell for The Spinoff: After six years of housing delay, a call for more housing delay. ‘At Auckland Council, compromise only really comes from one side of the housing debate.’
* Analysis by BNZ’s Mike Jones for Newsroom: Housing supply tipped to curb house price gains through 2027
* Deep-dive by Rachel Pannett for BusinessDesk-$: Who’s really using Seymour’s red tape tipline ‘Seymour promised to “smoke out” any lobbyists, but big businesses have used it. Sector-specific requests account for some 17% of submissions to tip line.’
Front page of the Day: A climate response
Cartoon of the Day: Matua pads
Timeline-cleansing nature pic: Off for a swim
Anything I’ve missed?
cheers
Bernard
PS: I update this post online later in the morning, including more detailed Picks n’ Mixes on housing, climate and poverty, a chart pack and more cartoons. It is only available to paying subscribers, who are also enabled to comment and use The Kākā’s chat room. Check back in here later this morning to see the full lists and chart pack.
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