What we\u2019ll probably get over the next couple of months is an insufferable and unhelpful series of complex, contradictory claims and counterclaims as politicians attempt to pick \u201cfiscal holes\u201d in each other\u2019s policy.<\/p>\n
To quote a great Monty Python sketch:<\/p>\n
\u201cThat\u2019s not an argument; that\u2019s just contradiction.\u201d<\/p>\n
\u201cNo it isn\u2019t.\u201d<\/p>\n
Whatever it is, it\u2019s horrible.<\/p>\n
If you genuinely love rabbit-hole arguments about obegal versus obegalX or core Crown debt versus net debt, then you are a sick person.<\/p>\n
You probably think Star Wars got better when George Lucas explained that the Force was midichlorians that live in Luke Skywalker\u2019s cells.<\/p>\n
I think there is a case for pulling back from the granular detail and considering bigger questions.<\/p>\n
What\u2019s the right amount of debt for New Zealand?<\/p>\n
Well, that might depend on how we use it and what we\u2019re using it for.<\/p>\n
We\u2019ll hear right-wing politicians compare government spending to a household budget.<\/p>\n
We\u2019ll hear left-wing politicians (digging deeper into their macroeconomic textbook) arguing that Governments are very different to households.<\/p>\n
The problem is that both arguments carry some weight.<\/p>\n
There is a well-accepted macroeconomic principle that government debt is different from household debt.<\/p>\n
A Government can issue the currency it borrows in; a household can\u2019t.<\/p>\n
So New Zealand borrows mostly in NZ dollars, and the Reserve Bank controls that currency.<\/p>\n
A household facing a shortfall has to find someone else\u2019s money.<\/p>\n
A Government, in extreme conditions, can always create more of its own.<\/p>\n
But I don\u2019t think that is the slam dunk some on the left think it is.<\/p>\n
Like mortgaged households, beholden to banks, there are limits to sovereign debt \u2013 especially for small nations like New Zealand.<\/p>\n
Lately, people have been worrying about the United States national debt going through US$40 trillion.<\/p>\n
That\u2019s 125% of US GDP.<\/p>\n
According to the last set of Budget economic forecasts (the Befu for fiscal nerds), New Zealand\u2019s net core Crown debt is expected to peak at 46.1% of GDP in 2027\/28. It will then slowly decline to 44.4% of GDP in the outer forecast year (2029\/30).<\/p>\n
That\u2019s a lot lower than the US, right?<\/p>\n
But it is also a lot higher than New Zealand was carrying pre-Covid.<\/p>\n
The US gets away with high government debt because the greenback is the world\u2019s dominant reserve currency \u2013 global demand for US dollar assets keeps borrowing costs low regardless of the debt level.<\/p>\n
That\u2019s the theory at least. The outer limits of US borrowing haven\u2019t been tested, but the recent rise in long-dated US bond yields certainly raised some concerns.<\/p>\n
The US also has the intangible but relevant advantage of being the world\u2019s global military superpower.<\/p>\n
If all else fails, it could deploy the nuclear option (which I hope I mean figuratively) of defaulting, and there isn\u2019t much anyone could do by way of claiming assets.<\/p>\n
For the past 40 years or so, New Zealand Finance Ministers on both sides of the House have agreed we need to run tighter Crown debt levels.<\/p>\n
New Zealand, thanks largely to our housing market, has high levels of private debt relative to many of our peers.<\/p>\n
We have less of a pool of savings to balance that debt, and we have a large current account deficit (we spend more than we earn), so we have to be a bit more cautious with our government borrowing.<\/p>\n
We are also prone to expensive natural disasters, vulnerable to global shocks \u2013 from pandemics to Wall Street meltdowns. We rely heavily on a few major commodity exports for our foreign exchange earnings.<\/p>\n
So we need to maintain borrowing capacity in reserve to manage bad times.<\/p>\n
Starting tomorrow, the Business Herald will launch its annual Nation of Debt series, tallying a grand total of New Zealand gross debt.<\/p>\n
That\u2019s all the mortgage debt, farming debt, business debt, consumer debt, student, central and local government debt.<\/p>\n
It\u2019s a big, scary number, closing in on a trillion dollars.<\/p>\n
But in the end, don\u2019t think it is the specific debt number that should drive debate as much as what we are doing with the money we borrow.<\/p>\n
That\u2019s where we should be putting the acid on politicians.<\/p>\n
Of course, our debt has to be serviceable. We have to be sure we can keep paying it back at a pace the international credit rating agencies are happy with.<\/p>\n
Weirdly, the likes of S&P, Moody\u2019s and Fitch always seem surprisingly chill on that point.<\/p>\n
After that, I think we should look at debt the way a business investor does.<\/p>\n
Again, different from a Government in many ways, but bear with me.<\/p>\n
Are we borrowing for growth or survival?<\/p>\n
The latter is not sustainable. But borrowing for growth isn\u2019t just approved of by business investors; it\u2019s expected.<\/p>\n
A company that runs a low-debt, low-growth strategy often loses the interest of investors.<\/p>\n
That brings us to the problem many New Zealanders have with increased Government borrowing.<\/p>\n
It is how efficiently we invest the money.<\/p>\n
It is very easy to make the case that we should borrow more and use it to invest in infrastructure and fix our health system.<\/p>\n
Governments can borrow cheaply, so they can just invest in areas that generate efficiency and productivity gains in excess of the cost of borrowing.<\/p>\n
Simple, right? But does it actually happen that way?<\/p>\n
Like many, I am sceptical about the ability of the Government to spend money efficiently.<\/p>\n
I\u2019m not sceptical on a deep ideological level. It is just that the evidence on the basis of the past decade or so of borrowing is poor.<\/p>\n
I want to see Governments invest in growth.<\/p>\n
But parties that advocate for that path (frankly, this includes both Labour and National based on current fiscal policy) need to earn back the public\u2019s trust on how they spend the money they borrow.<\/p>\n
That is what I think is missing in the great debt debate.<\/p>\n
The real Star Wars question was never how many midichlorians were needed to create the Force; it was how the Force was used.<\/p>\n
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.<\/p>\n