Analysis by Dr Bryce Edwards – What sort of topsy-turvy political world have we arrived at? This week, the Government continued to defend its fiscally conservative approach, in direct opposition to economists who suggest more spending is warranted. Even Treasury, the Reserve Bank, the private sector, and National appear to be open to much greater spending.
On Tuesday, Finance Minister Grant Robertson had to once again defend to economists why the Government is being so fiscally conservative – see Victoria Young’s Finance minister Grant Robertson resists calls for fiscal stimulus. Covering the Minister’s inaugural “Bloomberg address” in Auckland, this article reports: “Robertson says he will spend if necessary but for now he is resisting calls to use fiscal policy to stimulate New Zealand’s economy.”
Surely it should be the other way around. Shouldn’t a Labour Government be spending strongly on health, education, and infrastructure, with opposition coming from economists worried about debt levels and deficits? That would certainly be the normal order of things. Instead, there is a growing economic consensus about the need for Robertson and his Government to stop being so stingy and start spending on things the country urgently needs.
But as Reserve Bank Governor Adrian Orr has said, “we live in very very very interesting times”. This comment is meant in terms of fiscal and monetary conditions, yet this also applies to the political response to these conditions.
The KiwiBuild fiasco has again raised the issue of why the Government isn’t willing to invest in a mass programme of house building. The KiwiBuild reset announcement had a number of commentators arguing that the Government should be expanding house production rather than scaling back its ambitions.Most notably, Bernard Hickey argued yesterday that the Government could have undertaken a programme to make housing affordable, but this would have cost significant amounts of money and “would have necessitated a relaxation of the debt limit” – see: Young renters just got double toasted.
This couldn’t happen, Hickey says, because “our political class are still wedded to the idea that public debt should be as close to zero as is possible”. That means KiwiBuild, or any other proper house building programme, was always going to be undercut by a lack of ambition: “The decision by the Greens and Labour to both adopt the 20 percent debt target ruled out subsidising a mass house building programme.”
Hickey has argued many times for the Government to go beyond it’s highly-restrictive Budget Responsibility Rules and start spending. For example, last month he suggested that Robertson and Ardern have spent too many hours in the studio with Mike Hosking and this has made them overly-fearful of being more than National-lite on fiscal policy – see: The building case for big and long fiscal stimulus everywhere.
Similarly, former Labour politician Bryan Gould has complained that the current Government seems too “timid” and “foolish” to embark on the necessary state building programmes to meet New Zealand’s needs: “Many other countries around the world have followed this insight – not least, today, Japan and China – but, at various other times, countries like the pre-war United States re-arming under Franklin Roosevelt, and depression-ridden New Zealand under Michael Joseph Savage, when we built thousands of state houses and brought the Great Depression to an end in the 1930s” – see: More courage needed.
Gould says Robertson is failing to do the right and smart thing because he’s allowing National to set the political agenda: “It makes no sense for the government to be reluctant to borrow, when it can do so at virtually no cost, and could thereby provide a shot in the arm for a slowing economy – as well as proceeding with economically beneficial infrastructure projects. Sadly, Labour governments have often been unwilling to borrow when it would make sense to do so, for fear of being accused of profligacy, but this is to allow their opponents to set the agenda.”
And writing today, the boss of KiwiSaver company Simplicity, Sam Stubbs, says Government spending on infrastructure is urgent, and “In my 40 years of investing I’ve never seen such an opportunity. Why? Because demand, supply and price are in a rare and very close alignment. The demand for major infrastructure is clear, with many projects nationally and locally needing serious funding” – see: Government debt is low and borrowing is cheap; time to think very big.
Stubbs calls out the Government’s lack of action at a time when borrowing is so cheap and debt is so low: “fiscal restraint when interest rates are this low simply isn’t a rational way to manage any balance sheet, let alone a whole economy.” The Government’s reluctance to spend the necessary money just isn’t logical: “It’s looking increasingly like the Government is still wanting to save money for a rainy day, when its already raining. We need to build bridges over troubled waters in the short term, and we need them anyway. The case for investing heavily in infrastructure, using local money, is now compelling.”
Another private sector investor, Mark Fowler, writes in the Herald today that “the Government’s reluctance to spend” doesn’t make sense, and by building infrastructure they would be creating jobs, economic growth and valuable assets for the nation – see: Why are politicians so averse to investing for the future? (paywalled). He says Labour and National need to be listening more to the Reserve Bank, which is currently encouraging borrowing and spending.
Similarly, today TOP leader Geoff Simmons writes about the unsuccessful KiwiBuild reset, and argues that central government should be stepping in to fund the infrastructure necessary for massive new housing, and that this would be an “opportunity for the Government to finally be bold and transformative” – see: KiwiBuild reset shows Labour have completed their transition into National Lite.
The reluctance of politicians to deal properly with the “public infrastructure deficit” is also lamented by Pattrick Smellie, who says “our two main parties of government, National and Labour, are locked in a mindless contest to be the least willing to let the boat out on government debt” – see: Bone-headed debt debate ahead (paywalled).
Smellie points to Reserve Bank Governor Adrian Orr recently making “an unusually frank plea for the government to use its balance sheet strength” by spending more, and he says Orr’s request should be heeded. He argues that the “low-debt mantra” of the Finance Minister and others is harmful and unintelligent.
Although some more conservative economists are unconvinced about the need for a big spend-up, even former Reserve Bank economist Michael Reddell acknowledges that a good case can be made for more spending – see his blog post, Fiscal policy. He points out that by historical comparison, the current government is rather rightwing in its low level of expenditure.
What’s particularly interesting is Reddell’s calculations that the Labour-led Government are effectively spending less on health and education than National was under Bill English. Here’s his main point: “Education spending this year was last this low in 1988. Health spending has increased a little, but the share of GDP spent this year is lower than in all but the last two years of the previous National government. And this in a sector where the ageing population – and, arguably, advances in technology – could probably make a case for a rising share of government spending in GDP. At least if you were a party making the sorts of arguments Labour was making at the last election. There is something about their fiscal choices that – based on their professed values and rhetoric – doesn’t make a lot of sense to me”.
Nonetheless, the paradigm is changing fast, with everyone coming around to the need for increased government spending. This even includes the National Party. As Jenée Tibshraeny details, under finance spokesperson Paul Goldsmith National seems to be becoming much more fiscally liberal – see: National no longer sees need for government debt-to-GDP ratio to fall.
National is even relatively happy with the Government’s current levels of spending, with Goldsmith saying: “We think the figure at the moment is about right”. Furthermore, he says “if there are good opportunities to spend money on infrastructure, we’re open for that.”
This has been reinforced by a recent opinion piece by former National Finance Minister Steven Joyce, who has made the case for more spending. He’s outlined how at the time of the global financial crisis, his government spent more despite its declining income, and he argues it’s time for such an increase again – see: Here’s why the Government needs to spend more now.
Joyce says: “It makes sense in a slowing economy to bring forward infrastructure investment to boost economic activity and protect jobs. You get the economic boost from the extra spend, plus something to show for it. If you build the right infrastructure it can in turn boost economic growth in the future. Governments build things like hospitals, schools, prisons, electricity transmission lines, and new roads and railway tracks.”
Of course, National’s favoured target for infrastructure spending is on transport and roading, and Joyce claims the current Government are making disastrous cutbacks in this area.
With the clamour to spend more, there will now be a whole new debate on where this should occur. This topic is well covered by Liam Dann in his column, Get set for the most stimulating NZ election in a generation (paywalled). In this, he outlines how the ideological traditions of Labour and National will result in different areas for generosity at the next election. Beyond infrastructure spending – which both parties may end up agreeing on – it’s likely to be a question of more welfare spending (Labour) or tax cuts (National).
Regardless, Dann says to expect a new focus on spending over the next year: “Brace yourself, New Zealand. You’re about to get fiscally stimulated. With the Reserve Bank Governor, economists and business groups calling for the Government to inject more fuel into our slowing economic engine, the 2020 election is shaping up to be the most generous campaign in years. The time for austerity has passed. Politicians across the ideological spectrum have been given the green light to loosen the shackles on the Treasury vaults.”
For another very interesting discussion of these issues, see Thomas Coughlan’s National and Labour on the same page on debt. He points to National’s recent loosening of fiscal policy as being highly significant: “The concession was massive. If National wins power in 2020 and sets its debt limit for the rest of term, it would mean an increase of $36 billion over the 10 per cent target set by the previous National government’s finance minister, Steven Joyce.”
The topsy-turvy aspect of the situation could even play out further, Coughlan says, with National willing to set spending/debt targets higher than Labour: “If National really wanted to do something for the economy, it would set a public debt target above Labour’s. Such a target would probably align quite closely with where the business community would like to see public debt.”
And, if that seems odd, Coughlan also points out that it’s Treasury – alongside the Reserve Bank – that is currently signaling the need for, or possibility of, much higher government spending: “Even Treasury – that famously hawkish Government ministry – said net debt could rise to roughly 30 per cent of GDP and still leave headroom for a crisis like an earthquake or a recession. The case for borrowing has never been greater.”
Much of the debate about greater government spending relates to the possible use of an aggressive injection of money into the economy by Government if some sort of sharp recession struck. The common term for this is “helicopter money” – which is well explained by Thomas Coughlan: “Helicopter money is the nickname for stimulating the economy by putting money in peoples’ accounts, as if you had thrown it out of a helicopter” – see: Give Kiwis ‘helicopter money’ cash payouts if economy crashes – Treasury.
Finally, on the topic of the Government’s spending on housing and KiwiBuild, see my updated blog post, Cartoons about Labour’s KiwiBuild and the housing crisis.