Analysis by Keith Rankin.
Budget-related Economic Chatter
Last week in New Zealand was Budget week, and the chatter about the burden of government debt reached a crescendo. I will highlight here comments made, on Monday 11 May, by four economists with substantial media profiles, from Radio New Zealand’s Nine to Noon (hosted by Kathryn Ryan), and TVNZ’s Q+A (hosted by Jack Tame).
These economists – Brad Olsen (Infometrics), Sharon Zollner (ANZ), Shamubeel Equab – (all under 40 years old, as I understand) – and Cameron Bagrie (I think in his 40s). These are all highly capable professionals, with plenty of great insights to offer the New Zealand public.
The problem comes in two ways. Firstly, the lines of questioning such economists face reflect sets of unexamined assumptions. Secondly, most of our economists come from the same ‘liberal bourgeois’ mindplace as the journalists they engage with, and therefore are susceptible to normative assumptions infiltrating their analyses.
(Note here that use of the word ‘bourgeois’ is often associated with Marxist writing. I use the word here, not out of any Marxian sympathies, but because it is the best word to describe the mindframe that governs so much of our public discourse; and it is the mindframe that prevents so many people from engaging with even simple ideas that to not fit the liberal bourgeois sets of assumptions.)
The central issue here is that of government debt, and its presumed link to intergenerational inequity. The sense is that, when governments incur debt, they are grabbing ‘money’ (understood as a synonym of ‘wealth’) from the future, to satisfy the requirements of the present.
“Thursday’s Budget is set to reveal a wall of debt that will see debt-to-GDP soar. … Just how much debt can the country afford to take on?” (Kathryn Ryan)
Note the presumptive use of hyperbole [“wall” and “soar”], and the assumption that the debt of the government is the debt of “the country”. This latter characterisation of public debt leads to the ludicrous idea that creditor countries such as the Netherlands and Germany are in fact substantial debtor countries. Germany has a public debt to GDP ratio of 60%, and the Netherlands has a ratio of 49%. Indeed, under this characterisation, every ‘country’ in the world has an alleged debt; Yet, by definition, the world as a whole must have a debt of zero.
“We know what’s happening, spending and debt [are] rising….” (Kathryn Ryan)
Note that ‘spending’ is presented as a negative, a bad thing that raises debt. This idea about spending is pure mercantilism, noting that ‘mercantilism’ is to economics what ‘alchemy’ is to chemistry. The supposition is that the economic purpose of life is to ‘make money’, and that spending undermines this purpose (as in ‘the more money we spend now, the more money we must make in the future, to restore the coffers’). In particular, this mercantilist narrative sees exports as good (‘making money for a nation’) and spending on imports as bad (‘losing money as a nation’). [In fact imports are an economic benefit to a nation, exports are a cost – what must be given up – and spending is the market force without which there could be no market economy.]
“… the third rail of superannuation, will it come on the table again? …” (Kathryn Ryan)
“… I think there are a few holy cows, sacred cows that might be getting a little worried; superannuation is a biggie, the fact that it’s just universal, not means-tested, and kicks in at age 65 …” (Sharon Zollner)
Actually, the most sacred of sacred cows is the ‘financial responsibility’ rule that dictates government debt should be less than 50% of GDP, and preferably at around 20% of GDP.
The general tenor of Zollner’s comment is that taxes will have to be higher than they would otherwise be, and future benefits will have to be cut, in order to restore the government debt ratio to 20% of GDP.
Forcing older people to delay retirement at a time of potentially high unemployment makes no sense whatsoever. Retirement of workers today – and funding that retirement – is part of the solution, not part of the problem. The worst possible form of intergenerational inequity being contemplated this century is the raising of the age of qualification for New Zealand Superannuation; ironically it is the young people themselves who are most strongly promoting that policy, and the oldies who would be unaffected who are most strongly defending the rights of future generations to be able to retire and enjoy some life free from the dictates of market forces.
“… borrowed money needs to be paid back sometime, and that goes back to those issues of intergenerational fairness that you touched on … we have limited fiscal resources … it’s very important given the debt we are going to leave the younger generations with that we invest in projects that increase the productive capacity of the economy so that these things will in time pay for themselves …”
“… the key thing for me is who’s going to be left with this debt; I’m a young person … this is going to fall on young people if we don’t have a plan to pay it back … the people 30 years down the track, if we don’t have a plan are going to be saddled with this higher debt, so we have to have some idea what the timeframe is, and if the government is willing to take on some of these hard decisions, or if it’s going to pass the buck down to the further generations; not only to pay it back but to make those tough choices as well … (Brad Olsen)
“… look, we’ve had many decades of not dealing with the hard issues when it comes to the fiscal situation, whether it’s around aging or the superannuation questions … we have to think about, collectively, what’s the fairest way of paying [the debt] back …” (Shamubeel Eaqub)
In the abstract we may have ‘limited resources’, but the biggest present problem we are hearing about is excess labour (indeed much of the RNZ interview was about unemployment), an abundance rather than a scarcity of resources. The narrative suggests that, due to a scarcity of resources today we must conjure up resources from the future, and that these teleported resources will have to be extinguished (paid back) in the future. The narrative is that a conjuring of resources today must be accompanied by a deconjuring of these resources tomorrow.
The amount of gold (what most of us still tend to think of as real money) that is sitting in either goldmines or bank vaults will not make any difference to what is affordable or what is not affordable in the future. Money is not a limited resource, it’s a social technology.
The real issue is about how both present and future generations can have higher living standards, noting that living standards have taken a setback in 2020 due to the pandemic. Tricks around the conjuring of money today – pretending that newly created money comes from the future (rather than the present balance sheets of our central banks) – and the timing of when that money should be deconjured are in no way helpful. Failure to do the best we can today for the people alive in the world today will make things worse for future populations, not better.
“How bad are the books likely to be? (Jack Tame)
“In a word, terrible. … [we can expect fiscal deficits larger than] what I have seen in my working lifetime … ” (Cameron Bagrie)
“How are we going to pay for this? (Jack Tame)
“That’s the million dollar question on the other side [of the balance sheet]. … Borrowing today we are putting a tax or a liability on the next generation. The options are asset sales … spending restraint.… Or tax increases; look, at some stage I think that is going to be inevitable. I think we are going to need to make some pretty tough decisions in regard to those sacred cows we don’t want to talk about, such as the likes of raising the retirement age; well sorry, that one needs to get done. But the big one is, just make the economy grow faster. If the economy is doing well we are paying more tax … but its easier said than done to get a whole lot of magical growth out of this on the other side.” (Cameron Bagrie)
If governments do not borrow now – and borrow big – then interest rates in all the main national economies might have to be substantially negative in order to get desired saving and desired borrowing into balance. The biggest question for now is what would happen to the global market economy if governments fail to act as ‘borrowers of last resort’.
Bagrie is firmly wearing his ‘mercantilist hat’ when he talks about paying back the debt, and flogging our future 60-somethings as a way to help do this. But he wears his ‘economist hat’ when he says that economic growth is the best way (indeed the historical way) of achieving lower debt to GDP percentages. One real problem that economists who think inside the box face is that economic growth, as box-dwelling economists understand it, may itself be a part of the problem that future generations will need to untangle humanity from.
(The actual solution here is to expand the ‘relaxation’ ring of the economic pie chart; and to shrink the divided pie. This will require higher taxes and higher universal benefits; not to burden the rich or anyone else, but to ensure that non-labour income is distributed less inequitably. Twentieth-century solutions to inequality that focus on ‘jobs, jobs, jobs’ not only will not stem rising inequality; logically labour income cannot provide a solution when it represents a falling share of total income.)
How did the New Zealand government ‘repay’ its debt after the GFC?
Did the Australian government repay its debt? The UK?
New Zealand did not raise taxes to repay the post-GFC (global financial crisis) government debt. Nevertheless, that debt did fall back to under 20% of GDP. (See Chart Analysis – National Income, Spending and Debt.) The debt fell back in large part because of economic growth; one feature of that growth in New Zealand was the government running Budget surpluses from 2015, shown in red in the third chart. By definition, Budget surpluses means the repaying of net debt on the government’s balance sheet.
There was no policy in New Zealand to repay debt. No new taxes were used to repay that debt. No benefit cuts were introduced to repay that debt. Rather, the private sector in New Zealand became confident to run financial deficits; these private sector deficits are the main drivers of economic growth, and of rising tax revenues in entrepreneurial capitalist economies.
Back in 2009 there was much angst about the prospect of a decade of deficits’. We were worried then about how we would ever pay it all back. Not only was it so easy to pay back that we didn’t notice we were doing so, but the amount of new government debt incurred was less than we thought. The media narrative at the time was that the debt would be huge.
Australia, which did not experience a recession in 2009, did however experience a decade of government deficits. It had similar economic growth to New Zealand, powered also in large part by private sector deficits. But the Australian government did not prioritise the doctrinal sacred cow of ‘fiscal responsibility’. (Australia had other priorities, like funding cancer treatments, and tax cuts.) It did not pay back the government debt it incurred over the last decade, to the point that government debt in Australia reached 41.5% of GDP in 2018. Despite its failure to pay back the debt, compared with almost all other advanced capitalist countries, the Australian government serves an example of fiscal rectitude.
In 2010, the United Kingdom tried to implement an austerity policy – called fiscal consolidation – to repay its GFC-incurred government debt. It tried to do this before the private sector was ready to run financial surpluses. Thus, the Cameron government snatched fiscal defeat from the jaws of victory. Only the 2012 Olympic Games prevented the United Kingdom from moving into a post-recession recession. The United Kingdom experience is shown in the fourth chart of Chart Analysis – National Income, Spending and Debt. The result of the United Kingdom trying to repay its government debt was a government debt to GDP percentage of 83% in 2017, up from 34% before the GFC. In the UK the government tried to reduce its deficit at the same time that the private sector was trying to repay its debt. The result was that economic growth was suppressed, and government deficits remained at over 5% of GDP until 2015.
The European Union and the rest of the World, in the long run.
The European Union had the same idea as the United Kingdom. But, in the Eurozone, the private sector showed no interest in running deficits. Thus, government deficits accommodated private surpluses. However, by Eurozone edict, governments were determined to get their deficits down. The Eurozone succeeded by running a mercantilist economy, using low interest rates and exchange rates so that the Eurozone could run large foreign sector deficits (otherwise known as current account surpluses). The Eurozone wanted to make money by exporting much more than it imported. The Eurozone sees itself as an export economy.
Government debt levels remain high in the Eurozone; for example 60% of GDP in Germany. The fifth chart of Chart Analysis – National Income, Spending and Debt reveals the Eurozone’s long run strategy. On government debt, the plan is to run balanced budgets; and I expect that the European Commission will try to revert to that plan as soon as possible, following Europe’s severe Covid19 emergency. They do not plan to ‘pay back’ the government debt; rather their plan is to let the debt percentage fall as a result of export-led GDP growth.
The guts of the Eurozone strategy, shown by the Eurozone chart, is to have annual private sector surpluses at about 4% of GDP (in blue), matched by current account surpluses (foreign sector deficits, in green). And to do this into eternity.
What it effectively means is that, over time, the Eurozone hopes to give away 4% of its GDP every year. This is because, each year, countries outside of the Eurozone will buy 4% of the Eurozone’s output on tick, and will never repay that debt. If the world economy grows each year, these countries will have a stable debt percentage of their GDPs. These countries will never need to repay their debts to their Eurozone creditors. Further, Eurozone investors and exporters will continue to knock on the doors of these countries, asking them to keep importing goods and services from Europe, without asking for payment for those imports. Because Europe wants to perpetually export more than it imports, it therefore wants the rest of the world to import more than it exports, into perpetuity.
Giving away 4% of its GDP seems a strange wish for Europe to have. But it’s a reflection of the same sorts of mercantilist thinking that New Zealand’s liberal bourgeois journalists and economists indulge in when they claim that future generations of New Zealanders will have to pay back, as a burden, the money that we today appear to be conjuring from their future.