Peter Minten

Recently, Dave Stewart mentioned in his opinion piece that the debate about debt and debt limits was the language of fear.

I will try to explain here why I disagree with him. The world is awash with debt, on a governmental level, on a private level and a business level. Promoters of an economy funded by debt such as Dr Steve Keen and Dr Stephany Kelsey forget one thing: Servicing those debts comes from the real economy. It comes from cash that needs to be earned first. Therefore, if you engage in debt, you should use it to create something which enables you to pay that debt off in the future.

For the business community, this is pretty clear, but for private and public debt, it isn’t. Authorities should use debt to invest in infrastructure, science and education and so on, to create a society which is able to earn more and pay off the debt in the future. Ideally, private debt should be used in the same way by investing in yourself, by improving your skills and education or to start your own business, but, unfortunately, that is not the case. Private debt is mainly dedicated for consumption purposes.

Why does it matter? My thesis is that more governmental public debt in combination with a current account deficit increases economic inequality. The presence of a current account deficit is critical. What is a current account and why is a deficit so detrimental for an economy? A current account is a measure of all money flows in and out of a country, including trade income, investment income and money transfers. It explains the financial health of an economy. A current account deficit means more cash is flowing out of a country than comes in; they can’t pay their bills, and the shortfall needs to be made up with something else such as higher taxes, forced savings or selling the country's assets. Given the nature of the current coalition Government, they have chosen the second and third option. Mr Stewart mentions that New Zealand should increase borrowing to avoid the negative consequences of those choices made. He also uses the UK as an example of a country which could expand its borrowing. Is he aware that the current UK Labour government proposes to cut 5 billion pounds from benefit payments? Why would a Labour government put up such a harsh proposal and not simply expand government borrowing? You wouldn’t expect that from a Labour government, which I assume, Mr Stewart feels closely affiliated to.

The reason is that both the UK and New Zealand run high total debt levels. That is all debt, public and private, and both have a current account deficit meaning the country is not earning enough money to service those debts. Both countries embark on a forced savings strategy to deal with debt to reduce the interest levels they have to pay. (Ever wondered why interest rate levels in New Zealand and the UK are far higher than in comparative countries?) By focussing on forced savings measures and not increasing taxes, you can call it austerity, you increase the inequality within your society because middle and lower classes will have to pay the bill.

What about Japan then, I hear people say? Japan has the highest public debt, about 225 percent of GDP, and that is far higher than New Zealand and the UK. Japan has a low private debt and high internal savings, which were invested to develop Japanese industry. The result is that goods from Japan are in worldwide demand and, therefore, Japan has an enormous current account surplus mainly driven by trade. Because the Japanese are also fanatic savers, there is also a significant financial account surplus from investing in the rest of the world. (OJI fibres is owned by them and I assume we pay a handy dividend) Japan uses its massive current account deficit to service those public debts by buying up all the treasuries the government of Japan issues. This way, they keep interest costs very low.

Call me a prudent economic realist. The massive increase in debt during the previous government has only fuelled the housing market and consumption. Nothing of the massive $55 billion of Covid support was invested into future capabilities so we could deal with the aftermath later while we are in a position of being able to pay for it. We spent it all and now the chickens come home to roost. That is the current financial reality.

Disclaimer: I am not a trained economist. I view macro economics as a hobby of mine. For this opinion piece, I have used data from the OECD data indicator website regarding total public debt (government and local authorities) and current account data sets. I am currently following online lectures at the "Institut fuer Schweizerische Wirtschaft Politik” (Institute for Swiss Economic Policies) at the University of Luzern where a huge debate has emerged about the high level of public debt and the consequences for societies.