Bill English. Photo / Sarah Ivey
When private sector demand is weak, that's the time the Government should step up its spending.
As we await another miserly Budget from Bill English we are entitled to wonder whether the Government is overdoing the fiscal discipline.
Has its aversion to debt changed from prudent caution into a kind of irrational phobia?
We have entered a phase where fiscal policy (the net effect of taxation and government spending) is contractionary.
It is reducing demand in the economy and acting as a drag on growth, at a time when unemployment is stubbornly high - around 3 percentage points or 60,000 people worse than in the years before the recession.
The Government's debt is low by developed country standards and it has rarely been cheaper for it to borrow.
English in his scene-setting speech to the Wellington Chamber of Commerce a month ago made it clear tight fiscal policy is a permanent thing as far as he is concerned.
Even after the books return to the black in two years' time, we should not expect much let-up.
The focus will then shift to the target of getting net Government debt back down to 20 per cent of gross domestic product by 2020. It is 28 per cent now.
It is, the Finance Minister said, "quite a challenge".
Especially as the assets counted in calculating net debt do not include those of the New Zealand Superannuation Fund, contributions to which the Government is committed to resuming.
The Government has occasionally run a sort of misery-loves-company line that at a time when households and businesses are tightening their belts, it should do the same. Presumably it thinks that message will go down well with the public, confident that most people have never heard of John Maynard Keynes.
It is precisely when private sector demand is weak and a lot of the economy's resources, especially the unemployed, are going to waste that the Government should step up its spending. Austerity is for booms, not slumps.
But it is not as if the Government, faced with the double whammy of the global financial crisis and the Canterbury earthquakes, has been unwilling to use the strength of the balance sheet it inherited after 14 straight years of Budget surpluses.
Net Government debt has climbed from $10 billion or just 5.5 per cent of GDP five years ago to $58 billion now.
Rebuilding that buffer - the capacity to absorb future shocks to the economy - is one of the arguments the Government uses to justify its tight fiscal policy.
Another argument is that debt costs money. At the moment the Government's interest bill represents just over 5c in the dollar of core Crown expenditure.
Is it fair to saddle future taxpayers not only with the higher health and pension costs of an ageing population but a much higher interest bill as well?
But another argument English has run is on the face of it less convincing.
It is the proposition that since the GFC the financial markets take a much less tolerant view of indebted Governments.
It is hard to square that "beware the bond vigilantes" view with the prevailing level of bond yields.
The Government's most recent tender of 10-year debt got away at an average yield of 3.2 per cent. That is about half the levels prevailing before the global financial crisis and reflects the low level of interest rates globally.
It could be argued, however, that those low rates are the intended result of massive bond purchases by central banks - quantitative easing - and that when that distortion is unwound the New Zealand Government's cost of borrowing will rise along with everyone else's.
In the meantime, though, at least we can say that the spread or interest rate differential between New Zealand bonds and benchmark US Treasuries has not changed much over recent years.
Can we count on that continuing?
The International Monetary Fund in a recent paper said that the costs of high public debt - from higher real interest rates and the distortions associated with the taxes needed to service the debt - had long been recognised.
But the recent crisis had brought to light another potential cost - the risk that a level of debt which is manageable when interest rates are low can trigger a vicious cycle if they rise substantially.
"If investors worried about a higher risk of default require higher risk premiums and thus higher interest rates, they make it more difficult for Governments to service debt, thereby increasing the risk of default and potentially making their worries self-fulfilling."
When debt is high, that might not take much of a change of heart by investors, the IMF says.
New Zealand Government debt levels are not high by international standards - gross debt is 40 per cent of GDP and net debt 28 per cent.
But the same cannot be said of the country's (as distinct from the Government's) debt to the rest of the world.
Foreign debt and other claims on the New Zealand economy exceed New Zealand assets abroad by $150 billion or 72 per cent of GDP. That is a conspicuously high ratio by international standards and is expected to get worse as the current account deficit widens.
That deficit is a measure of how far national saving falls short of funding investment in the economy.
And national saving includes government saving as well as that of the household and business sectors. So lifting national saving is another reason for the Government to return to surplus and resume the reduction of its debt.
Especially so since the Reserve Bank yesterday voiced concern at signs that the improvement in household saving rates may be stalling and that household debt is rising from a level already high relative to incomes.
The Government also argues that by running a tight fiscal policy it allows the bank to keep monetary policy looser than it otherwise could - lowering pressure on interest rates and the dollar.
However, as the bank reminded us yesterday, that silver lining comes with an increasingly ominous cloud in the form of rampant house price inflation, most notably in Auckland.
With the dollar as high as it is, the bank is reluctant to raise interest rates.
With the supply side of the housing market, especially in Auckland, unlikely to relieve the pressure on prices for years, and with gruesome examples in the Northern Hemisphere of what happens to an economy when a housing bubble bursts, at some point the bank is going to have to crush the demand side by raising interest rates.
If that coincides with fiscal contraction from a debt-obsessed Government, the effects could be unpleasant.