Grant Robertson says 'now is the time' to spend big on infrastructure

Finance Minister Grant Robertson presented the half-year economic and fiscal update in Wellington on Wednesday, giving more details of an increase in infrastructure spending. Photo / File

COMMENT:

After two years of running massive surpluses, Grant Robertson will loosen the purse strings to prop up the New Zealand economy.

The Finance Minister delivered a half-year update on Wednesday which includes a hefty infrastructure programme, with an additional $12 billion of new spending promised, more than half of which will go to new transport projects, mainly road and rail.

Combined with the impacts of a softer economy, the moves see the Government borrowing an additional $20b over the next four years.

Net debt will peak around $7b or 10 per cent higher than previously expected, pushing share of the economy above 20 per cent.

This breaches Labour's Budget Responsibility Rules - at least its original ones - but still leaves New Zealand's debt levels low by international standards.

It is also a far-from-unexpected development.

Robertson has been facing growing calls to take advantage of low interest rates to address identified spending needs, most notably from the governor of the Reserve Bank.

Robertson, who flagged the infrastructure spending at the Labour Party conference in late November, also appears to have the backing of the Treasury.

Caralee McLeish, who became secretary to the Treasury this year, said the increased infrastructure spending was a good example of fiscal policy (government spending) and monetary policy (interest rates) working together.

The Finance Minister has said in recent days that he is not aware of any economic commentators who disagree that conditions are right for investment and has claimed to have support from the business community.

Today's announcement, he said, would provide confidence to business leaders of a strong pipeline of government spending in the years to come.

"We believe that the conditions are now right for further capital investment in New Zealand," with well identified infrastructure needs, healthy government books and low interest rates.

Just how low interest rates are is remarkable. The rate at which the Government can borrow has now halved in two years, meaning that although in nominal terms borrowing is higher, the cost of covering New Zealand's net debt has fallen by more than $100 million a year.

The spending comes at a time when Treasury confirmed New Zealand's economy has slowed.

In May, Treasury forecast that the New Zealand economy would grow by 3 per cent in 2020, but the latest forecasts trims growth in 2020 to 2.2 per cent.

This will flow through to a lower tax take and higher welfare payments than previously thought.

The move will include political risks.

In next year's Budget, likely to be delivered a few months before the general election, Robertson is forecast to post a small deficit.

This, combined with the additional billions of spending, expose Robertson to accusations that the Government is spending more than it promised when it took office.

But if there is a time to increase spending and boost the economy in a way which has long-term benefits, it is hard to see a better time than now.