The Front Page: Budget 2023 preview – Should NZ take on more debt to build necessary infrastructure?

New Zealand has faced major infrastructure concerns in recent years. Photo/Dean Purcell.

In every Budget, New Zealand faces the option between fiscal responsibility and borrowing to invest in the necessary infrastructure.

In recent decades, political leaders for both Labour and National leaned heavily in favour of not taking on too much debt. Sense Partners economist Shamubeel Eaqub explains that this approach has its roots in the calamitous thinking of the 1970s and 80s.

“Across our political spectrum, there is a general commitment to sustainable finance and this is definitely a throwback to the disaster that New Zealand faced under [Robert] Muldoon when the country almost went bankrupt, leading to huge reforms in the 1980s,” says Eaqub.

The commitment to financial responsibility means that our country is now in a far better financial position than many other countries, but this does come at a cost.

“There’s always a trade-off,” says Eaqub.

“When we choose not to borrow, we also choose not to invest. When you borrow money it’s not for paying bills – that’s what taxes are for. Most of the money that we borrow is usually for investment in our infrastructure, and that’s an area where New Zealand has been left behind. We’re not the only ones, but we have a huge infrastructure deficit that will take a huge amount of investment to overcome.”

This deficit applies to our rail, roading, buildings, healthcare, education, housing stock and myriad other parts of our society.

“On top of that, we’ve got all the climate-change related issues … and we have to invest more infrastructure to make our cities more resilient.”

None of these problems are going away, and they will only worsen over time unless more investment is put into rectifying those issues.

The Government committed to raising New Zealand’s public debt ceiling to 30 per cent of GDP, but Finance Minister Grant Robertson has so far been reluctant to tap into that additional headroom.

“There was quite a bit of work done by the Treasury, which asked: What is a responsible amount of debt that New Zealand should have? Essentially, after all that work was done, they said about 30 per cent of GDP is a good target, if we also do two things. One is to run deficits only during periods of crises, and secondly, when we choose investment projects, we choose them wisely.”

Eaqub says that, even with the impact of Covid factored in, New Zealand still didn’t use all the headroom available.

He says you can’t blame New Zealand’s infrastructure deficit on any one political party.

“They’re all spineless. None of them are willing to actually front up and put real dollars on the line to invest long-term in our infrastructure.

“What we’ve seen is that they are willing to borrow a little bit more for a crisis response, which is absolutely right. But I think we also need to have more borrowing for actually investing in our infrastructure.”

That political inertia has essentially locked us in a low-debt, low-investment situation, where politicians focus more on short-term gains rather than the longer-term benefits of investing in the future, he says.

This short-term approach is reflected in the current debate focused on inflation.

“Improving our roading capacity, bridges or improving our rail system will take five, 10 or 15 years to deliver. We should not be so myopic as to change all our long-term decisions because of that. Arguably, in the long term, having better infrastructure and more efficient transport will reduce our inflation problems, not make them worse.”

So how likely are our politicians to invest more in infrastructure? Why are other countries more willing to take on debt? And is our AAA credit rating at risk if we do take on more debt?

Listen to the full episode of The Front Page podcast to hear more on this issue in the lead-up to Budget 2023.

The Front Page is a daily news podcast from the New Zealand Herald, available to listen to every weekday from 5am.

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