John Roughan: Budget 2022 and why the public debt is important

OPINION:

Every time I read a Budget from this Government I am left with one recurring question: how did it decide to spend that particular sum on that item? The spending decisions are very precise — $370 million more for this, $720 million extra for that. How do they arrive at amounts like those?

As a taxpayer, I know how I hope they would do it. Ministers and officials would look for a practical solution to a problem in their area of responsibility and if they can't find one they wouldn't ask for more money.

Or, if they thought they had found a solution, they would work out exactly how much money it needed, then try to convince Grant Robertson and the Cabinet their proposal could succeed. The decision-makers would ask the same questions householders ask when shopping: Do we need this? Will it work? Is it worth its cost? Can we afford it?

All that sounds fairly obvious you would think, but I am not all sure this how the present Government works because it seldom has a specific programme to announce when it trumpets how much more it is going to spend on a problem. It believes state spending is inherently virtuous and it should spend as much as it can, rather than no more than it needs.

As much as it can, means an extra $6 billion in the coming year for new expenses and nearly $10 billion over the next four years for capital projects. These amounts are calculated by the Treasury based on the hope that economic growth will generate enough revenue to reduce Budget deficits over the next few years and reduce the debt we have run up during the pandemic.

For two years governments everywhere have had economic licence to spend as much as they could. Western countries had never seen their economy locked down against a virus before and everyone expected a recession on the scale of the Great Depression. It didn't happen.

As soon as lockdowns were lifted consumer demand returned rapidly and strongly. Households with incomes maintained by governments when they had not much to spend it on were cashed-up and keen to spend, particularly on houses they were now enjoying working in.

Factories and freight carriers, also emerging from lockdowns are struggling to meet the demand. The result is inflation, a much bigger problem now than anything more government spending can fix. More government spending in fact pours fuel on the fire.

Finance Minister Grant Robertson presents the 2022 Budget at the lockup in Parliament. Photo / Mark Mitchell

We learned 30 years ago how to stop inflation. It requires higher interest rates and lower government spending. Higher interest rates we are getting from the Reserve Bank, reduced spending we will not get from this Government. Robertson is adamant about that.

The bad news in this week's Budget, actually announced beforehand, is that the Treasury has raised the limits on the Government's overall spending by adopting a higher debt target than the level, 20 per cent of GDP, we got down to before the pandemic.

It was largely due to that debt level, a legacy of the late Sir Michael Cullen mainly, that New Zealand has weathered the global financial crisis, a major urban earthquake and now a pandemic better than most countries.

Now, net debt is to fall no lower than 30 per cent of GDP, and that is based on a new definition of the debt to include the assets and liabilities of other Crown agencies such as the NZ Super Fund. Their finances are not managed by the Government and including them could make the Government's financial management look better than it is.

A debt of 30 per cent of GDP, Robertson admits, would be 50 per cent on the measure previously used.

He and the Treasury justify the change because the new measure is more comparable to the one used by the International Monetary Fund. Maybe, but what matters is the way the debt is read by international investors, currency dealers and credit agencies.

The public debt — not to be confused with the national debt which is largely private borrowing in an open economy — is the secret of our success. I vividly recall a former Treasury Secretary, Graham Scott, telling us the government's debt was the one thing that interested credit inspectors most.

Low public debt, very low by international comparisons, is the main reason our dollar has been strong and we have a first-world living standard despite a tiny population living a long way from large markets. It is the reason we can afford first-world health services too.

All is at risk if the Government continues to spend what it can, paying scant attention to what it is buying.