So, a record deficit huh? The scene is being painted for a chop-chop Budget, but is our public debt really that bad? Let's take a look at our history...

So, in two days time Bill English will announce that we have the largest deficit EVER by a New Zealand government. All round the world folk have seen stories of how our deficit will be $15-17 billion. Cue wailing and gnashing of teeth.

Certainly, no-one will want to sit back and admire such a deficit. Both National and Labour are inclined to lead the breast-beating, for opposite political reasons. National wants to justify cuts to government spending, Labour wants to damn the government for its economic mismanagement.

So the message has been that our economy is in dire straits and drastic action (cuts or a change of government, depending on who's spinning) is required.

But is it really that bad? We've got our biggest population ever and we've just been through – or we're arguably still at the tail end of – one of the largest economic crises the world has known. So you'd expect the government to have spent more.

To get a sense of how this really compares, you have to look at comparable measures. So I've been trying to get my head around our government debt as a percentage of GDP and per head of population.

The latter has been hard to find up-to-date figures for. The Stats table I found peters out in the mid-1990s. But it found that public debt per head of population peaked around the war years, and again in 1987. In those days it was as high as $19,000 each, in Year 2000 dollars and remained quite high in 1993, at $15,000. (In the 1960s and 70s it was mostly around the $9,000-$11,000 mark).

If anyone can dig up the 2000s, I'd like to see them!

But the most common relative measure is public debt as a percentage of GDP.

Now, we all know that our total debt has gone north in the past generation. See this chap for some rather useful graphs. But to risk labouring the point, that's because houses are so much more expensive (meaning bigger mortgages) and we've all got addicted to buying more and more stuff, regardless of whether we've saved for it or not. That's what's caught the eye of the credit ratings agencies and prompted the 'OMG we're like Greece' Cassandras.

Thing is, we're not. Like Greece, that is. The government debt has never been a problem; indeed it hit historic lows under Michael Cullen. We bottomed out in 2008 with a public debt that was just 20% of GDP. (There are several sources for this, each slightly different. But here are the OECD figures as one example).

It's fascinating to look waaaay back at just how much debt New Zealand government's have been willing to carry in the past. We tipped over the 100% mark for the first time in 1884, and amazingly, we stayed at least in hock to the tune of 95% of our GDP until 1951. Yep, 1951.

Comparisons have been made between this recent recession and the Great Depression. Well, our government debt in 1933 hit its all-time high as a percentage of GDP: 248%. Now that's serious debt!

In the wealthy 1960s, our debt as a percentage of GDP was still mostly over 60%. It didn't dip under 40% until 1997. When Labour took over in 1999 it was 35%. Even as public spending grew, public debt went down to 20%, as mentioned, in 2008, but has jumped back up in 2009 to 27% and in 2010 to 31%.

So yes, it has climbed again. But that borrowing has kept the economy ticking over, which is what a responsible government with a low debt should do in tough times. It has stimulated a flat economy and carried the private sector.

Don't forget, it's not just the recession and the earthquakes government money has had to carry us through in recent years. Around $8 billion was wiped out of the economy when the finance companies fell over, and then there are all the leaky homes and billions more lost there.

Given that list of misery, anyone arguing against increased government spending deserves a spanking.

I've always been mighty relieved that this government went against any free-market instincts in Cabinet and committed to stimulus. It deserves applause for that spending. The concern comes when you look at how they did it.

As I've written before, much of the supposed National-led government stimulus was in fact started under Labour; that which wasn't was essentially some roads and the extra tax cuts. And those tax cuts were just about the most scatter-gun, favour-the-rich form of stimulus any government could have chosen.

My worry now is that the government seems to be signalling that its stimulus days are over. John Key's pre-Budget speech left the impression that the government's heavy lifting is done and it now reckons it's time to stop spending and let the private sector take over. The PM repeatedly mocked Cullen's stewardship during the 2000s and praised the growth and economic management of the 1990s.

We can all remember the unemployment, wage stagnation and cuts to public services that passed for "growth" in the '90s, not to mention the lack of savings and higher public debt. And I'm not yet convinced that the economy is healthy enough to take the strain. It seems risky to me to whip the crutches away so soon.

So excuse me for being a little wary.

And remember, when all the red and blue Cassandras start bleating about the government's record deficit, take a deep breath and remember your history. It could be worse, and it has been.


*With apologies to Andrew for stealing his schtick and using a song title as a headline

Comments (14)

by Kyle Matthews on May 17, 2011
Kyle Matthews
by Tim Watkin on May 17, 2011
Tim Watkin

Not regarding per capita, but interesting nonetheless Kyle. Curious to see where we borrow from. But especially to see how much was saved by paying down the debt during the 'good times' in the '00s. Saved us over $350m in interest payments alone.

That's a lot of hip ops.

by Draco T Bastard on May 17, 2011
Draco T Bastard

But that borrowing has kept the economy ticking over,

Except for the minor technicality that it hasn't. We're worse off now because, despite the massive borrowing, the economy's been going backwards.

I've always been mighty relieved that this government went against any free-market instincts in Cabinet and committed to stimulus.

Except that it didn't. Tax cuts are well within the ideological free-market paradigm (which is why NACT were calling for them the entire decade before the GFC) and always fail to be stimulatory. In fact, history has shown that economies grow with higher taxes because the government can spend more. HINT: It's neither the rich nor the private sector that are the driver of the economy.

And remember, when all the red and blue Cassandras start bleating about the government's record deficit, take a deep breath and remember your history.

I really wish they would. It'd put paid to the stupid neo-liberal economic system that we have forced upon us and which is destroying our economy.

by Chris de Lisle on May 18, 2011
Chris de Lisle

"That's what's caught the eye of the credit ratings agencies and prompted the 'OMG we're like Greece' Cassandras."

"And remember, when all the red and blue Cassandras start bleating about the government's record deficit"

This is not an apt classical reference! In myth, Cassandra's predictions, though never believedn by those around her, were always correct.

I'm fairly sure that that's the exact opposite of what you meant.

by Andin on May 18, 2011

" But to risk labouring the point, that's because houses are so much more expensive (meaning bigger mortgages) and we've all got addicted to buying more and more stuff, regardless of whether we've saved for it or not."

"Given that list of misery, anyone arguing against increased government spending deserves a spanking."

So the population (or should I say some of the population) has to curb it's addictive materialistic acquiring habits, and the govt has to stop pretending its our frugal grandaddy and open its wallet.

Well its probably the opposite of what will happen, but thanks for putting it out there! As they say.


by on May 18, 2011

Geoff Bertram produced a fairly detailed and compelling demystification of the debt issue recently.

by Tim Watkin on May 18, 2011
Tim Watkin

Chris, that'll teach me for not doing enough Classics. I was focused on their gloomy forecasts, not whether those forecasts come true - not results-focused enough!

Draco, it's about opportunity cost. The economy is much better off than it would have been had the government not borrowed. Of course tax cuts are orthodox right-wing policy, but that doesn't make them bad. Left-wing governments have been known to cut taxes to stimulate. And anyway, they're still stimulatory.

by stuart munro on May 18, 2011
stuart munro

@ Tim - read Krugman on tax cuts. They are not typically very effective stimuli. Neither left nor right in New Zealand, nor Treasury should be regarded as authorities on economic matters. Their policies have conspicuously failed.

by Draco T Bastard on May 19, 2011
Draco T Bastard

And anyway, they're still stimulatory.

Not really. Give them to the poor and they'll be spent and may cause some stimulatory effect but, as the poor don't get taxed a lot anyway, it's not a hell of a lot and so won't do much to stimulate the economy. Give them to the rich, which this government did (increases to GST, ACC resulted in real tax increases on the poor), and they'll be used to pay down debt and/or holidays (which is what happened) which, again, fails to be stimulatory.

The theory that all these tax cuts will go into savings causing a sudden massive overload of available cash dropping interest rates and allowing businesses to borrow to grow is a load of bollicks - especially during a recession. During a recession people are risk averse and will hold on to their money and so the interest rates are going to go up not down. Even the OCR won't do much here because, although it allows an infinite amount of cash creation, the banks are going to be cautious about lending and they also want to pull back the losses that they suffered due to the recession causing people to default on their loans meaning that they will keep interest rates high (Mortgage rate = 5.65%, OCR 2.5%).

In boom times tax cuts may be stimulatory but that, of course, is when you don't want stimulation.

And then there's this thing called history or if you prefer reality. It's where you judge theory against what actually happened and tax cuts have always failed to result in a boost to the economy.

The economy is better off than it would be if the government hadn't borrowed but it would be even better off if the idiots hadn't cut taxes as then there would have less borrowing needed and we may have been able to afford some real stimulation.


by Luc Hansen on May 20, 2011
Luc Hansen

In a recent itunes podcast, Johann Hari made the point that while the current Cameron government is making a virtue of slashing (and I mean slashing!) government spending, history shows that Britain has been in debt, as a percentage of GDP, greater than the current level for 200 out of the last 250 years, including when it was still a great empire.

The problem in New Zealand, like Britain, is this: our politicians mainly act on belief, not evidence.

If they acted on evidence, they would surely follow Krugman's recommendations.

But the belief they act upon is mainly wrong belief.  Exhibit A is Bill English's steadfast belief that targeting income tax reductions towards the wealthier amongst us will generate economic growth.

Epic fail.

And to think we are prostrating ourselves to the Gods of Credit Ratings (GCR), the same gods who gave companies like Enron etc gold plated credit ratings, must surely tell us all is not well in our world.

And that's even before meeting James Hansen! (no relation)

by animalspirit on June 04, 2011

All NZ businesses have high levels of debt so that they don't pay taxes and can access the welfare system!   The problem with banks borrowing since the "implosion" as it has been called (Access Economics Roger Bootle) is that Kiwibank etc are borrowing money which may be suspect ie loaded with the dreaded derivatives which are still being unearthed as it were.  Interesting comment by Martin Vander Weyer in The Spectator "an awful lot of money seems to have ended up in some very strange hands and places" and "much of this new money has no real home at all"  - "bond traders around the world - knowing little, caring less, barely even talking to each other - can cause taxes to rise and governments to fall."   Economics is not what we all thought it was in the age of the internet and fast trading! (Issue Jan 1 2011).

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