On revelations about government borrowing

For years, government borrowing has been treated as a sign of irresponsibility, of a country living beyond its means, of the policies of borrow and hope etc etc. In the case of the current government, the level of borrowing – decried only last month as running at $380 million a week – has been sternly interpreted as ‘unaffordable.” It has been used by the centre right to justify a wider message of essential belt tightening and cutbacks to services and public sector jobs.

Having demonised the notion of virtuous borrowing during a recession, the virtuously frugal Key government now finds itself embarrassed by the revelation that it has actually been taking advantage of market conditions and borrowing far more than the country does, in fact, need.

This information first saw daylight a month ago, when Prime Minister John Key told Parliament that the country was borrowing more than it needs, to take advantage of lower interest rates. It now transpires that fully $100 million a week of the borrowing load has been deliberately undertaken in excess of need. (Add to that, as Labour leader Phil Goff pointed out in Parliament in early May, the $44 million a week being expended on giving tax cuts to the wealthiest 10 percent in the country.)

As Finance Minister Bill English told RNZ this morning the government had borrowed in excess of need because the lending conditions had been so favourable. “He said that borrowing more sooner, makes it slightly cheaper, but in the big picture, the country’s debt has increased rapidly and the Government must put a stop to it.”

So much for government borrowing being “unaffordable”. Evidently, it is quite affordable, if the purpose justifies the investment. The public would feel exactly the same about many of the services and jobs being axed in the name of a frugality that the government deliberately chooses to ignore, when conditions suit it to do so. In the circumstances, English has some cheek to be lamenting that the country’s debt has increased rapidly and the government must now put a stop to it. That’s a bit like a Victorian patriarch gathering his children together in the drawing room to lecture them that all this spending on port, cigars and subscriptions to the country club really have to stop, forthwith.

The issue then, is not borrowing -= but the purpose to which the borrowing is put. The issue is not debt, but the sustainability of the debt. Austerity is not a virtue in itself – as Europe is in the process of discovering:

In Europe, by contrast, the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems. Underlying this insistence have been economic fantasies, in particular belief in the confidence fairy — that is, belief that slashing spending will actually create jobs, because fiscal austerity will improve private-sector confidence.

Unfortunately, the confidence fairy keeps refusing to make an appearance. After the creation of the euro in 1999, European nations that had previously been considered risky, and that therefore faced limits on the amount they could borrow, began experiencing huge inflows of capital…..Greece’s government, finding itself able to borrow at rates only slightly higher than those facing Germany, took on far too much debt. The governments of Ireland and Spain didn’t (Portugal is somewhere in between) — but their banks did, and when the bubble burst, taxpayers found themselves on the hook for bank debts.

What to do? European leaders offered emergency loans to nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. Objections that these programs would be self-defeating — not only would they impose large direct pain, but they also would, by worsening the economic slump, reduce revenues — were waved away. Austerity would actually be expansionary, it was claimed, because it would improve confidence…..

But as I said, the confidence fairy hasn’t shown up. Europe’s troubled debtor nations are, as we should have expected, suffering further economic decline thanks to those austerity programs, and confidence is plunging instead of rising.

The revelation that English has been just as pragmatic as his predecessor Michael Cullen about borrowing means that we can now afford to can the ideological bluster about the need for cutbacks and for mindless belt tightening in the state sector. Instead, we should be having a serious debate about the virtues of a sensible borrowing programme and the dangers of carrying out savage austerity policies and job cuts during the unemployment trough of a recession, and while domestic spending is still weak, and barely off its sickbed. As things stand, Deficit Phobia is an illness that is being promoted as a cure.

Like their counterparts in Europe, ordinary New Zealanders are on the hook for debts pumped into the economy by private banks. The debt we should be concerned about is private sector debt – and not government debt, which has for nearly a decade, been moderate and relatively responsible, and at levels that have been the only thing that has sustained this country’s international credit ratings.


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