Even before you factor in the tendency of National’s caucus to self-implode, Judith Collins should have her work cut out. Somehow, she has to convince the voting public that the world’s most effectively managed response to the Covid-19 crisis has been a failure, and on a scale where new management needs to be called in. Good luck with that. National can’t credibly fault the health outcomes. There is no community transmission in New Zealand and the human errors that have occurred haven’t harmed anyone at all. So, National has to reframe that success. Sure, the government has cared for us well, but has it cared for us too much?
Unfortunately for Collins, the virus is thrilled to bits whenever governments take a tough love approach to public health for the sake of the economy. More people get sick, with no compensating benefit to the economy. Sweden, Texas, Florida, California, Melbourne… they’re all having bad health outcomes with no economic upside in sight. In fact, Australia is a cautionary example of how rapidly things can deteriorate – for business and for the public at large – when you treat maintaining economy activity as your top priority. Which is what National has been promoting ever since the pandemic arrived here.
Clearly, it is because New Zealand has been more disciplined about public health, that our cafes and restaurants are now open for business, and are busily recouping the ground they lost during the lockdown. Because Labour was smarter about managing the virus than a National government would have been, business is currently in a better place. Not an ideal place – firms reliant on international tourism and foreign students are still in dire straits – but better than they would have been under different leadership. The point of saying so is to underline that there is no rational reason to regard National as a safer pair of hands during the next stage of the pandemic. Quite the contrary.
Taxes, debt and other scary monsters
Election 2020 is occurring against the backdrop of the worst international recession in 80 years. To meet that challenge, the government has undertaken an extensive borrowing programme to mitigate the socio-economic harm that would have otherwise resulted, and to provide firms with survival rations until something closer normality returns. (If National wants to criticise the extent of the borrowing, it needs to specify who and what it would have sacrificed.) To date, National has been claiming that a centre-left government will need to raise taxes to pay back the lenders and secondly that the borrowing programme will impose a crushing burden on future generations. Neither fear is well founded The borrowing will not be entirely a free lunch, but the burden is likely be far less of a problem than the scary rhetoric would suggest.
Raising taxes. This is a phantom menace, largely born of the stereotypes about ‘tax and spend’ liberals that conservative parents use to scare their children with at bed-time. At the outset of a huge recession not even a Labour/Greens government is going to raise income taxes, sales taxes or business taxes when demand is dropping, jobs are being shed, and as the economy is already facing deflationary pressures. (There is no risk of the borrowing over-heating the econ0my.)
Overseas, some gazillionaires are calling for a wealth tax to be imposed on themselves, but the Grant Robertson who declined to fight for a capital gains tax would probably regard a wealth tax as not worth the negative perception messages. Especially when it would be more symbolic than essential. (see below.)
Right now, the coalition is showing no desire to do a 180 degree change of course on tax. In any case, the wage subsidy scheme, the grants to small business and other supports have arguably added up to the biggest tax cut programme this country has seen in decades.
This doesn’t mean that the next government should shelve the search for a tax framework that’s more fair, less socially regressive than GST, and more environmentally efficient. One of the few upsides of the Covid-19 recession is that it has opened up the space for what will seem politically possible, once the pandemic has done its worst. To that end, a rational debate about the tax system would be useful, if it isn’t dominated by the hysterics in the Act Party and National. Even former PM Jim Bolger has argued that we need to discuss whether taxes and local body rates should rise in the wake of the recovery.
At least Bolger is thinking about how the pandemic has changed things since the hey-day of John Key. National and Act by contrast, remain locked in a past where taxes can only go downwards, and cuts to social spending (and the selling of state assets) are the virtuous path to balancing the budget and reducing the role of government. Mind you, not all of the Collins team think that way, to be fair. A few weeks ago, a rising talent like Nicola Willis felt able to say publicly (during the brief reign of Todd Muller) that National shouldn’t have sold so many state houses. Do Collins and Brownlee agree with Willis on that point?
Borrowing and burdens Obviously… slashing social spending in the Covid recession would be as foolish as hiking taxes – and the outcomes would be far more cruel. Instead, and while the method the government has chosen to fund its $60 billion borrowing programme isn’t perfect, it seems far preferable to the alternatives.
For starters, we are not borrowing those billions from a bank vault in Zurich. The relatively small amounts to do with foreign enders foreign lenders is denominated in NZ dollars. Meaning: unless the currency goes through the floorboards, and even then we have a floating exchange rate that makes adjustments possible, as needed. Furthermore, the only major import commodity that’s denominated is US dollars is oil, and – because of the global Covid recession and related reductions in demand – the price of oil has (conveniently) plunged.
So far, so good. As economist Geoff Bertram has recently been at pains to point out, our politicians and media have long tended to treat the New Zealand economy as being subject to the same rules as a firm or household that relies on funding from an outside source. The economy isn’t like that. Governments and banks create wealth. Given the floating exchange rate, a government can safely create the funds if needs without much risk of inflation in a Covid climate where a lot of resources and productive capacity are currently being under-used. Here’s how Bertram put it recently in the NZ Herald:
In today’s deflationary setting, there is no need for Government to kill off the short-term monetary effects of its increased spending. In severely recessionary circumstances such as the present, creating money, which neither firms nor households can do, is a valid and viable way to finance Government spending.
The political taboo on money creation is a political construct, not an economic one. A money-financed fiscal deficit in a non-inflationary setting leaves no necessary burden on future generations – just the benefits of an avd recession and so a stronger economy.
This isn’t an isolated opinion. Bertram’s arguments are developed further in this podcast seminar. In May financial columnist Brian Fallow explained the process here. Bernard Hickey’s arguments along similar lines are here.
“There’s no reason why you don’t get the Reserve Bank to effectively print the money and lend it to the government, just as the Reserve Bank did in 1935, when it lent money to the government to build state houses. This would happen by the Reserve Bank buying bonds, he says…”“Which means that the Reserve Bank is guaranteeing to the market that it is going to keep long term interest rates low by just hoovering up government bonds, effectively creating money to make sure that we can all be paid, and that the economy doesn’t get hit very, very hard.”
MMT, not explained
I’ve deliberately avoided trying to explain the body of supportive thought for this approach, which is called Modern Monetary Theory. In their spare time, economists can debate and justify and fine tune MMT with each other to their heart’s content. Instead, I’m focussing on the perceptions rattling around among non-economists in the political arena. As mentioned, Covid-19 has opened up the space for recognising our positive dependence on government, especially within a small economy like ours. This can only be beneficial to us in the battles to come on climate change.
The Escape Route
To repeat: it is not inevitable that large scale borrowing will require either high taxes and intolerable debt burdens in future. The core political claim is that you can escape both those fates and fund the Covid-19 response – and other social needs – via the Reserve Bank is using here, and as its counterpart in Canada is also doing right now. In brief, and as Hickey says, the Reserve Bank buys government bonds – which are essentially a contract to pay the investor (be it a bank, a corporate entity or a hedge fund) at a given rate of interest and then puts that money at the disposal of the government. It is one arm of government (the RBNZ) putting money into another pocket (Treasury). To repeat: in the deflated economic conditions we are in right now there are plenty of under-utilised resources lying idle. So there is little chance of the economy over-heating.
Is it a free lunch ? No. As Brian Fallow pointed out to Bertram in a recent web seminar, Treasury itself has calculated a modest rise in the ratio of debt to GDP by 2034. Modest, yet not insubstantial. But arguably, far more tolerable than having National’s shadow finance minister Paul Goldsmith plunge the country into a decade of austerity. Largely out of fear of government assuming a leadership role in stabilising the economy and fostering investment.
Right now though, I’m going to shut up for a moment and give space to this analysis of what the central bank of Canada is doing. Does this initial crisis situation sound familiar ?
The increase in the deficit is mainly caused by the fall in tax revenues resulting from the lockdown-induced recession, and the extraordinary spending measures adopted by the government to support the economy and manage the pandemic. The Parliamentary Budget Office says these measures totalled $146 billion as of April 24.
Like some New Zealanders, a few Canadians have been mildly freaked out by the borrowing numbers. Where is the money for all this extra spending coming from?
With tax revenues down, the only option right now is borrowing. But who can lend the government such large sums? At what cost? And how are Canadians going to pay it all back? Is the federal government going to have to raise taxes and cut regular spending once the COVID-19 crisis
is over? The good news is that the cost to Canadian taxpayers and beneficiaries of government services should be minimal. Canadians do not have to fear years of austerity from their federal government once the pandemic has passed.
How come ? As in New Zealand, the central bank – the Bank of Canada – is buying bonds at the rate of $5 billion a month, via the Canadian government’s Bond Purchase Programme. This intervention gas kept the interest rates on the bonds relatively low – at a time when Covid-19 might have otherwise seen Canada’s cash-strapped banks and corporates needing a high interest rate incentive to participate in the bond market.
And OK, and here’s the Canadian outcome:
Assuming federal government spending and the Canadian economy go back to some kind of normal when the pandemic is over, then the government will simply be able to roll over its debt into the future and, therefore, not have to pay back any of it — possibly forever. In other words, as long as investors are willing to buy the government’s bonds, then it can issue new bonds to pay back old bonds that are coming due. And if the economy grows faster than the deficit, then the debt-to-GDP ratio decreases, as it has in the last decade.
So Canadians will not have to suffer twice for the coronavirus pandemic: first by being locked down and then by paying higher taxes and/or experiencing cuts to regular federal government programs. Instead, they should thank the government for doing the right thing by reducing the economic and social harm caused by the pandemic lockdown at little cost to future public finances.
That’s the very same path New Zealand has now embarked upon. It would be unlikely to survive the election of a National government, which seems to be barely at the abacus stage when it comes to knowing how to run a modern economy. Clue: it doesn’t involve making a fetish out of attaining budget surplus, regardless of the social cost that this involves.
One last thing …
As with our own Reserve Bank, the Bank of Canada is buying bonds (at a price) on the so called secondary market from banks and corporates, thereby enabling them to clip the ticket at the taxpayer’s expense on the way past. In a pure and a-political world, there would be no good reason why our Reserve Bank couldn’t buy the bonds directly from Treasury on the primary market, and thereby save the taxpayer a sizeable chunk of money.
How much ? NBR has estimated that the added cost of the secondary market transactions on $60 billion dollars is about $120 million. So, why doesn’t’ the government eliminate the middleman? As Bertram says
the reason is ideological and/or political – partly to preserve the perception of central bank independence, and partly to stave off the political charges that this is some kind or ‘funny money.’ It isn’t.
Footnote: As mentioned, this column isn’t at attempt to explain, or defend Modern Monetary Theory. But if you want to explore the rationale behind MMT, here’s ABC Australia’s basic intro to MMT. Stephanie Kelston’s book The Deficit Myth is highly recommended. So is Jeremy Rose’s interview on Spinoff with MMT’s leading theoretician Professor Bill Mitchell.