Debt vs delivery: the trust problem behind NZ’s borrowing debate

Kielder, I'm Chelsea Daniels and this is the front page, a daily podcast presented by

the New Zealand Herod.

New Zealand's debt burden has nearly doubled in 10 years, but there are signs the country's

borrowing habits are becoming more sustainable.

New Zealand businesses have boosted their borrowings by more than $6 billion in the last year,

to $143 billion, which is a potential sign of rising confidence in the economy.

So is debt really as bad as we think, or are the numbers telling a more nuanced story

about households, businesses and the government?

Today on the front page, NZ Herod Business Editor at Large Liam Dan is with us to examine

the numbers behind the nation's march towards $1 trillion in debt.

So Liam, our national debt is approaching $1 trillion.

That doesn't sound so good, does it?

No, put it in context.

So I think we should admit that this is a device, the Herod Nation of Dets series is about,

it's tracked it over 10 years, it is the gross national debt.

So that's everything, that's the government debt, that's all our mortgage debt.

And of course it sounds bad in the same way a mortgage might sound bad.

It sounds bad having half a million dollars of mortgage debt, unless you've got a million

dollar house.

And so let's bear in mind that New Zealand does have assets with well over $2 trillion of assets.

So we've got more than double our housing stock, throwing our Kiwi saver, our savings.

And we've got a lot more, our net household wealth is still around $2 trillion.

So it could be worse.

And that's one of the reasons that the global ratings agencies, the credit ratings agencies,

are relatively relaxed about New Zealand's debt level.

And though we have had huge growth in mortgage debt and some pretty big growth in government

debt.

So this is all about tracking the progress of our debt, how fast is it going up relative

to asset growth and all the rest of it.

And finally enough, the economic downturn of the last two or three years has probably

been fairly positive for that figure, given that most of it, our household wealth and

our household debt is tied to mortgage debt.

That borrowing has been pretty subdued.

And in the last year, it's really almost been flat in inflation adjusted terms.

Right, so when we see that figure, when we say national debt, we've got to get national

debt down.

Every party in this election cycle is going to be talking about tax debt, tax debt.

Should the average Kiwi lose any sleep over this?

Well, I guess it's about the quality of debt.

So people do lose sleep over government debt.

But I wouldn't be so fixated on the number itself as much as what we're doing with the money.

So if we're just borrowing to inflate our own house prices, that hasn't been great.

It's good to see that being a bit more subdued in the past few years as the housing market

has come off.

Because for a while, the Reserve Bank was worried about the financial stability effect of

the fact that we were just borrowing more and more house prices were going through the

roof.

But we're effectively just having to borrow to service our own, the same houses.

We still have to live somewhere.

And then with national debt, I guess it's about how well governments are spending the money.

And so there are arguments that New Zealand still has relatively low government debt at

a debt to GDP ratio at around 40 something percent.

We've been as low as 20 something percent.

And some people prefer to see it low.

They feel like New Zealand's vulnerable to these external shocks and we need to keep that

national debt low.

But others look at say the US or Japan and they've got more than 100 percent of GDP.

125, yeah.

125, yeah.

You wrote in your column.

Yeah, yeah, that's right.

Thanks for the reminder.

Yeah, look, there are some reasons why they can get away with that.

But yeah, look, could New Zealand borrow more possibly in theory, but then you have to trust

the government to spend that money well.

So if you're borrowing money, there's good debt and bad debt.

If you're borrowing money and investing it somewhere productive that generates more

of a return on the investment than the interest you're paying, that works.

Businesses try to do that.

That's, you know, that is an expectation that good businesses will carry a certain amount

of debt because they will have ideas.

They'll be expanding.

They'll be looking for places to grow.

In your latest column, you write, what will probably get over the next couple of months?

There's an insufferable and unhelpful series of complex contradictory claims and counterclaims

as politicians attempt to pick fiscal holes in each other's policy.

If you genuinely love rabbit hole arguments over a bigel versus a bigel X or core crown debt

versus net debt, then you are quote, and I'm quoting you, a sick person.

Yeah, that was a bit harsh.

It was not.

It's not that to me.

I mean, I know some people who are, though, that got those kind of, it's the pointers.

That it becomes an argument about accounting.

And I find it really boring because you have to go, you scout through the numbers,

you're arguing about how the different parties are accounting.

And there's accounting tricks and there's different time periods.

And then I would question how, you know, realistically, any of these projections turn out in the end.

We should expect some rigor to what they do.

But I think you take it all with a grain of salt to some extent.

I think what's more important is that the parties vying to run the government

can convince us that they are going to spend the money.

Well, I just get very bored by arguments on accounting.

It's coming for sure.

But I think the average person gets lost.

How can you be sure they're all adamant that they're right?

We go to talk to some experts and they say complicated things and we go, I don't know.

You also throw in a Monty Python question.

Yeah, it just becomes, you know, there was a department of arguments.

There's nothing wrong with a good argument, but just contradicting each other's very boring.

You know, just, no, you're the numbers don't add up.

Your numbers don't add up.

Yeah, now let's hope that maybe we'll see a bit more of a bigger picture debate about where we're going with government borrowing

and how we're planning to invest the money.

Is there ever a right amount of debt for New Zealand?

And what do you reckon that might be?

Well again, it's difficult because the right amount of debt for a business, a person, a household is somewhat affected by your appetite for risk.

And New Zealanders all have different appetites for risk.

And so, yeah, you know, should we take a more expansive approach and just borrow and, you know, really build all our infrastructure, you know, sounds good,

but you have to trust that that infrastructure will get built and that governments can build it.

You know, I think, again, I come back to the pace of growth and debt, you know, and this is where the Reserve Bank comes in.

They're watching to make sure that there aren't areas of borrowing that are getting out of control.

And there were, you know, there was concern about mortgage debt for quite some time.

And there was concern about agricultural debt because farmers were borrowing a lot to invest in deriying.

And that looked pretty precarious.

And so, you know, it starts to, if it starts to rely on, you know, a certain return coming back that looks difficult to achieve, then there are reasons to be worried.

Now, we got lucky with deri, it's gone fine.

And farmers have had plenty of money come back through the fontare of payouts and commodity prices and they've paid down a lot of that debt.

So Reserve Bank is no longer stressed out about mortgage debt, particularly or agricultural debt.

So that is a good thing.

The global ratings agencies aren't hugely stressed out about our government debt.

We're just going to pretty good rating, didn't we, from Moody?

Well, it's been maintained.

There are warnings here and there because, you know, we did blow it up during COVID.

You know, we have a track record of being able to keep paying, which that's important.

If we were looking at massively borrowing more, they'd really be looking at us closely.

I don't think either major part is.

I think both national and labour are talking about, you know, a path of bringing debt to GDP down,

but over different timeframes.

So, nationals talking about, well, labour is talking about taking about a year longer to get it to that 40% back to the 40% mark, I think.

Depending on how you calculate the numbers.

Yeah, well, look, I mean, you know, it's right.

It's, as soon as you start using timeframes and it can really, it makes the money quite abstract.

It's one of the reasons we've committed to getting the books back into balance.

So, we need to balance the government's book so that we're not borrowing the fund day-to-day expenses,

which is what we are doing right now.

And, in fact, the level of borrowing has gone up since the last election.

So, you know, we would have been almost back in surplus by now,

had the national party not made the decisions they've made.

They've taken what was going to be, I think, about a $3 billion surplus next year

and turned it into a $14 billion deficit.

Election year debate obviously fixates on crown debt,

while most of the nation's debt is actually private mortgages.

Why do politicians do you think keep fighting over that relatively small piece of the pie?

Well, I mean, it is...

It's a big pie.

Yeah, yeah. And it's about our ability to keep servicing it.

The ratings agencies do actually look at the aggregate, the total debt.

And that's the housing debt and our private debt and the concerns around that,

one of the reasons that we can't run such high government debt or perhaps,

you know, or would come under pressure.

So, in Japan, they run really high levels of government debt,

but a lot of that debt is owned by Japanese investors,

and they have enormous savings rates.

And so, you have to look at both sides of the ledger.

As New Zealand's savings grow, Kiwi Savers has been a good thing.

It could actually take some pressure off, you know,

where we're going with government debt.

I think, you know, already, I think, you know,

the talk of getting back to 40% debt to GDP

is a long way from where we were under Bill English and some Michael Cullen,

where we were sort of, you know, we liked that 20% figure.

And, you know, they were running a pretty tight ship.

And that was valuable when we had global financial crisis,

and then the Christchurch earthquakes.

So, you know, there is always that risk of something big and bad happening

that requires more, you know, more borrowing.

And COVID was another one, you know.

And so, another COVID or another, you know,

reduces our capacity to do emergency borrowing when the debt levels are high.

Right, so the real issue isn't how much government borrows,

but how efficiently it spends.

And we're not too amazing at that.

Are we? Do we need to prove ourselves in order to be able to spend more?

Yeah, well, that's my opinion.

It's what I'm putting out there that I think you can make a good case

for more government borrowing if you can sell the idea

that it will be really efficiently invested.

And I'm not sure that all New Zealanders feel that governments are good at that.

We look at the infrastructure spend.

Yeah, that's right.

The infrastructure spend and what's being delivered.

A lot of spending on scoping plans and things.

And then we don't actually see something get built.

So, yeah, I would say that it's the trust there.

I think, you know, if we want to borrow more governments needs

to earn back the trust around the ability to invest it.

How do we prove that?

Well, I don't actually don't even know that they need to do it themselves.

I mean, I think there are some ways around it.

My view is that you could, you know, public private partnerships,

boost the capital, you know, New Zealand capital available

by, you know, boosting Kiwi Saver, which I think, you know,

a lot of both parties want to boost contributions to Kiwi Saver.

And as that grows, there's more New Zealand capital available

that sort of reassures foreign investors.

And, you know, a combination of local money, local private money,

and foreign private money balanced with some government spending

could actually be a path forward.

But, yeah, I don't know.

Like, governments did used to see, did seem to be able to build

do amazing works, public works projects in the 1930s and 50s.

But, they also were up against what seems to me a lot less democracy in those days.

You know, like, they were just to clear that that town is going to be flooded,

you know, with a massive hydro dam project.

And, it, it, that all looks a lot more difficult politically.

So, I'm not sure.

Probably a lot more workplace accidents as well, though, in the 19th century.

Yeah, all that stuff. I mean, you know,

we have, you know, more ability to complain about things.

And, and, you know, probably with some good reason.

But, it makes it harder for governments to do things.

So, maybe we need to look at some other ways to, to do those things.

The red tapes got in a bit too much.

Yeah, I mean, I guess, you know, like, one person's red tape is another person's

not dying while at work.

So, you know, I don't want to just...

They're extremes, right?

I mean, when you're spending millions of dollars,

I want to, I want to meet these review writers

who are getting all of these reviews written for the government over the years.

Yeah, a review after a few, after a few contractors upon contract.

It's great for the consultants.

It's amazing for them.

Yeah, I mean, like, I don't often agree with Winston Peters,

but he made the point that really, you know,

the next hub, crossing...

Why don't we just tender it and let the private sector do the work?

I was surprised to hear him say that because I imagine he would be hoping that it would be

domestic money, but rather than foreign money coming in.

But I think, you know,

you pay in the end, you pay by borrowing up front.

Those in favor of more debt will argue that governments can afford to borrow

about as cheaply as it gets, you know, because they can issue government bonds

and they get the lowest interest rates.

So, therefore, that's the argument for them to do it rather than the private sector.

But then, again, I just think, you know,

when we get the private sector involved, we pay over time either through a sort of

a lease arrangement or through tolls, user pays, into the future.

And it's true, it could cost more than if you just borrow using government bonds and do it,

but you have to believe that the government will actually successfully build the thing.

And that's where I think the trust is missing.

So, bottom line, debt, what's the headline?

Ooh.

Well, I mean, we use this bit...

Ooh, is the headline.

Well, I guess it's... I'm torn because we use this big nominal figure, you know,

getting close to one trillion because it is an attention grabber.

I know that...

But I think it's important to, you know, once we grab the attention to look at the pathway.

And so, the headline this year really has been that some of our biggest debt concerns,

primarily the mortgage debt rate of mortgage debt growth and agricultural debt,

have us abdued, a sort of healing themselves. So, the downturn has an upside in that we've

seen some rebalancing in that part of the economy.

The place where we're probably not so happy is in the business debt world, because...

sector, because actually, again, this is where you'd like to see business feeling

confident enough to borrow, to invest, and to do more. And I think some more growth in business

debt wouldn't be a bad thing. I think it's... it's crept back up to around 5% growth in the past year,

but looking at the number of liquidations and so on, you've got to think that that may include a

lot of smaller businesses that are just borrowing to survive at the moment.

Thanks for joining us, Liam. Cheers.

That's it for this episode of The Front Page. You can read more about today's stories and extensive

news coverage at NZherald.co.nz. The Front Page is hosted and produced by me, Chelsea Daniels.

Kane Dickie is our studio operator, Richard Martin, our producer and editor, and our executive producer

is Jane Yee. Follow the Front Page on the iHeart app, or wherever you get your podcasts,

and join us next time for another look beyond the headlines.