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

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1. 0:06Speaker 1: Kia ora, I'm Chelsea Daniels and this is The Front Page, a daily podcast presented by the New Zealand Herald. New
2. 0:16Speaker 1: Zealand's debt burden has nearly doubled in 10 years, but there are signs the country's borrowing habits are becoming more sustainable.
3. 0:26Speaker 1: New Zealand businesses have boosted their borrowings by more than $ 6 billion in the last year to $ 143 billion, which
4. 0:33Speaker 1: is a potential sign of rising confidence in the economy. So, is debt really as bad as we think, or are
5. 0:42Speaker 1: the numbers telling a more nuanced story about households, businesses and the government? Today on the front page, NZ Herald business editor-at-large Liam Dan is with us to examine the
6. 0:53Speaker 1: numbers behind the nation's march towards $ 1 trillion in debt. So, Liam,
7. 1:01Speaker 1: our national debt is approaching $ 1 trillion. That doesn't sound too good, does it?
8. 1:08Speaker 2: No, put it in context.
9. 1:09Speaker 3: So I think we should admit that this is a device, the Herald Nation of Debt series is about, it's tracked it over 10 years. It is the gross national debt.
10. 1:17Speaker 3: 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
11. 1:27Speaker 3: having half a million dollars of mortgage debt unless you've got a million-dollar house. And so let's bear in mind
12. 1:35Speaker 3: that New Zealand does have assets worth well over $ 2 trillion of assets.
13. 1:43Speaker 2: So we've got more than double.
14. 1:44Speaker 3: Our housing stock, throw in our KiwiSaver, our savings, and we've got a lot more– our net– household.
15. 1:54Speaker 2: Wealth is still around two trillion. So, um, you know, it, it could be worse.
16. 1:58Speaker 3: Um, and that's one of the reasons that the global ratings agencies, the credit, credit ratings agencies, um, are relatively relaxed about New Zealand's debt level, even though, um, you know,
17. 2:10Speaker 3: we have had, um, huge growth in mortgage debt and some pretty big growth in government debt. So this, this is all about tracking the progress of our debt. How fast is it going up relative to, um, you know, uh,
18. 2:22Speaker 3: asset growth and all the rest of it. And funnily enough, the economic downturn of the last two or three years has probably been fairly positive for that figure, given that
19. 2:34Speaker 3: most of it, our household wealth and our household debt is tied to mortgage debt, that borrowing has been pretty subdued.
20. 2:44Speaker 3: And in the last year, it's really almost been flat in inflation-adjusted terms.
21. 2:50Speaker 4: Right.
22. 2:50Speaker 1: So when we see that figure, when we say national debt, we've got to get national debt down. You know, every party in this election cycle is going to be talking about tax debt, tax debt. Should the average Kiwi lose
23. 3:02Speaker 1: any sleep over this?
24. 3:04Speaker 2: Well, I guess.
25. 3:06Speaker 3: It's about the quality of debt. So, you know, people do lose sleep over government debt. But I wouldn't be
26. 3:14Speaker 3: so fixated on the number itself as much as what we're doing with the money. So, um, if we're just borrowing to inflate our own house prices, that hasn't been great.
27. 3:26Speaker 3: It's good to see that, um, being a bit more subdued in the past few years as the housing market has come off. Uh, because for a while there, the reserve bank was worried about the financial stability effect of
28. 3:36Speaker 3: the fact that we were just, um, you know, borrowing more and more. Our house prices were going through the roof, but we're, you know, effectively just, um, you know, having to borrow to service our own, uh, you know, the
29. 3:48Speaker 3: same houses, we still have to live somewhere. And then with national debt, you know, I guess it's about how well governments are spending the money. And so, you know,
30. 3:59Speaker 3: there are arguments that New Zealand still has relatively low
31. 4:05Speaker 3: government debt at a sort of a debt to GDP ratio at around sort of 40-something percent. We've been as
32. 4:12Speaker 3: low as 20-something percent. And, you know, some people prefer to see it low. They feel like New Zealand's vulnerable to these external shocks and we need to keep that
33. 4:22Speaker 3: national debt low. Others look at, say, the US or Japan, and they've got more than 100% of GDP.
34. 4:30Speaker 1: 125 in the US.
35. 4:32Speaker 2: 125, yeah, yeah.
36. 4:32Speaker 1: You wrote in your column on Sunday.
37. 4:34Speaker 2: That's right.
38. 4:35Speaker 3: 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
39. 4:45Speaker 3: you have to trust the government to spend that money well.
40. 4:47Speaker 3: So if you're borrowing money, there's good debt and bad debt.
41. 4:50Speaker 3: 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.
42. 5:01Speaker 3: There's 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.
43. 5:10Speaker 1: In your latest column, you write, what will probably get over the next couple of months is an insufferable and
44. 5:18Speaker 1: unhelpful series of complex, contradictory claims and counterclaims as politicians attempt to pick fiscal holes in each other's policy. If
45. 5:27Speaker 1: you genuinely love rabbit hole arguments over Obeagle versus Obeagle X or core crown debt versus net debt, then you are, quote, and I'm quoting you, a sick person.
46. 5:38Speaker 2: Yeah, that was a bit harsh, wasn't it?
47. 5:39Speaker 1: Explain that to me.
48. 5:40Speaker 3: I mean, I know some people who are those kind of.
49. 5:45Speaker 3: The point is that it becomes an argument about accounting and I find it really boring because you have to go,
50. 5:53Speaker 3: you scour through the numbers, you're arguing about how the different parties are accounting and there's accounting tricks and there's
51. 6:01Speaker 3: different time periods and then I would question how, you know, realistically any of these projections turn out in the end.
52. 6:11Speaker 3: It's We should expect some rigour 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
53. 6:23Speaker 3: is that the parties vying to run the government can convince us that they are going to spend the money well.
54. 6:31Speaker 2: I just get very bored by arguments that.
55. 6:39Speaker 3: On accounting, it's coming for sure. But, um, you know, I think, you know, the average person gets lost. How can you be, be sure they're all adamant that they're right. Um,
56. 6:50Speaker 3: we go to talk to some experts and they say complicated things and we go, uh, I don't know.
57. 6:55Speaker 1: Well, you also threw in a Monty Python, um, quote.
58. 6:58Speaker 4: Yeah. Yeah.
59. 6:59Speaker 3: Well, it just becomes, uh, you know, that was the, the, the, the, was it the department of arguments? Uh, you know, there's nothing wrong with a good argument, but just contradicting each other is very, very boring. You know, just, uh, No,
60. 7:10Speaker 3: your numbers don't add up. Your numbers don't add up. Yeah, now let's hope that maybe we'll see a bit more
61. 7:17Speaker 3: of a bigger picture debate about where we're going with government borrowing and how we're planning to invest the money.
62. 7:28Speaker 1: Is there ever a right amount of debt for New Zealand and what do you reckon that might be?
63. 7:33Speaker 3: Well, again, it's difficult because the right amount of debt for New a business, a person, a household is somewhat
64. 7:43Speaker 3: affected by your appetite for risk. And New Zealanders all have different appetites for risk. And so, yeah, you know,
65. 7:52Speaker 3: should we take a more expansive approach and just borrow um and you know really build all our infrastructure you know sounds good but you have to trust that that
66. 8:02Speaker 3: infrastructure will get built and that governments can build it um you know i i think again i i come back to the um the pace of of growth and
67. 8:13Speaker 3: debt um you know and this is where the reserve bank comes in they're watching to make sure that there aren't areas uh of borrowing that are getting out of control and there were there were you know there was
68. 8:24Speaker 3: concern about um mortgage debt for quite some time, and there was concern about agricultural debt because farmers were borrowing
69. 8:32Speaker 3: a lot to invest in dairying, and that looked pretty precarious.
70. 8:36Speaker 3: And so, you know, if it starts to rely on, you know, a certain return coming back that looks difficult
71. 8:48Speaker 3: to achieve, then there are reasons to be worried.
72. 8:51Speaker 2: Now, We got lucky with dairy. It's gone fine.
73. 8:54Speaker 3: And farmers have had plenty of money come back through the Fonterra payouts and commodity prices, and they've paid down a lot of that debt. So Reserve Bank is no
74. 9:03Speaker 3: longer stressed out about mortgage debt particularly or agricultural debt.
75. 9:10Speaker 3: So that is a good thing. The global ratings agencies aren't hugely stressed out about our government.
76. 9:20Speaker 1: We just got a pretty good rating, didn't we, from Moody's?
77. 9:23Speaker 3: Well, it's been maintained. There are warnings here and there because we did blow it up during COVID. We have a track record of being able to keep paying, which
78. 9:34Speaker 3: 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 party is. I think both National and Labour
79. 9:45Speaker 3: are talking about a path down of bringing debt to GDP down, but over different timeframes. So National's talking about, well,
80. 9:57Speaker 3: Labour's talking about taking about a year longer to get it to that 40%.
81. 10:00Speaker 2: Back to the 40% mark, I think.
82. 10:02Speaker 1: Depending on how you calculate the numbers.
83. 10:05Speaker 2: Yeah, well, look, I mean, you know, that's right.
84. 10:07Speaker 3: As soon as you start using timeframes and it can really, it makes the money quite abstract.
85. 10:21Speaker 4: It's one of the reasons we've committed to getting the books back into balance. So we need to balance the government's books so that we're not borrowing the fund day-to-day expenses, which is what we are doing right now. And in fact,
86. 10:31Speaker 4: 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,
87. 10:42Speaker 4: about a $ 3 billion surplus next year and turned it into a $ 14 billion deficit.
88. 10:48Speaker 1: 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?
89. 11:00Speaker 2: Well, I mean, it is... It's a big pie.
90. 11:04Speaker 1: Yeah, yeah.
91. 11:05Speaker 3: And it's about our ability to keep servicing it. The ratings agencies do actually look at the aggregate, a total debt, and that's the housing debt and private debt and the
92. 11:16Speaker 3: concerns around that are one of the reasons that we can't run such high government debt, um, or perhaps, you know, or, or would come under pressure. So in Japan, they run
93. 11:27Speaker 3: really high, um, levels of, of, of government debt, but a lot of that debt is owned by Japanese investors and, you know, and they have, um, enormous savings rates. And
94. 11:37Speaker 3: so you have to look at both sides of the ledger as New Zealand's, um, uh, savings grow. Kiwi save has been a good thing. Um, it, it could actually
95. 11:46Speaker 3: take some pressure off, uh, um, you know, where we're going with, um, with government debt. I think, you know, already we're, I think, you know, the talk of getting
96. 11:55Speaker 3: back to 40%, uh, percent debt to GDP is a long way from where we were, um, under Bill English and, and, and Sir Michael Cullen, uh, where we were sort of,
97. 12:04Speaker 3: you know, we liked that 20%, uh, figure and, and, you know, they were, they were running a pretty tight ship, uh, And that was valuable when we had global financial crisis
98. 12:15Speaker 3: 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,
99. 12:27Speaker 3: you know. And so another COVID or another, you know, it reduces our capacity to do emergency borrowing when the debt levels are high.
100. 12:35Speaker 1: Right. So the real issue isn't how much government borrows.
101. 12:38Speaker 1: 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?
102. 12:48Speaker 3: Yeah, well, that's my opinion is 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
103. 12:59Speaker 3: that it will be really efficiently invested. And I'm not sure that all New Zealanders feel that governments are good at that.
104. 13:06Speaker 1: Well, look at the infrastructure spend.
105. 13:08Speaker 2: Yeah, that's right.
106. 13:09Speaker 3: The infrastructure spend and what's been delivered, a lot of spending on scoping plans and things, and then we don't
107. 13:16Speaker 3: actually see something get built. So yeah, I would say that it's the trust there. I think if we want
108. 13:25Speaker 3: to borrow more, governments needs to earn back the trust around the ability to invest it.
109. 13:31Speaker 1: How do we prove that?
110. 13:33Speaker 3: Well, I 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,
111. 13:41Speaker 3: public-private partnerships, boost the capital, you know, New Zealand capital available by, you know, boosting KiwiSaver, which I think, you know,
112. 13:51Speaker 3: a lot of both parties want to boost contributions to KiwiSaver and As that grows, there's more New Zealand capital available that sort of reassures foreign investors. And, you know,
113. 14:02Speaker 3: the combination of local money, local private money and foreign private money balanced with some government spending could actually be a path forward.
114. 14:12Speaker 2: But, yeah, I don't know.
115. 14:14Speaker 3: Governments 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
116. 14:26Speaker 3: less democracy in those days, you know, like they would just declare that that town is going to be flooded, you know, with a massive hydro dam project. And that
117. 14:36Speaker 3: all looks a lot more difficult politically. So I'm not sure.
118. 14:39Speaker 1: Probably a lot more workplace accidents as well, though, in the 1930s. Yeah, all that stuff.
119. 14:43Speaker 3: I mean, you know, we have, you know, more ability to complain about things and You know, probably with some
120. 14:53Speaker 3: good reason, but it makes it harder for governments to do things. So maybe we need to look at some other ways to do those things.
121. 14:59Speaker 1: The red tape's gotten a bit too much.
122. 15:01Speaker 3: Yeah, I mean, I guess, you know, like one person's red tape is another person's not dying at work. So, you know, I don't want to just.
123. 15:09Speaker 1: There are extremes, right? I mean, when you're spending millions of dollars, I want to meet these review writers who are getting all of these reviews written for the government over the years.
124. 15:19Speaker 2: Yeah.
125. 15:20Speaker 1: A review after a review after a review, contractors upon contractors.
126. 15:23Speaker 2: It's great for the consultants.
127. 15:24Speaker 1: It's amazing for them.
128. 15:25Speaker 3: Yeah, I mean, like, I don't often agree with Winston Peters, but he made the point that really, you know, the next harbour crossing, why don't we just tender it and let the private sector do the work?
129. 15:36Speaker 4: Yeah.
130. 15:37Speaker 3: I was surprised to hear him say that because I imagine he would be hoping that it would be domestic money rather than foreign money coming in. But I think, you know, you pay.
131. 15:48Speaker 2: In the end.
132. 15:49Speaker 3: You pay by borrowing up front. Those in favour of more debt will argue that governments can afford to borrow about as cheaply as it gets, you know, because they
133. 15:59Speaker 3: can issue government bonds and they get the lowest price.
134. 16:03Speaker 3: 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
135. 16:13Speaker 3: 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
136. 16:24Speaker 3: 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.
137. 16:35Speaker 1: So bottom line, debt, what's the headline?
138. 16:40Speaker 2: Well, I mean, we use this big... Is the headline.
139. 16:45Speaker 3: Well, I guess I'm torn because we use this big nominal figure, you know, getting close to one trillion because it is an attention grabber.
140. 16:53Speaker 2: I know that.
141. 16:55Speaker 3: 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
142. 17:06Speaker 3: our biggest debt concerns, primarily the rate of mortgage debt growth and agricultural debt, are subdued, are sort of healing themselves.
143. 17:18Speaker 3: So the downturn has an upside in that we've seen some rebalancing in that part of the economy where The place where we're probably not so happy is in the
144. 17:30Speaker 3: business debt sector because actually, again, this is where you'd like to see business feeling confident enough to borrow, to invest,
145. 17:40Speaker 3: and to do more. And I think some more growth in business debt wouldn't be a bad thing. I think it's crept back up to around 5% growth in the past year, but looking at the number of liquidations and
146. 17:52Speaker 3: 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.
147. 17:59Speaker 1: Thanks for joining us, Liam.
148. 18:00Speaker 3: Cheers.
149. 18:04Speaker 1: That's it for this episode of The Front Page. You can read more about today's stories and extensive news coverage
150. 18:11Speaker 1: at nzherald.co.nz. The Front Page is hosted and produced by me, Chelsea Daniels. Kane Dickey is our studio operator, Richard Martin,
151. 18:21Speaker 1: our producer and editor, and our executive producer is Jane Yee.
152. 18:26Speaker 1: 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.