Borrowing to spend is like waiting for Godot

Dr Bryce Wilkinson
NZ Herald
28 September, 2023

History does rhyme, and apocalyptic plays can make a sobering point or two.


This government is borrowing heavily to fund current spending. On Treasury’s latest projections, it will have borrowed $66 billion for this purpose between 2019 and June 2026. That is over $33,000 per household.


That represents either a lot of additional taxation or greatly reduced spending in the future.


Worse, as Treasury’s cautionary remarks accompanying its forecasts hint, these projections look too optimistic. In my view, they assume an implausible degree of future spending constraint by this big-spending government.


False hopes from prolonged deficit-spending rhymes with the past. In the 1975 general election, opposition leader Robert Muldoon was campaigning against the ‘borrow and hope’ policies of the third Labour government (1972-75).


His public meetings featured large-scale charts showing ballooning deficits in both the government accounts and in the balance between exports and imports. The public debt held by foreigners was skyrocketing.


Muldoon was accusing Labour of incompetent economic management, of failing to adjust to the fall-out from much increased global oil prices.


Labour defended the heavy borrowing on the basis that the higher oil prices might be temporary.


Things would come right, they hoped. Economic growth would pick up lifting tax revenues. Labour’s excellent economic management would be vindicated.


By the time this “she’ll come right” strategy was looking implausible, the die was cast. Politically, Labour could not take tougher measures. To do so would be seen to be admitting that Muldoon had been right all along.


Labour’s ‘borrow and hope’ strategy of the mid-1970s reminded me of Samuel Beckett’s play “Waiting for Godot”. Two deadbeat characters wait passively for an apparently godlike character to arrive and save them from their predicaments. But Godot never arrives, and the two characters remain lost, bereft of any capacity to act.


National won the 1975 general election handsomely. Muldoon, unlike Labour and the two characters in Beckett’s play, had the capacity to act.


Muldoon’s 1976 Budget set out to cut the fiscal deficits decisively. A nasty recession in 1977-78 saw him reverse that strategy sharply.


The upshot was that the third National Government (1975-84) ran sizeable fiscal deficits year in, year out.


The formidable Muldoon defended the rising public debt by humorously asserting that “most people wouldn’t recognise a fiscal deficit if they fell over it”.


As a fiscal strategy, though, “borrow and hope” debt accumulation is irresponsible.


Most households know that continually borrowing to pay for the groceries piles up future grief. Government borrowing to subsidise their cost of living is much the same.


The main difference is that, when Government does it, it is less clear who will bear the future cost of repayment.


People wanting financial relief today may hope that the burden will fall on others. That hope is a divisive, “them versus us” wish. It is not good for democracy or civil society. It can be a winner for politicians, though.


In the event, Muldoon’s government arguably gave the fourth Labour government (1984-1990) the biggest economic and fiscal hospital pass in New Zealand’s history.


It took successive governments over a decade of tough measures to turn Muldoon’s fiscal deficits into surpluses. 


This week, The New Zealand Initiative released a report, The Deficit Diaries: Six Years of Red. It traced the path from projected fiscal surpluses in 2017 to the current projections for sustained fiscal deficits until 2027.


Some readers will recall the controversy over whether Labour’s fiscal plan in late 2017 had a large ‘fiscal hole’.


The report shows that, while appearing prudent on paper, in practice, Labour’s spending was not constrained by its plan.


In 2017, Labour planned to limit its spending in the five years to June 2022 to an increase of $11.7 billion above Treasury’s forecasts at the time. Two years later (December 2019) Treasury was forecasting it would be a $29.7 billion increase. In early 2020, the arrival of Covid-19 blew away even that degree of constraint. Actual spending in that five-year period was $77 billion higher than Treasury had forecast it would be in 2017.


A material increase at the time was certainly justifiable as a temporary measure. But the real fiscal problem is that the government intends to make that increase permanent.


Heavy borrowing to pay for current operating spending will continue unless tough decisions are taken. Unfortunately, they may not be.


Labour probably cannot promise tough spending cuts because, as in 1975, that would admit that it had got things wrong.


National may not take tough fiscal decisions either. It may prefer to ‘borrow and hope’. To do otherwise risks being accused of imposing ‘fiscal austerity”.


Complacency is a compounding factor. Our report argues against complacencies commonly used to justify deficit spending.


One such argument - that debt is all right if interest rates are low relative to income growth - is hardly compelling with today’s high interest rates.


The report also suggests that the recent IMF assessment of New Zealand feeds complacency. The IMF excused New Zealand’s much increased public on the grounds that other prosperous countries have even larger debt-to-income ratios. But that development likely makes New Zealand’s ratio more imprudent, not less.


Unfortunately, calls on politicians to throw good money after bad are inexhaustible.


The next government should take spending quality very seriously.,  


But are either National or Labour capable of decisive action to cut ill-justified spending? Or are they a bit like those two despairing characters in Beckett’s play, waiting for a surplus that will never come?


To read the article published on the NZ Herald website, click here.

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