I am prompted to write this now for a couple of reasons:
the current doubt over what Barnett Consequential funding Scotland will get from Westminster’s borrowing to support our economy impacted by Covid-19, and for how long – and such uncertainty over Consequentials is the norm.
the recently heard claim from scare-mongering Unionists – also from media Vox Pop (‘scare-mongered’?) contributors – that Covid-19 and the need for emergency funding shows up that an independent Scotland could not have coped with the financial challenge – and if independent, we would have been doomed!
So it is timely to see how New Zealand’s public finances are ‘coping’ with the pandemic’s economic challenges. I hope my search provides some interesting and useful insights.
New Zealand acts like ‘big’ countries
NZ operates its public finances and its borrowing processes much like the UK Treasury: for example, the NZ Treasury’s Debt Management Office (DMO) has been operating in the international bond market for over 25 years. It sells NZ Government bonds on a weekly basis through a 30 minute online auction (the ‘tender’).
Borrowing is normal – and currently very cheap for New Zealand too!
On 11 September 2020, the NZ news website ‘Newsroom’ had this: “It happened just after 2pm on Thursday, September 10, via the results of bond tender 738. …. it is one of the most significant events in our economy’s history, and for our Government.”
It explains: “The Treasury’s Debt Management Office (DMO) announced on Thursday it sold $50 million worth of inflation indexed bonds maturing in 2040 at an average yield of minus 0.1032 percent. The DMO reported there were 22 successful bids for the bonds from fund managers where they paid the Government money to lend their money to the Government.” The NZ Government had actually received offers that day to borrow up to $72 million. “That means there are fund managers out there this week with so few places to put their money and so afraid of the future that they are willing to pay more than $1m for a piece of paper that guarantees they will get $1m back in 20 years time.”
As we will see below, it’s also worth noting that the NZ Government is borrowing from lenders who will be paid back – in time – in NZ Dollars. The NZ Government of course is the sole issuer of the currency. But there is more!
Example of ‘normal’ agency – New Zealand’s 22 October, 2020 weekly Bond Auction
The contrast this week could not be more stark. As the Scottish Government tries to get clarity over Barnett Consequentials from a Westminster government we didn’t vote for – how much if any, and for how long – the NZ Government had full agency to act on behalf of its citizens
The NZ Nominal Bond Tender 744 conducted on 22 October, 2020 achieved this:
Maturing 2024 Bond Series: $250 million borrowed by the NZ government at an average yield payable of 0.0195%
Maturing 2031 Bond Series: $250 million borrowed at average yield of 0.5675%
Maturing 2041 Bond Series Series: $100 million borrowed at average yield of 1.2445%.
What is the New Zealand government borrowing and from whom?
More broadly, a recent statement from the NZ Treasury indicated that the Covid-19 recession and the various recovery measures will force the government to increase borrowing through bond issues from $94.2b at the end of June to $210b by the end of June 2024.
If this sounds scary, hold on- there is more to learn from the same source:
“… the truth is the Government is borrowing money off its own bank, who just invented it, albeit in a slightly roundabout way. In theory, the bank will eventually sell the debt back out into financial markets to tighten monetary policy and lift longer-term interest rates at some vague future date. Or it could hold the bonds to maturity and ‘make’ the Government pay back the money to the Reserve Bank (i.e. its own bank) when the bonds mature.”
On 18 August 2020 the ‘STUFF’ online news outlet in NZ also asked this question: ‘Who’s the Government borrowing the money from to pay for Covid-19 response?’
Economist contributors told its readers: “Through quantitative easing – basically printing fresh cash to buy government bonds – it (the NZ Government) was fast becoming the largest holder of government bonds.”
“The Reserve Bank is targeting $100 billion of quantitative easing and will end up owning around 60 per cent of all government bonds, … Already it owns around 23 per cent of government bonds, the Reserve Bank revealed in its latest Monetary Policy Statement, and it’s buying them at a rate of around $940 million a week.”
““The Reserve Bank is basically replacing the role of foreigners, and other local buyers,” …. This ensures the government has to pay very little for its borrowing, ….: “The Reserve Bank is a friendly buyer. If the government was ever struggling to repay, the central bank would simply extend the programme indefinitely.”
And all this is ‘normal’ too. We are told from this NZ source: ’This kind of in-country money creation and bond purchase scheme is happening in countries all over the world, … including Australia, the US, and the UK.’ And this is: “more like printing money to spend rather than borrowing”.
The inflation scare debunked
The above article goes on: “Future risks lie around the re-emergence of faster inflation in coming years, accompanied by higher interest rates, which would drive up the cost of government debt.” But “… that outcome would probably signal a strongly growing economy – one that could also withstand tax increases and tighter fiscal policy.”
These insights into the management of the public finances by independent, currency issuing countries will be familiar to readers of the excellent Tax Research blog written by Professor Richard Murphy – I commend it warmly!