Our 2023 “no frills” or “no thrills” budget is yet another missed opportunity that will consign the country to more debt. Few can argue against the need to fund infrastructure and resilience ($6 billion) and public housing ($3 billion) but the downside is that other worthy causes have missed out. Add to that the country is projected to record a $6.96 billion deficit for the year to June 2023.
There is no need for the Government to borrow from financial institutions for infrastructure projects though. It can borrow from its own bank, the Reserve Bank, using zero-interest Reserve Bank credit rather than interest-laden debt. This is called Direct Monetary Financing.
Our Reserve Bank created $55 billion in 2021–2022 and used it to buy NZ Government debt, showing that it can be done. But it provided the money to financial institutions to buy back existing debt as a stimulus package and to bring down interest rates. This was a mistake as the money ended up in an already overheated property market and house prices, and the banks’ profits, took off. Spending the money directly on public infrastructure would have avoided this.
We say that the Government should require the Reserve Bank to create the $9 billion dollars allocated in Budget 2023 for climate resilience and housing infrastructure, rather than going to private investors. The savings will free up funding for other areas of the economy that missed out.
The Bank of Canada did a similar thing during the period 1935–75, when, working with the government, it engaged in significant direct or indirect financing to fund the construction of highways, airports, bridges, schools, hospitals, and other physical infrastructure. A paper for The Levy Economics Institute titled ‘Is Monetary Financing Inflationary? A Case Study of the Canadian Economy’ found that this spending by the Bank of Canada had little or no impact on inflation.
The Reserve Bank has provided Direct Financing in the past. In the 1930s the first Labour Government was under enormous pressure to provide jobs and lift the standard of living for ordinary kiwis, as the world was in the grip of the Great Depression. The Government, under Michael Joseph Savage, did that by having the Reserve Bank inject low-interest money into the economy for infrastructure projects, industry development and housing.
Direct monetary financing will free up tax money for other sectors of the economy such as health, social welfare and tax relief. We do not need to go further into debt, just to get by.