We are repeatedly told that money is scarce and that the Government must attract private investors or go to ‘the markets’ to borrow if it wants to invest in major projects.

This is only true if it needs to borrow in a foreign currency. It is not true for borrowing in New Zealand dollars—the vast majority of government borrowing—because the New Zealand Government is the ultimate issuer of our currency. This means the Government has financing choices unavailable to households, businesses or local authorities.

There is no technical reason why its Reserve Bank cannot buy bonds directly from the Government.¹For instance, see footnote below: Treasury, Reserve Bank told Government it could just print money to pay for Covid-19 We (almost) saw this happen during the Covid crisis when the Reserve Bank created new money with a few accounting entries to buy about $50 billion of New Zealand Government bonds and $4 billion of local government bonds. It could have bought the bonds directly, but instead, it insisted they first be sold to banks and investors. It then paid billions too much to buy them back, a cost now borne by taxpayers. Our 2021 petition to Parliament explains why it should have gone direct and cut out the middlemen.

Let’s use the right tool for the job

Monetary financing shouldn’t replace all conventional bonds (nor does it replace the need to levy taxes). There are good reasons why we should sometimes issue bonds to private investors. But an effective public finance toolkit should include both. The New Zealand Treasury has analysed the pros and cons and highlighted instances where monetary financing can be effective.

Among key benefits of monetary financing are:

• Long-term public financing at zero and low interest rates
• Interest payments that would have gone to lenders can instead pay off the loan principal or pay for better public services
• Strengthens sovereignty over key public assets (they are not needed as security for foreign lenders)
• Can be used as a tool for achieving monetary and fiscal policy goals

The main objections to direct monetary financing are:

• That politicians or Parliament will misuse this power
• That it will lead to inflation

There is little evidence or research to support these objections but they have been used successfully in recent decades to shut down debate. There are clear benefits offered by monetary financing, as well as solid research to support its use, and it’s time to move the debate past knee-jerk dismissals.

[M]onetary financing, taking various guises, was a relatively standard aspect of economic policy over the past three hundred years … Empirical correlation between monetary financing and inflation is, at best, weak and selective, whilst causation has not been demonstrated. The theoretical approach rests on assumptions about the workings of the monetary system—including that banks predominantly create money that businesses invest and that central banks can influence such credit creation via changes to short-term interest rates—assumptions that no longer appear to hold.
— Josh Ryan-Collins, Is Monetary Financing Inflationary?

In our view, the concerns about misuse and inflation can be addressed with robust institutional design and clear rules on when this valuable public financing tool can be used as part of the government’s monetary and fiscal toolkits.

Positive Money believes it’s time for a ‘grown-up’ discussion about building robust institutions and rules to support the responsible use of monetary financing.