There has been significant criticism of the new Labour Government Finance Minister, Grant Robertson, of late because of his determination to stick to his budget surplus & government debt to GDP targets outlined in his Budget Responsibility Rules that formed part of the coalition agreement. Even orthodox economists are ambivalent about this government “borrowing” more given its very low level of “debt” and the long list of deferred spending by the previous government. His intransigence is more connected to trying to change perceptions of Labour Governments as reckless “tax and spend” agents than any fiscal requirement. Yet under MMT this criticism barely scratches the surface of how wrong his beliefs are.
Through the MMT lens, the very phrase “tax and spend” is wrong. A sovereign government like New Zealand spends, then taxes. Last year’s taxes do not fund this year’s spending. They offset it by “making room” in the economy for government spending without it becoming inflationary. They moderate inequality by draining more money from the wealthy than the middle class and poor. And they act as price signals for the government to discourage behaviour or consumption without prohibition eg smoking, or encourage activity in one sector as opposed to another. But your taxes are not put aside in a government savings account for future spending. They are effectively consigned to an accounting rubbish bin, just as your mortgage principle payments are each week.
So how does the New Zealand Government fund itself? It passes spending appropriation bills in Parliament and the Reserve Bank, as the Government’s bank, goes to its keyboard and enters some numbers into the respective bank accounts of the government departments from which they can make payments for benefits, goods and services. That’s it. They don’t need prior taxes to spend. They don’t need to sell bonds and borrow.
So why does the government “borrow” by selling government bonds? Turns out these bonds are not for spending but to add/subtract reserves from the banking system so the RBNZ can maintain its interest rate targets; manage liquidity in the banking system, especially the payment system; and also to provide an essentially risk free place for high net worth individuals, corporations or financial institutions to park their cash. They are in effect a term deposit. Pension funds etc love government debt! They appear as a liability on the government’s ledger as at some point the bond will be redeemed plus interest. But this will never be an issue for the Government as it can create NZD at will via the RBNZ. Calling it Government Debt rather obfuscates its purpose. As long as these liabilities are in NZD it can never go bankrupt or not meet its payments. Prior to the NZD being floated in 1985 it was effectively pegged to the USD and debt was issued in USD. When the 4th Labour Government devalued the NZD in 1984 it caused a “crisis” because the lower exchange rate caused the real debt to balloon and provided a good excuse to initiate asset sales. This is no longer the case. The NZD can fluctuate as much as it likes but if the bonds issued remain in NZD there will never be a repayment problem. The exchange risk is with the foreign bond holder.
But not only does the government sell bonds, it also repurchases them via the RBNZ’s Domestic Markets Division in Open Market Operations. By this complicated method (it includes other financial instruments) it tries to keep bank reserves at a level that prevents trading banks from lending to each other at rates that undermine its Overnight Cash Rate and thus interest rates in general. These bonds fund nothing in government -the money has already been created and spent – although they do form part of the trading banks capital under Basel Accords that allow them to create their own credit money in the form of loans.
The upshot of all this is that neither taxes or Government “Debt” fund the New Zealand Government’s spending. They are tools to offset that spending’s inflationary and banking system liquidity effects.
Which brings us back to deficits and surpluses. A Government Budget Deficit simply means in any given period it has put into the economy via its spending more than it has subtracted in taxes, fees and fines. It is no more than an accounting observation. Likewise a Government Budget Surplus is simply spending less than it has subtracted. Neither of these is “good” or “bad” although in the popular narrative a deficit has negative connotations, because it has been associated with debt and conflated into the erroneous “household analogy” by politicians and journalists. If we as individuals, households or businesses run deficits and use debt to cover the difference, we will have to pay it back. Not only that but our debts can accumulate. As noted in Part 1, New Zealand with a free floating sovereign currency and a government owned central bank, has no such issue. It can always create more money & never default on any obligations in NZD. It is not like a household. It does not have a “credit card” it can “max out”. Nor will accumulated deficits be a burden on future generations. It will always be able to fund superannuation, health & education in the future in NZD.
That said there are two other sectors in the economy to be considered besides government. They are the Private Sector (Households, Businesses) and the External Sector (Imports/Exports, FDI, profit repatriation etc which are reflected in Trade & Current Account balances) When I said deficits or surpluses are neither good or bad, it depends on the nation’s circumstances and the balance between the three sectors. If, as in New Zealand’s case, we have a general outflow from the External Sector via a fluctuating Trade Balance and a persistent Current Account Deficit, the other two sectors must make up the difference or economic activity will fall into a recession. When the Private Sector is spending more than it earns, unlike the government it has to borrow money or draw down savings. This can act as a drain on the economy especially when debt servicing reduces consumption elsewhere. In this situation the Government must spend more than it takes to make up for the other two sectors. A Government Budget Deficit is essential.
If however a government runs an “Austerity Lite” budget like Grant Robertson, reducing government spending in real terms to get a surplus, and there is still a net drain through the External Sector (the largest of which is transferred profits to Australian parent banks) the Private Sector must make up the difference. It can only do so by earning more or, as in New Zealand’s case, borrowing more. Thus instances of New Zealand running a Government Surplus have been accompanied by a massive rise in private borrowing, as during the last Labour Government with Finance Minister Michael Cullen, who Grant Robertson is trying to ape.
A rare instance of where it is appropriate for a government to run a surplus is Norway. It generates so much revenue via its oil exports and probably its sovereign wealth fund, and has a private sector borrowing heavily, it needs the government to act as a drain to prevent inflation escalating.
So Grant Robertson’s determination to run a surplus is not virtuous. It will cause a recession and unnecessary hardship unless the Private Sector keeps borrowing heavily (which itself exacerbates the drain through the Current Account Deficit via repatriation of profits to Aussie banks) or suddenly starts running astronomical Trade Surpluses. As MMT demonstrates, deficits aren’t to be feared. They are a critical part of maintaining consumption in the economy and directing money where the government determines it is needed most. Taxes assist this by draining money from “undesirable” sectors and creating spending space in what they determine to be “desirable” sectors. Which sectors are deemed desirable or undesirable and how much “space” is required is a political judgement of respective political parties. The degree of “fiscal space” and taxation is also determined by the acceptable level of inflation.
MMT is a return to a mixed economy where full employment via the Job Guarantee is given priority via deficit spending. This spending could be continued as it is now with Treasury and the RBNZ trying to manage interest rates with the issuance and repurchase of bonds; or the language and mechanism could change all together. If it didn’t mind the OCR being zero and tried to influence the quantity of credit via some other mechanism other than interest rates, the government could forgo bond issuance all together and adopt what is called Overt Monetary Finance or Public Credit ie just having the RBNZ create money or issue perpetual bonds directly to the government without the private financial system being involved at all. There are multiple options, including breaking up the big 4 banks and recreating a network of regional and local banks with different lending priorities to those that exist now in favour of property. As The New Chicago Plan and the recent Swiss Vollgeld referendum show there are also options for reserve banks to control the money supply with 100% reserve banking rather than indirectly through interest rates. There are technological options involving blockchain.
The current system is not a law of nature and economics is not a hard science as most orthodox economists would have you believe. It is a constantly evolving. The economy has its place within society and the natural environment and its limits, not the other way around. As such the combination of government spending, taxation, private credit and external trade will be constantly changing. MMT offers the most realistic and flexible response.
For a far more in depth explanation of much of the above, read 3 blog posts by Bill Mitchell starting here
So Social Credit were right all along? I do wonder if Grant Robertson secretly knows all this but thinks that it is too politically explosive to admit to it. Although he does promise a surplus he seems to be aiming for as small a surplus as possible, as if he is only worried about the symbolic gesture of making sure there is no deficit for anyone to point to. Bill English, however, was straight-forwardly ignorant, he really thought that the government needed to make savings.
Love you work! Beautifully clear exposition on MMT. My god so many nations including OZ and NZ have shot themselves in the foot by the failed economic and political ideology of neoliberalism/monetarism
I recently posted a different view of a Job Guarantee program, featuring bottom-up administration and max automation, at TENonline.org/jg.html . Any critique of that proposal is welcome.