Speaker 1: Kyora. I'm Chelsea Daniels and this is the Front Page,
Speaker 1: a daily podcast presented by the New Zealand Herald. New
Speaker 1: Zealanders are well on their way to a collective one
Speaker 1: trillion dollars in debt. At the current rate of growth,
Speaker 1: we'll hit that landmark inside the next three years. Current
Speaker 1: gross debt sits at more than eight hundred and seventy
Speaker 1: billion dollars for the year to May. At the same time,
Speaker 1: five years after COVID hit, and the government is still
Speaker 1: paying the price. Core Crown borrowings rows eleven percent in
Speaker 1: a year, hitting two hundred and thirty nine billion dollars.
Speaker 1: That's one hundred and fifty six percent higher than in
Speaker 1: May twenty nineteen. Today on the front page ends at Herald,
Speaker 1: Business Editor at Large Liam Dan joins us to delve
Speaker 1: deeper into our nation of debt. Liam, what are the
Speaker 1: main factors contributing to this ongoing growth in debt?
Speaker 2: Yeah, New Zealand's got two big drivers of that really big,
Speaker 2: ugly debt. Number one of them. Well, the biggest one
Speaker 2: really is our housing market and the mortgages. So the
Speaker 2: mortgage debt is the largest chunk of our debt. It's
Speaker 2: up around three hundred and seventy seven three hundred and
Speaker 2: seventy eight billion dollars. And when we have a housing boom,
Speaker 2: it really saws, it goes up, you know, ten percent
Speaker 2: a year or something. At the moment, it's only rising
Speaker 2: sort of about four or five percent a year, which
Speaker 2: is relatively subdued, and that's because, as we know, the
Speaker 2: housing market has not been booming as much. But it's
Speaker 2: such a big number that it's still even a small
Speaker 2: percentage rise, it's it's pretty huge, and it's not one
Speaker 2: that where we look like we're paying down exactly anytime soon.
Speaker 2: And the other one, of course is government debt, which
Speaker 2: is you know, really highly political, has been in a
Speaker 2: lot of debate about that. That is somewhere around two
Speaker 2: hundred and thirty nine billion dollars using the measure that
Speaker 2: we do cork around borrowing for this nation of debt series,
Speaker 2: and that's up eleven percent, so and obviously even bigger
Speaker 2: rises during COVID, like it basically is almost doubled since
Speaker 2: So it was doubled since COVID. And even though the
Speaker 2: government is currently talking about paying down debt and you know,
Speaker 2: cutting back on spending and being fiscally responsible in things.
Speaker 2: It's still in a situation where that total debt is
Speaker 2: actually growing. They're having to sort of refinance the debt
Speaker 2: and borrow more to do some of the things they
Speaker 2: want to do. I guess what they're doing is reducing
Speaker 2: the rate which is increasing and hoping that they can
Speaker 2: sort of get it back on a downward track, maybe
Speaker 2: by around twenty twenty eight.
Speaker 1: So it's no surprise that the nation's mortgage that accounts
Speaker 1: for the bulk of what we owe. Does that just
Speaker 1: show how we're far too reliant on housing being our
Speaker 1: main investment or is this always going to inevitably be
Speaker 1: the biggest one?
Speaker 2: Well, I mean kiwis like to own their own homes,
Speaker 2: so it's not just investment the investment side. But yeah,
Speaker 2: I mean when you look at sort of the product
Speaker 2: productivity of countries around the world, you look at a
Speaker 2: country like Germany, they've got much lower rates of home ownership,
Speaker 2: only about fifty percent of people. People just rent long
Speaker 2: term there and so the money you know that they
Speaker 2: save money and they for the retirement and all the rest,
Speaker 2: and that goes means more money is going into funds
Speaker 2: which promote business growth and you know, economic productivity. So
Speaker 2: New Zealand does have that problem. There are times when
Speaker 2: it gets it looks precarious where the Reserve Bank is
Speaker 2: very worried about the state of our mortgage debt. The issue,
Speaker 2: of course is that you know, like we always feel
Speaker 2: safe around mortgage debt because we've got this house. But
Speaker 2: if property prices really fall back, which they actually have
Speaker 2: quite a bit in Auckland and Wellington in the past
Speaker 2: couple of years, then people have negative equity. They don't
Speaker 2: you know, the debt can be bigger than the value
Speaker 2: of the home. And if if there was a really
Speaker 2: big crunch, if that happened right across the nation, we'd
Speaker 2: still owe all that money to the Australian banks. But
Speaker 2: housing stock isn't isn't worth what we thought, So yeah,
Speaker 2: there's there's some there's some sort of risks around how
Speaker 2: you know intensely we sort of invest in housing and
Speaker 2: I think, look, you know, it's it's it's a real
Speaker 2: bummer that for a lot of people right now that
Speaker 2: the housing market has come off so much, especially if
Speaker 2: you've bought around the peak. But it maybe is quite
Speaker 2: positive in the sense that it might be shifting the
Speaker 2: culture a little bit. People are looking at other investments
Speaker 2: and you know, moving away from housing being such a
Speaker 2: dominant thing. So perhaps we'll see some rebalancing in the
Speaker 2: in the debt debt numbers over the next few years.
Speaker 1: So the rate of debt growth has moderated recently with
Speaker 1: both government borrowing and the housing market. Calling what events
Speaker 1: or policies have influenced this moderation, do you think.
Speaker 2: Yeah, well, the government has you know, it's still it
Speaker 2: hasn't been able to sort of suddenly slash the debt,
Speaker 2: but the government has tightened up fiscally and is trying
Speaker 2: to spend trying to lower the rate at which spending increases,
Speaker 2: and then ultimately trying to spend less. It hasn't really
Speaker 2: been helped by the tax take coming down, so the
Speaker 2: economy hasn't been booming, so that means it's lower levels
Speaker 2: of tax coming in for the government. So that makes
Speaker 2: it harder to keep doing what they want to do
Speaker 2: without continuing to borrow. So that's difficult, but that has
Speaker 2: been a government policy and it's something that they're trying
Speaker 2: to achieve. And then the other one, of course, we've
Speaker 2: talked about a bit just that housing market coming off
Speaker 2: is a really big factor, and people talk about investors
Speaker 2: coming out of the market too. So in fact, in
Speaker 2: the last sort of the last six months to a yeah,
Speaker 2: there's been a slight increase in the amount of borrowing
Speaker 2: for mortgages. Not it's still at moderate levels, but people
Speaker 2: are talking about investors coming out of the market and
Speaker 2: the positive being more first home buyers going in. But
Speaker 2: of course first home buyers have to borrow more from
Speaker 2: the bank. Either the investors will have another property or
Speaker 2: two they can use for equity. So probably more first
Speaker 2: home buyers means that you're just going to see bigger numbers,
Speaker 2: you know, in terms of what has to be borrowed
Speaker 2: from the bank. Yeah, those are the two big ones.
Speaker 2: But we're also seeing really subdued borrowing in the business
Speaker 2: sector because the business sector is really struggling with the
Speaker 2: slow economy, so they're not feeling like investing to expand
Speaker 2: their businesses at the moment, so they're not borrowing from
Speaker 2: the banks to do that at any particularly high rate.
Speaker 2: And the one, you know, the bright spot in the
Speaker 2: economy is the farmers and the agricultural money coming in.
Speaker 2: The export money is coming in for farmers, but they
Speaker 2: seem to be at this stage paying down debt. So
Speaker 2: we've seen agricultural debt fall and that's probably a positive
Speaker 2: thing because a few years ago the Reserve Bank used
Speaker 2: to worry a lot about how heavily leveraged our dairy
Speaker 2: farmers were. But they're having a couple of good, good
Speaker 2: seasons in a row.
Speaker 1: Here.
Speaker 2: It's a chance for them to pay down the debt
Speaker 2: and get there, get the balance sheets in order, and
Speaker 2: then hopefully go spend some money and help the economy
Speaker 2: take off a bit.
Speaker 1: Well, aren't they in for a rebate of sorts with
Speaker 1: a government policy if they were to buy say like
Speaker 1: a massive tractor or something.
Speaker 2: Yeah, not just the farmers, all business, so that we
Speaker 2: could see that come through in the in the borrow,
Speaker 2: you know that that's sort of an incentive to maybe
Speaker 2: borrow a bit more because it's not going to cost
Speaker 2: you as much. And it's not just the ute or
Speaker 2: the tractor. It's you know, ideally it's a manufacturing firm,
Speaker 2: you know, thinking that they can see opportunity to increase
Speaker 2: their production and buying another another plant or another machine
Speaker 2: or something like that to improve their productivity. So hopefully
Speaker 2: that will actually lift it. So business business borrowing is
Speaker 2: one of those ones where you kind of want to
Speaker 2: see it. You know, with the household borrowing, you don't
Speaker 2: want to see too much debt, but with businesses, you
Speaker 2: want to see enough confidence that they are borrowing to
Speaker 2: invest because businesses are typically borrowing to invest in things
Speaker 2: that will make more money. And if business borrowing is
Speaker 2: down and out, that usually is a sign that business
Speaker 2: is a bit down and out.
Speaker 1: So this morning, Wellington Business editor Jane tib Schrainey wrote
Speaker 1: and she described the government's finances as suffering from long COVID.
Speaker 1: What fiscal legacies from the pandemic do you see is
Speaker 1: the most persistent or concerning.
Speaker 2: Yeah, there's just been a step change in the size
Speaker 2: of the debt and you know, people are still debating
Speaker 2: how much of that was required, whether the government should
Speaker 2: have pulled the pin on the stimulus earlier. You know,
Speaker 2: there was a lot of things going on and people
Speaker 2: have their own views on the level of the health
Speaker 2: crisis and the lockdowns. But while we were locked down,
Speaker 2: the government had to keep things running. Yeah, it's just
Speaker 2: it's it's a really large increase in the overall level
Speaker 2: of debt and that. But by New Zealand standards, I
Speaker 2: should say, so we have something like debt of around
Speaker 2: forty two percent of GDP. So you know, our GDP's
Speaker 2: four hundred and something and you've got what's at the
Speaker 2: debt two hundred and thirty nine billion that's expected to
Speaker 2: rise and peak at about forty six percent of GDP.
Speaker 2: Pre COVID, we were down at twenty percent of GDP.
Speaker 2: We were we'd really gone through a phase of paying
Speaker 2: down debt which we'd sort of actually built up through
Speaker 2: the GFC the last big crisis, and that had been
Speaker 2: paid down, and that meant there was scope to do
Speaker 2: more borrowing and COVID, and that's a good thing. But
Speaker 2: then you know, now you think, well, if there was
Speaker 2: another crisis and the government really had to bail out
Speaker 2: the country, it would be struggling a bit. There's always
Speaker 2: a lot of controversy about how much debt a government
Speaker 2: can take on because in international terms, when you look
Speaker 2: at some of the other countries in the world, the UK, Japan,
Speaker 2: they have debt level, public debt levels up near one
Speaker 2: hundred percent or in Japan's case, well over you know,
Speaker 2: one hundred percent of their GDP so they actually borrow
Speaker 2: a lot more, and you'll hear the argument that, hey,
Speaker 2: our government could relax and could borrow more and build
Speaker 2: all the infrastructure. The sort of counter argument to that
Speaker 2: comes from Treasury and plenty of other voices I suppose
Speaker 2: as well, but they would argue that, you know, in
Speaker 2: New Zealand, we have that really high level of housing debt,
Speaker 2: so much of our debt is financed internationally because we
Speaker 2: don't save as much. So in Japan some we like Japan,
Speaker 2: the public are incredible savers and they've got all these savings,
Speaker 2: and those savings fund the public debt. So the private debt,
Speaker 2: private investment of the people for their retirement funds is
Speaker 2: enough to actually fund a large chunk of the government's borrowing,
Speaker 2: which means they're not exposed to sort of big international
Speaker 2: banks deciding they don't like the look of us anymore,
Speaker 2: which is always a risk for New Zealand because we're
Speaker 2: so exposed internationally.
Speaker 1: On our debt, we're mirroring a trillion dollars.
Speaker 3: Just sounds like so much bloody money, doesn't it, Sarah.
Speaker 3: It's one of those numbers that you can't even comprehend, right,
Speaker 3: You just keep adding a Z onto it or another
Speaker 3: O and because it just doesn't seem kind of kind
Speaker 3: of real. But the thing is, it's like when you borrow,
Speaker 3: you want progress or you want an outcome from that.
Speaker 3: And I feel like that's the part that we're not
Speaker 3: around whole day. The bang for the buck that's coming
Speaker 3: from that massive debt just doesn't seem to kind of
Speaker 3: be there. We're just treading water. And I think that's
Speaker 3: the kind of concerning thing.
Speaker 1: Well, Treasury warns that New Zealand's finances are in structural deficit.
Speaker 1: What does that mean?
Speaker 2: It means turning it around so that we actually see
Speaker 2: debt going down so that we earn more than we
Speaker 2: bend is very very difficult. It's a structural problem. And
Speaker 2: that's because I mean, you know, in simple terms, with
Speaker 2: the population aging, more people going to be needing, the superannuation,
Speaker 2: all that sort of stuff, you get to a point
Speaker 2: where the numbers just don't add up. You're either going
Speaker 2: to have to tax a lot more or you're going
Speaker 2: to have to cut spending a lot. New Zealanders don't
Speaker 2: want to do that. They want to keep up as
Speaker 2: sort of a we want the first world services. But
Speaker 2: we're not prepared to do the things to get there. So, yeah,
Speaker 2: it's a difficult one and the one that most politicians
Speaker 2: will fall back on as well. We're going to bring
Speaker 2: in policies to make the economy boom, because you can
Speaker 2: grow your way out of debt if you have a
Speaker 2: strong enough you know, GDP, you can make lots of money.
Speaker 2: The government will get a lot more tax because the
Speaker 2: economy's humming, and also the numbers will get bigger, and
Speaker 2: that the debt doesn't look so bad relative to the
Speaker 2: size of the economy. But you know, so far we're
Speaker 2: a year and a half into this government's term. That's
Speaker 2: not happening yet unfortunately.
Speaker 1: So we're edging towards one trillion dollars in combined debt.
Speaker 1: Is there a breaking point? So, is there some number
Speaker 1: or you know, percentage of GDP that we look at
Speaker 1: and we say we cannot go past that point without
Speaker 1: completely collapsing the economy?
Speaker 2: Say, when there probably are numbers, the trillion doesn't necessarily
Speaker 2: mean that much other than it's sort of a big
Speaker 2: scary number. Yeah, And of course what we're doing to
Speaker 2: get up to that near that trillion, that that's eight
Speaker 2: hundred and seventy two billion dollars. That's that's the gross debt.
Speaker 2: So that's us adding up all the government debt, all
Speaker 2: the private debt and you know from including local government,
Speaker 2: student loans, housing, business and agriculture, and you know, with
Speaker 2: debt you also have to look at that balanced against
Speaker 2: the wealth and the nation. It's a bit like you know,
Speaker 2: you have a you might have a big mortgage, but
Speaker 2: your house might be worth a million and a half dollars,
Speaker 2: and so you do have to look at you know,
Speaker 2: New Zealand savings and kind of New Zealand's overall wealth,
Speaker 2: you know, to balance it out. But unfortunately that's also
Speaker 2: sort of been going backwards in the past year or so,
Speaker 2: so savings rates have been coming down, and the stats
Speaker 2: ENZ does a household net worth survey where it looks
Speaker 2: at all the assets owned by households and that's fallen
Speaker 2: away a bit as well. So that makes our equation
Speaker 2: look worse. Yeah, the reality is we are reliant on
Speaker 2: big ratings agencies like S and P, and they have
Speaker 2: a number that they don't like. They don't like our
Speaker 2: current account deficit getting above ten percent of GDP. I'm
Speaker 2: not quite sure what their government number would be. They
Speaker 2: will sometimes warn about housing debt, but there is a
Speaker 2: point and if our debt started to look precarious, like
Speaker 2: it's all about our ability to service it, if we
Speaker 2: can keep paying it, mostly the international banks don't care.
Speaker 2: But if it starts to look like something that we
Speaker 2: would struggle to pay off, if we had another crisis,
Speaker 2: for example, that we couldn't you know, hit those targets,
Speaker 2: then they would re raate us, so they would downgrade
Speaker 2: our credit rating, and we would see that in the
Speaker 2: cost of borrowing, our interest rates would go up, our
Speaker 2: dollar would fall. And so that's why we're at the
Speaker 2: mercy of those rating agencies, and why it's important to
Speaker 2: keep debt within sort of boundaries that basically the economists
Speaker 2: and the banks are comfortable with, because whether we like
Speaker 2: it or not, the decisions that those international organizations make
Speaker 2: will ultimately determine, you know, how good or bad the
Speaker 2: economy is.
Speaker 1: And I saw that Treasury also insists that we need
Speaker 1: extra large buffers due to our reliance on trade, exposure, exposure,
Speaker 1: exposure to natural disasters, and offshore debt. How do we
Speaker 1: create that kind of rainy day fund if we are
Speaker 1: continuing to grow debt at the same time.
Speaker 2: Yeah, well that's that. That's why I guess the government
Speaker 2: would argue that it's had to be fiscally tighter in
Speaker 2: the last year or so. There are plenty of people
Speaker 2: saying that they haven't gone far enough. Actually, although you know,
Speaker 2: that's a debatable point. But under Bill English, we really
Speaker 2: paid down debt, you know, getting down to that twenty percent.
Speaker 2: That really did give us a buffer and we were
Speaker 2: able to spend in COVID. I mean, well, I sort
Speaker 2: of said it was the GFC, but it was the
Speaker 2: christ At earthquake and combination with the GFC that blew
Speaker 2: out our debt. And Bill English being the kind of
Speaker 2: finance ministry was, he was very focused at paying that
Speaker 2: down over several years. So it wasn't a complete shock,
Speaker 2: it wasn't a complete austerity type scenario, and so we
Speaker 2: could do that. Hopefully we can do that gently over
Speaker 2: a number of years. But I guess the risk is that,
Speaker 2: as the Treasury points out, we are vulnerable to another
Speaker 2: big earthquake. Flooding risk seems really high, or if at
Speaker 2: the moment the commodity prices are booming, but if they collapsed,
Speaker 2: or if you know, something crazy happened in the world,
Speaker 2: like geopolitical, something like Taiwan becoming a flashpoint for conflict
Speaker 2: with China and America saying no one's allowed to trade
Speaker 2: trade with China, that kind of thing. If we had to,
Speaker 2: you know, if we had a real disruption to our trade,
Speaker 2: we would be stuck. And at the moment we're slightly
Speaker 2: up near the upper end of what we can afford
Speaker 2: to do, so it would limit the government's ability to
Speaker 2: bail us out.
Speaker 1: Is there any point of getting down to zero percent
Speaker 1: dat No.
Speaker 2: Probably not. I don't think modern economies work that way,
Speaker 2: and modern businesses don't work that way. It's important to remember,
Speaker 2: you know, you say, we talk about big, ugly debt figures,
Speaker 2: and debt always seems like the villain, but it's not
Speaker 2: really debt when it's used well and used is a
Speaker 2: way of getting things done that you couldn't get done before.
Speaker 2: It's an amazing invention of the you know, not a
Speaker 2: modern economic invention. It's been around for thousands of years,
Speaker 2: but you know, it enables people to in society to
Speaker 2: achieve things that they couldn't have otherwise. So it transfers
Speaker 2: wealth across a sort of a time band. You know.
Speaker 2: It means that you can say, well, you give me
Speaker 2: the money now, will make something happen. It speeds up
Speaker 2: transactions in the economy and it keeps It can really
Speaker 2: enable a lot of wealth creation. So debt itself is
Speaker 2: sort of you have to look at it sort of
Speaker 2: as a neutral thing. It can be really positive, it
Speaker 2: can be really negative, but it's not inherently bad. It's
Speaker 2: just about the amount that we take on and also
Speaker 2: very importantly what we're using it for. So the trouble
Speaker 2: with the housing thing is that you know, if we
Speaker 2: all borrow to buy houses and we compete against each other,
Speaker 2: we push up the house prices. There's no gain to
Speaker 2: anyone from the house price on because it's just paper money.
Speaker 2: We've all pushed up the house price. We've all had
Speaker 2: to borrow more from the Australian banks. Real money has
Speaker 2: to go out to pay the Australian banks. But the
Speaker 2: bigger numbers on the house prices aren't really helping the
Speaker 2: economy grow. If we were borrowing to invest in you know,
Speaker 2: tech startups or whatever and all that sort of stuff,
Speaker 2: I think that would be a lot more productive for
Speaker 2: the economy.
Speaker 1: Thanks for joining us.
Speaker 2: Liam cheers, no worries.
Speaker 1: That's it for this episode of the Front Page. You
Speaker 1: can read more about today's stories and extensive news coverage
Speaker 1: at enzidherld dot co dot nz. The Front Page is
Speaker 1: produced by Jane Ye and Richard Martin, who is also
Speaker 1: our editor. I'm Chelsea Daniels. Subscribe to the Front Page
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Speaker 1: in tomorrow for another look behind the headlines.