No matter how seductive it sounds, central bank funding of the additional government spending on Covid-19 would set New
Zealand on a dangerous path, according to a new report by the New Zealand Initiative.
The report, Deficit spending in a crisis: why there is no such thing as a free lunch, highlights some concerning ideas from both the government and the Reserve Bank about expanding the money supply to
help pull New Zealand out of the Covid-19 economic crisis.
Author Dr Bryce Wilkinson said there is plenty of evidence from other developed nations that such funding is likely to
escalate over time rather than shrink.
“I’m not concerned about fluctuations in central bank borrowing and lending due to changes in economic circumstances –
things like inflation, output or unemployment,” he said.
What worries Dr Wilkinson is that, far from being temporary, central bank monetary expansions in countries like Japan,
the UK, the US and even the European Union during the GFC have continued to increase.
Even more worryingly, the measures were accompanied by significant increases in public debt, asset values and debt
leverage.
“Fragility in those asset prices now undermines the stability of the entire international financial system. None of
these countries or regions seem to have a means for rectifying this debt and leverage problem."
“New Zealand should resist the pressure to go down the same path,” he said.
He pointed to a “pernicious international view” that creating trillions and trillions of dollars of additional central
bank credit is a great way to hold back recession, keep world share prices high and interest rates low.
“New Zealand has good institutional arrangements in place for guarding against a repeat of the public debt spiral and
inflationary pressures of the mid-1980s."
“To restore public debt to prudent levels requires a credible plan to create future fiscal surpluses to offset current
deficit spending. To avoid excessive debt, rising asset prices and increased pressure to pump more money into the
banking system, New Zealand must ensure any increases in central bank borrowing and lending are not a one-way street,”
Dr Wilkinson said.
Budget 2020 will be the test of how the government plans to return public debt to prudent levels.
Read more:
Deficit spending in a crisis: why there is no such thing as a free lunch is available here.