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DEC 11

Escaping the debt trap

Numbers were a big issue leading up to the election. There was debate on the level of spending, net debt vs. gross debt and the time it will take a particular policy framework to deliver a surplus to the Government current account. Out turns of our national accounts depend on our ability to earn as much as our propensity, or otherwise, to spend.

Boosting earnings now needs more than lip service in regard to rebalancing our economy. Treasury forecasts show the Government’s current account in surplus during 2015 based on what we have always seen as optimistic growth forecasts - bring these back to even historical averages and surplus might prove to be elusive. Add to that the softening world forecasts and a surplus during 2015, on a business as usual basis, is not going to happen. The forecasts for growth in private debt will also see the total national debt expand rapidly.

The following tables demonstrate the split between Government and overall national debt. The first is from the Treasury’s pre-election update and the second is from this years’ Budget.


This debt problem means that offshore borrowing will continue to prop up the New Zealand dollar. In addition to increased debt servicing, our borrowings are killing our ability earn and invest – we are in a debt trap and business as usual will not save us.

Both major political parties have had a change in their leadership group and a change in economic strategy could accompany the new faces. Steven Joyce has been promoted to create jobs and growth, and an increased focus on the tradable economy is the only way of achieving this. David Shearer must also consider the traded economy when deciding on his economic team. All parties must look to build on some promising new ideas tabled in this electoral cycle.

Policies to increase foreign earnings; reduce foreign borrowings; and to encourage domestic saving are needed to escape the debt trap we are in. Reform of Monetary Policy must be at the top of this list. Fiscal responsibility is important, but earning more through growth in the real economy must be the top priority if we are to solve the debt problem.

tags: gross debt, public debt, monetary policy
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