Government could use cheap money to help people

This week’s interest cut by the Reserve Bank of New Zealand (RBNZ) is a clear indication that all is not well in the local and global economy.

The RBNZ’s cut of half of one percent is a massive drop. Historically, cuts in the Official Cash Rate (OCR) normally move in increments of 0.25% not 0.50%, and that must be causing the balloon to go up somewhere.

This is the sound you should be hearing in your head.

Ignoring for a moment talk of another global recession (or depression if you listen to the likes of Gerald Celente), what this cut means is that the government could borrow from its own bank – the RBNZ – far more cheaply than from the international banks. Why would the government not borrow at 1%?

Chris Leitch, leader of the Social Credit Party, suggests government could give cash to people in New Zealand to keep them buying stuff. And that the Reserve Bank could start the process of funding government infrastructure projects.

During the GFC the National government helped foreign-owned banks in New Zealand; now with a Labour-NZ First coalition in power he wonders why it isn’t prepared to use RBNZ’s cheap money to help people closer to home.

It’s a fair point. Why wouldn’t government reduce the burden on taxpayers of $millions of unnecessary interest payments? It could even refinance its existing borrowings using this cheaper money.

Leitch says: “The government signalled an $8 billion dollar increase in borrowing in the 2019 budget update, so the Reserve Bank could fund that for a start.

“The RBNZ could also replace the government’s current private sector borrowing with Reserve Bank funding, and save taxpayers $6 billion each year in wasted interest payments.

“That $6 billion could be left in the hands of taxpayers through a tax cut, particularly for those on the lowest incomes.”

As an aside; Kiwis paid $75.6 billion in taxes in the 2016/17 financial year according to Treasury. A pretty high figure for a working population of 2.6 million people.

Leitch says there are three things that could be done, or start to be done, to get the country’s economic wheels spinning:

  • Investment in productivity-generating infrastructure such as roads and rail.
  • Investment in companies needing capital to introduce new technology or develop and market new innovations.
  • A direct payment to New Zealand citizens as a dividend from New Zealand Inc, based on the value of the economy and the country’s publicly owned assets.

“The Provincial Growth Fund has made a start in investment directly into the productive economy but it’s only tinkering around the edges,” says Leitch.

“Its offer of $10 million for Westland Milk to develop new processing capacity (since withdrawn) was an indicator of what could be done. But it’s nowhere near enough.”

Leitch would like to see the government set up a Development Bank so that businesses needing cash for innovation and new technology could get the money they need without begging overseas investors and paying commercial interest rates.

“That capital could be provided at zero percent interest so that those new projects did not have a front-end additional cost on their development,” says Leitch.

He also proposes putting cash straight into the pockets of every working age adult in the country. Much like the Universal Basic Income idea seen in countries such as India, Poland and Finland. The idea has merit.

“A dividend paid to New Zealand citizens would not be a handout,” says Leitch. “It would be their return on the investment in time, innovation, and hard work that they, their parents, grandparents, and great grandparents have made in creating the assets and economic base the country now enjoys.

“The consumer spending that would result would go a long way to providing the boost to the economy that the Reserve Bank itself is now calling for.

“It would result in more business for retailers and manufacturers, as well as significant additional tax income, repaying some of the distributed dividend. The irony is that the RBNZ itself has in its hands the power to solve the problem.”