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