The Spinoff: One reason the left keeps losing economic arguments

Read the original article in the Spinoff

It is often said that in politics, explaining is losing. No wonder, then, that the left’s explanation-heavy forays into debating economics typically look like one defeat after another.

Nowhere is this more obvious than in the discussions about government debt – the amount our politicians have borrowed from financial markets in order to pay for things they cannot currently afford. This is a hugely consequential issue. A political party’s attitude towards government debt not only determines what we can and cannot build, it also serves as a metaphor for their economic credibility and, thus, their electability.

When National argues that the government needs to curb its borrowing, it relies on the readily comprehensible metaphor of the domestic economy. As finance minister Nicola Willis always says around budget time: “Like Kiwi households, we are tightening our belt.” Middle New Zealand, by and large, nods in agreement.

The left then launches into a complicated explanation of why, actually, the government is nothing like a household, citing reasons such as counter-cyclical policy, monetary sovereignty and intergenerational equity. It promptly loses the public argument. 

How to escape this trap? Though some would find it a bitter mouthful to digest, the left would be better off accepting the “government as household” metaphor – and turning it to its advantage.

One of the weaknesses in the right’s argument, after all, is the claim that we shouldn’t run up debts for the future. Yet this is precisely what households – and indeed businesses – do all the time.

The point about borrowing, when done sensibly, is that it enlarges one’s future means. Without it, individuals and organisations would be hopelessly constrained by their day-to-day income.

A business may, for instance, borrow $100 million from a bank in order to build a new factory. The $5 million it pays every year in interest on the borrowing (assuming a rate of 5%) could be attacked as unaffordable. But if the factory increases the firm’s revenue by $20 million a year, the annual interest charge is a tiny price to pay (and the borrowing is soon repaid). The company can easily afford the expense because the borrowing has permanently enlarged its capacity to pay.

Households, too, are constantly borrowing – most obviously in the form of mortgages. This allows them to purchase homes they could never afford based on their current means. The advantages are less about economics and more about building a nest. But the associated security and stability undoubtedly have flow-on financial effects.

This logic gives the left a readily comprehensible way to defend government borrowing. If the state relied solely on current tax revenues, it could not afford the new water pipes, hospitals and power generation on which this country’s future prosperity depends.

And once it has, through extra borrowing, built that infrastructure, our means will be permanently enlarged. As with households, that enlargement comes in non-financial forms: safer drinking water, better health, lower carbon emissions. And as with businesses, it comes in financial forms: the higher tax revenues generated from the extra economic activity this infrastructure makes possible. 

It may seem alarming that the government’s annual interest charge – the amount it pays lenders for the privilege of borrowing their money – has reached $8.9 billion. But not only is it a very small proportion of New Zealand’s annual income of around $450 billion, it’s simply the cost of enlarging our future means. 

As long as the borrowed money is well spent, we will generate far more than $8.9 billion – in financial and non-financial benefits – from the infrastructure that this borrowing has enabled. On these terms, borrowing is far from irresponsible; not borrowing would be the irresponsible move.

This argument gains extra strength from an element that does – to give the left some credit – make governments slightly different from households: their intergenerational nature. Future generations will benefit from the infrastructure built through borrowing, so they should pay some of the cost of said infrastructure, via interest charges spread over the coming decades. This, though, is an argument that can be bolted onto the “government as household” metaphor; it does not directly contradict it. 

The household metaphor also provides a simple way to explain whether borrowing is appropriate. Although households legitimately borrow to buy the family home, they shouldn’t put their groceries on the credit card. That’s what day-to-day income is for. On parallel lines, governments can legitimately borrow for infrastructure, but not to pay nurses’ salaries. That’s what tax revenue is for.

The “government as household” metaphor faces its greatest challenge during recessions, when the state must prop up the economy by borrowing and spending more precisely because households are not. If everyone “tightens their belt” at the same time, the resulting contraction can be disastrous, as this government has discovered.

That insight provides Labour with a defence of its past economic record: by and large its borrowing was a necessary way to counteract household retrenchment during the pandemic, just as Bill English borrowed to get us through the GFC. But that insight will be far less relevant next year when – barring unforeseen disasters – the economy will be growing again.

In 2026, National will be once more telling voters that, like a household, New Zealand needs to live within its existing means, borrowing and spending less and – in consequence – unable to afford the things it might like. National will also claim that because the opposition doesn’t understand this reality, it cannot be trusted with the public finances.

The left can launch into another series of explanations about why the government isn’t like a household, arguments that, though correct in part, will be basically unintelligible to swing voters. Or it can accept the “government as household” metaphor, flawed though it may be, and start pointing out why it supports a much bigger government than Nicola Willis would like to admit.