I’m not a financial economist, but I occasionally take a look at the Reserve Bank’s fantastic collection of credit statistics. Their short-term and long-term data series often say a lot about where the New Zealand economy’s currently going and where it’s been.
One interesting indicator is the 10-year New Zealand government bond yield, which measures the interest rate that the government must pay on its debt. Here’s a chart of the last 20 years of government bond yields (unadjusted for inflation):
As you can see, bond yields were pretty consistent throughout the mid-2000s – sitting at around 6%. However, they started a major downward slide in 2011, rose in 2013, and then fell back again in 2014. At the time of writing (12 August 2015; these posts are written and scheduled in advance), bond yields were sitting at 3.29%.
Essentially, the government’s borrowing costs are sitting at historic lows. This is important for two reasons.
First, it is a symptom of persistent economic weakness in New Zealand and the rest of the world. Pessimism about growth prospects has led people to prefer to lend money to governments, where they can get a lower but more certain return, rather than invest in businesses. The more people try to lend to governments, the more bond rates are driven down.
Second, low government bond yields enable governments to borrow more to make long-term investments in infrastructure and state housing. This doesn’t mean that we should simply borrow money and spend it at random. We still need to exercise some rigour in project selection and economic evaluation, and ensure that we’re not overheating the construction industry by trying to do too much at once.
However, it does mean that we can afford to go a bit further down the list of worthy projects. Many of the issues currently bedevilling New Zealand – Auckland’s growth pressures and Christchurch’s halting rebuild – could be addressed if central government simply borrowed a bit more money to build new streets, public transport facilities, cycleways, and housing developments. It’s literally never been cheaper.