Affordable Funding For Infrastructure Will Grow The Economy

Positive Money New Zealand submitted a petition to Parliament this week that asks Parliament to inquire into the Reserve Bank providing financing towards significant infrastructure projects at zero, or near to zero interest rates.

Positive Money spokesperson Don Richards says that we need to use this inexpensive public funding method, like New Zealand did in the past, or understand why we cannot.

Our Infrastructure Commission estimates it will cost $31 billion per year, close to a tenth of New Zealand’s GDP, to plug the infrastructure deficit and build for the future. Interest, much of it paid to foreign lenders, can double the cost of projects.

“New Zealand is in a financial hole, and we keep digging the hole deeper,” says Richards. Established thinking is that we have to keep borrowing, or use stretched tax dollars to pay for infrastructure, he says. We are even borrowing to keep the lights on.

“The Government faces multiple calls on funding, not just from infrastructure, and when you take into consideration our aging population and limitations on tax revenue in the future, then the Government needs to look elsewhere for funding. We say, let’s also look to our own bank.”

Positive Money’s petition proposes using a facility of the Reserve Bank known as Direct Monetary Financing (DMF). With appropriate guardrails, this can make a safe, timely, and pragmatic contribution towards funding our infrastructure. The Reserve Bank would provide credit to fund non-recurring, productivity-enhancing public investments. These funds could be provided at zero or near-to-zero interest. They would not be externally borrowed and, by cutting interest, would reduce future tax burdens on New Zealanders.

Our Reserve Bank proudly states that they enable economic wellbeing and prosperity for all New Zealanders, and while this has been true for the banks we borrow from, ordinary New Zealanders and businesses are struggling. It is time our Reserve Bank stepped up to the plate, like they have done in the past .

Richards is encouraged by a 2021 speech given by the new Reserve Bank Governor Dr Anna Breman when she was Deputy Governor of the Swedish Central Bank. Dr Breman’s speech was titled, “Monetary policy in the wake of the corona crisis – we need to think along new lines” and she said monetary policy needs a bigger toolbox and mentioned fiscal policy financed by the central bank. Richards says that this can include Direct Monetary Financing.

DMF is not radical. It has international precedents—including in New Zealand’s own history—and can be implemented safely with appropriate legal, economic, and institutional safeguards. There is concern DMF may be inflationary, but as economist Morgan Edwards states, “It is not the source of funding that is inflationary, rather it is where and how the money is spent.” Where there is capacity in the economy, DMF would not be inflationary.

Our Reserve Bank provided financing for projects up until the 1980s and it was particulary active over the period from 1935 to 1939 where GDP rose by 30%, partly as a consequence of its low cost financing of housing and industry development. In 1938, as a consequence of DMF, New Zealand had the highest GDP in the world, outstripping both Switzerland and the United States and New Zealand emerged from the Great Depression sooner and in better shape than most countries.

Richards urges Parliament to consider the use of Direct Monetary Financing as an option to solve the decades of underinvestment in infrastructure as every year of underinvestment worsens infrastructure bottlenecks and raises long-term costs.

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