Introduction to New Zealand’s Infrastructure Crisis
New Zealand is facing a significant infrastructure deficit, with the country’s Infrastructure Commission estimating that it will cost $31 billion per year to plug the gap and build for the future. This amount is close to a tenth of New Zealand’s GDP, highlighting the severity of the issue.
The Problem with Current Funding Methods
The current approach to funding infrastructure projects involves borrowing money, often from foreign lenders, which can double the cost of projects due to interest payments. This is a significant concern, as New Zealand is already struggling with debt and the burden of interest payments is falling on taxpayers. Established thinking suggests that the government must continue to borrow or use tax dollars to pay for infrastructure, but this approach is unsustainable and ignores the potential for alternative funding methods.
A New Approach: Direct Monetary Financing
Positive Money New Zealand has submitted a petition to Parliament proposing the use of Direct Monetary Financing (DMF) to fund infrastructure projects. DMF involves the Reserve Bank providing credit to fund non-recurring, productivity-enhancing public investments at zero or near-to-zero interest rates. This approach has been used in the past in New Zealand and has international precedents, making it a viable option for addressing the country’s infrastructure deficit.
How Direct Monetary Financing Works
With DMF, the Reserve Bank would provide credit to fund infrastructure projects, rather than relying on borrowing from foreign lenders. This approach would reduce the burden of interest payments and decrease the financial risk associated with infrastructure projects. The funds provided through DMF would be used for specific, productivity-enhancing projects, and would not be used for general government expenditure.
Addressing Concerns about Inflation
One concern about DMF is that it could be inflationary, as it involves creating new money to fund infrastructure projects. However, economist Morgan Edwards notes that it is not the source of funding that is inflationary, but rather how and where the money is spent. If the economy has the capacity to absorb the new money, DMF would not be inflationary. In fact, by providing low-cost funding for infrastructure projects, DMF could help to stimulate economic growth and increase productivity.
Historical Precedents for Direct Monetary Financing
New Zealand has used DMF in the past, with significant success. In the 1930s, the Reserve Bank provided low-cost financing for housing and industry development, which helped to stimulate economic growth and reduce unemployment. In 1938, New Zealand had the highest GDP in the world, outstripping both Switzerland and the United States. The use of DMF also helped New Zealand to emerge from the Great Depression sooner and in better shape than most countries.
Conclusion
The infrastructure deficit in New Zealand is a significant challenge that requires a new approach to funding. The use of Direct Monetary Financing offers a viable alternative to traditional borrowing methods, and has the potential to reduce the burden of interest payments and stimulate economic growth. By providing low-cost funding for infrastructure projects, DMF could help to address the country’s infrastructure deficit and promote long-term economic prosperity. It is time for the Reserve Bank to step up and provide the necessary funding to support New Zealand’s economic wellbeing and prosperity.
