Here’s the key news in Aotearoa’s political economy over the last day or so around housing, climate and poverty, along with analysis and detail in the video and podcast above, and in the PDF of the presentation attached below, for paying subscribers:

* The Lead: The Government has convinced the nation that a scary ghost story about public debt from the days of Rob Muldoon and Ruth Richardson is still real, even though the Government’s assets are now worth far more than its debt. That debt is also not vulnerable anymore to the exchange rate and interest rate risks that made it so risky in 1980s and early 1990s. That’s because the debt is issued at fixed interest rates in New Zealand dollars, often to local fund managers and banks. It used to be in foreign currencies on floating rates.

* The Sidebar: Auckland Council is expected to debate a range of housing intensification options later today in response to the Government’s latest downsized ‘Plan Change 120.’ Earlier this year, Housing Minister Chris Bishop slashed planned housing expansion to 1.4 million from an initial 2.0 million after a backlash from National MPs in Auckland’s suburbs who feared the extra supply would reduce land value appreciation. Councillors are expected to opt for the least ambitious proposal, which Council Economist Gary Blick has estimated would produce the least economic gains from productivity ($700 million) and reduce house price inflation by only 1-2%. The most economically ambitious but least politically popular option for capacity of 2 million homes would generate $3.9 billion of gains and reduce house price inflation by 5-8%, Blick has advised the Council.

* The Quote of the day is from Donald Trump to the FT-$’s Ed Luce, about how Benjamin Netanyahu will have to accept any deal the US negotiates with Iran: “He won’t have any choice. I call the shots. I call all the shots. He doesn’t call the shots.” Shortly after his comments, Netanyahu launched retaliatory strikes on Iran, which had itself retaliated against Israel’s resumed strikes on Beirut.

* The Scoop of the day is via Andrea Vance for The Post-$ on how PM Christopher Luxon’s office found receipts for Briscoe’s purchases in the private emails of its staffers, but not the briefing sent by Fonterra and Z Energy to the gmail account of the PM’s then-Chief Policy Advisor Matt Burgess.

* The Deep-dive of the Day article is an interview with Val Adams by Michael Morrah for NZ Herald about the number of children suffering from illness because they lived in damp and cold housing, or are just plain homeless.

* The Chart du Jour shows how Singapore has a gross debt to GDP ratio more than three times higher than New Zealand, but, like New Zealand, it also has massive publicly owned assets in the form of sovereign wealth funds. Unlike Singapore, which built its economy and society on a massive stock of easily available and affordable public housing, New Zealand is now reducing public funding for housing at a time 33,000 children and 57,000 women are homeless, arguing its debt is more of a threat than homelessness and the misery (and public health, justice and education costs) it produces. (See below and in the video above)

Paying subscribers get the full Picks n’ Mixes below and access to Substack Live Chorus sessions, along with the PDF of the presentation used in the Substack Live attached below. If we get more than 100 likes I’ll open it up for the public.

Why are National (& Labour) so afraid of an old ghost story?

The Government is betting its political future and the nation’s economic future on a story that seems intuitively right to many households and has gone unchallenged in our public debate.

The story is that New Zealand’s public finances are in deep trouble again and that the Government has no choice but to ‘cut its cloth to fit’ and ‘tighten its belt’ to avoid the wrath of ‘bond market vigilantes’ deciding that our debt is too high and we can’t pay our bills. These investors would, in theory, sell New Zealand Government bonds, pushing up interest rates for everyone and wrecking the economy.

The slightly less scary version is that New Zealand needs to have a much bigger ‘buffer’ of ‘rainy day’ funds in the form of low Government debt just in case we have an earthquake or bad storm. This story depends on the idea that we are small and a long way from the centre of capital so we ‘naturally’ are more vulnerable to a bond market revolt.

Versions of this story are now so ingrained in the collective psyche of Treasury officials, politicians from both National and Labour, and the media, that the latest telling of the story to argue for job and welfare cuts has been largely accepted. Without any challenge. The Post-$ and The Press-$ accept it, as does The NZ Herald-$, 1News and RNZ.

‘There is no alternative’

Luxon and Finance Minister Nicola Willis have repeatedly argued they inherited a ‘set of books in a mess’ and, like any family or business, have had to ‘clean up the mess,’ through spending restraint. They pointed at the end of 2023 to Government Gross Debt rising by over $100 billion to $220 billion is six years, and that the interest bill had risen to $8 billion a year — more than it cost for Police and Corrections. This sounds unsustainable and bad, with no alternative to spending cuts.

Surely, they argued, any household or business would make ‘tough decisions’ to ‘balance the books’ urgently to avoid being cut off by the bank? This has been an easy story to tell New Zealanders because we have been told for so long that we’ve been here before under Rob Muldoon in the wake of big Budget deficits and borrowing to fund Think Big in the early 1980s and in 1990 when BNZ was collapsing and needed rescues from the Government and National Australia Bank. The suggestion is the books are again in just the same sort of ‘mess’ and voters and opinion-makers in media and the bureaucracies have found it easy to take the short cut to believing this same ghost story. On both the left and the right.

Foundational for the ‘Third Way’

The most famous anecdote from the Clinton-Blair-Clark ‘Third Way’ era comes from Bill Clinton’s election-winning campaign advisor James Carville, who said after bond investors sold bonds and forced up interest rates that:

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody.” Carville in 1993 to the Wall Street Journal.

It represented a shibboleth of modern politics: that no matter what voters or politicians wanted, the bond markets would always decide based on what they believed was financially sustainable because these ‘bond vigilantes’ were the most powerful force in the political universe. If they ‘voted’ against a Budget they could force up interest rates that would soon turn into higher mortgage rates, an economic downturn and inevitably the end of a Government.

Liz Truss, the lettuce and the UK ‘gilt’ market revolt

The latest example of the ghost story turned real that story tellers point to is the bond market revolt that effectively ended Liz Truss term as UK PM in the last week of September 2022 after just 45 days in the job. The story goes that Truss proposed a debt-funded tax cut, which was rejected by bond investors, who pushed up interest rates sharply. Her political supporters then jumped ship, apparently proving again the potency of the bond vigilantes.

Aside from the murky role of the Bank of England in not intervening immediately to stabilize the market when most other central banks would have, Truss’ situation was quite different to New Zealand’s in 2026. Britain’s Government debt-to-GDP ratio at the time was 102% of GDP and Britain does not have a sovereign wealth fund.

New Zealand’s Gross Debt to GDP is barely 40% of GDP and, most importantly, it has total assets of $611 billion, as well as total liabilities of $426 billion. That means the Government has a current net worth of $185 billion and it is forecast to rise to $207 billion by the middle of 2030.

Would you leave kids homeless when you were worth $207 billion?

It’s astonishing that the asset side of the equation is ignored in the debate, especially when any household-type analysis would definitely include the assets. It would also focus on the affordability of the interest costs.

The full story is also not being told on interest costs. The oft-cited $9 billion figure is also a gross figure that doesn’t take into account either interest receipts the Government gets or the dividends it receives each year from state owned enterprises and others.

For example, the Government reported in its Crown Accounts last week that interest costs were $8.5 billion in the 10 months to the end of April this year, while interest receipts and dividends were $6.2 billion. That means the net interest costs of $2.3 billion represent barely 2% of the Government’s revenues over the same period.

Would you leave your kids homeless with interest costs of 2% of income?

Just imagine telling your neighbour that your debt was so worrying that you were prepared to leave your kids homeless and sick li...