Positive Money is petitioning Parliament to inquire into Reserve Bank financing that can cut the cost of major infrastructure projects by providing financing at zero, or near to zero interest rates.
Positive Money spokesperson Don Richards says that 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.
“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.
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. New Zealand emerged from the Great Depression sooner and in better shape than most countries.
The Canadian Central Bank also provided money for infrastructure projects for 40 years (from 1935 to 1975) to build roads, hospitals and schools with little or no impact on inflation, and China is currently using Direct Monetary Finance throughout its economy.
In New Zealand, the freed up tax money that would have been spent on costly financing could be used in other sectors of our economy to improve social services and address other pressing issues.
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.
About Positive Money
Positive Money NZ is an independent, non-profit group. For more than a decade, we have advocated for a fairer, more productive monetary system that benefits everyone. Our patron is Bryan Gould, and we are part of a global movement of organisations, the International Movement for Monetary Reform, campaigning to change the way money is created so that money serves society.