Labour's plan to bring down debt: Your questions answered
You might have heard a bit of discussion about Government debt lately, as experts weigh in on the COVID-19 economic recovery. If you’re wondering why it’s such a contested topic, or even if you’re unsure of what Government debt actually is, then read on - we’ve got you covered!
Below, we’ve answered some of the most common questions about debt and our plan to keep a lid on it - all whilst we protect services like health and education, rebuild, and keep New Zealand moving.
Q: Why is the Government borrowing more money now, when the world is facing an economic downturn?
A: We’re doing everything possible to protect New Zealanders from the immediate impacts of COVID-19. This includes continuing our decisive health response, but also creating jobs, supporting businesses, and investing in our communities to help cushion the economic blow. That’s more important than ever as the global impact of the pandemic continues to play out.
Doing this requires us to spend in the short term, but it’s worth it to keep New Zealanders safe and our economy moving as we deal with the impacts of COVID-19. Right now, the best thing we can do is to borrow responsibly to support our people, businesses and communities as we get through the pandemic and build back better.
Q: Why do Governments need to borrow money anyway?
A: Normally, Governments pay for essential services like hospitals, schools, roads, and Police through taxes. The tax that comes from your paycheck or through GST helps to fund these key services.
But when there isn’t enough tax income to pay for these essentials, the Government has a choice: it can raise taxes, cut funding for services like healthcare and education, borrow money to cover the bill, or adopt a mixed approach.
It’s not unusual for Governments to borrow money, especially during a crisis or emergency. For example, after the Canterbury earthquakes, the National Government borrowed billions of dollars as part of their response.
Q: Where do Governments get the money from?
A: When a government borrows money, it’s a little different than borrowing money from a friend or taking out a loan from the bank.
Most of the money a Government borrows comes from people buying bonds. These are similar to a term deposit: a person invests between $1,000 and $500,000 in Government bonds, which they get back with interest after a set period of time. In the meantime, the Government uses this money to pay for programmes like the wage subsidy or investing in services like healthcare. While there are also other ways a Government can borrow money, overall, around half of Government debt is borrowed from people buying bonds.
Thanks to our careful economic management prior to COVID-19, we can borrow at much lower rates than many other countries.
Q: How much money is the Government borrowing?
A: With COVID-19, we’re facing an unprecedented global challenge. We’re pulling out all the stops to support New Zealanders and our economy through a 1-in-100 year shock, rolling out a package that includes immediate support like the wage subsidy and strong border controls, along with more long-term initiatives like infrastructure projects that will create jobs and boost local economies. To fund this, we will borrow around $60 billion.
Q: How does Labour plan to pay this debt back?
A: The key to our plan is sustainable economic growth. More people in work, more businesses thriving, and more New Zealanders out shopping means more money coming into the Government.
That’s why we will continue to grow the economy as we support people through the pandemic, so we can pay down debt over time. Unlike some other parties, we’re also protecting vital social services like health and education.
In fact, our plan is to implement a new top tax rate, that will see the top 2% of earners - those earning over $180,000 - pay a little more to support the COVID recovery and rebuild. This means that 98% of Kiwis will have no income tax changes under Labour for the next three years.
Our plan to get the economy moving is already underway. We’re investing in shovel-ready infrastructure projects right around the country, which will create much-needed jobs. We’re supporting businesses so they can make it through the storm, and funding new initiatives to help them grow in the future. We’re backing our exporters to boost earnings, and investing in trades training and apprenticeships to keep people working.
Together, these steps will help our economy grow, so we can boost the Government’s funds and pay down debt. You can read more about Labour’s plan here.
Q: How long will it take to pay back?
A: From the beginning, we’ve been clear that it will take several years to pay down this debt. But compare this to National’s target: Their approach to debt could require slashing essential services like hospitals and education to make their numbers stack up. In fact, one economist has stated that reaching National’s targets will mean “taking a chainsaw” to our public service.
We think that’s a big risk. That’s why we’re taking a common sense, balanced approach: prudent borrowing now to support people through COVID-19, while investing to create jobs and growing the economy.
Q: Will this mean our children and grandchildren will need to pay more taxes?
A: No. Under our plan, debt will be managed by a range of factors including by growing the economy. Of course, we must be mindful of the debt that future generations may carry, but if we choose not to invest now, we will leave these future generations with a debt of another kind: entrenched poverty, long-term unemployment and underfunded public services.
Thanks to going hard and going early our economy is one of the most open in the world, meaning we can continue to position New Zealand globally as a place to trade with and invest in. This puts us in a good position to take full advantage of the economic head start we have over other countries, helping us to build back better for future generations.
Q: How does our debt compare to other countries?
A: Thanks to our Government’s careful economic management over the past three years, we went into COVID-19 with very low levels of debt, in a much better position than many other countries.
Before COVID, our net debt was around 19% of GDP, while the average for other advanced economies was about 80% of GDP (and some countries had net debt of more than 100% of GDP). Forecasts show that, even at its peak, our net debt will still be lower than other countries’ pre-COVID balance sheets.
Read more on Labour’s tax policy here, and check out this cool new tool to check if your income tax will be affected.
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