Academic journal article The Reserve Bank of New Zealand Bulletin

Dealing with Debt: Speech to the Auckland Employers and Manufacturers Association, 6 August 2012

Academic journal article The Reserve Bank of New Zealand Bulletin

Dealing with Debt: Speech to the Auckland Employers and Manufacturers Association, 6 August 2012

Article excerpt


Households, firms, and governments across much of the advanced world have taken on very large amounts of debt in the last couple of decades. In New Zealand, for example, the private sector owes three times what it did in 1998. People and governments are now living with the aftermath; dealing with the debt. Many individual lives will have been irreversibly changed. Even at an aggregate economy level, it looks as though we could be dealing with the aftermath for quite some time yet.

This speech offers some perspectives on what the accumulation of debt means for people, and for our economies. Inevitably some of the material will have quite a provisional flavour: how things will play out remains uncertain, and is being intensely debated by academic researchers and policymakers alike. It matters to us all.

Some context

Debt is not new. In his recent book, Debt: The First 5000 Years, the American sociologist David Graeber demonstrates the central role that credit has played in economic and social life stretching back millennia. But some things are newer: for example, the scale and pervasiveness of the public and private debt, the scale of cross-border gross and net debt, and the central role that highly leveraged financial institutions and wholesale financial markets play in making that debt possible. And what is particularly striking in the last few decades has been the rate at which debt has increased (relative to income).

If debt is not new, neither is it a bad thing. Debt gives borrowers and savers alike additional options. The ability to lend and borrow is an important part of what enables us to enjoy the sort of life we do. To see the point, one has only to try to imagine a world without debt-a world in which entrepreneurs could not borrow to develop fast-growing firms, and where home ownership was restricted to the rich and the over-50s (who had saved the full price of a house).

At a national level, the ability of one country's citizens to borrow from those of another country means that regions that need a lot of new capital to develop (think of the United States or New Zealand in the late 19th century) can borrow from those with a lot of savings (think of the late 19th century United Kingdom). That has huge benefits. Public debt can serve important purposes too. Historically, many of the biggest increases in public debt occurred during wars; debt allowed the huge fiscal costs to be spread across time. Other big increases in public debt were used to fund the expansion of public infrastructure. More mundanely, the ability to borrow enables governments to buffer some of the macroeconomic effects of downturns.

High debt and big swings in public and private debt have featured prominently in New Zealand's modern economic history:

* Central government debt was over 100 percent of GDP for 70 years from the 1870s (and in excess of 200 per cent of GDP at peak). In 1972 net government debt was as low as 6 percent of GDP, but was back to 50 per cent by 1992 (Figure 1).

* Private debt data are not as readily available, but total mortgage debt-houses and farms-is estimated to have been around 140 percent of GDP at the end of the 1920s. It is a little lower than that now, but as recently as 1990 the stock of mortgages was equal to only around 35 percent of GDP (figure 2).

* Our net international investment position (the net amount of debt and equity raised from foreign lenders and investors) has gone through similarly wide fluctuations. We were very heavily dependent on international capital prior to World War II, but the net amount outstanding abroad dropped to perhaps as low as 5 percent of GDP in the early 1970s. Over the 1970s and 1980s, the net reliance on foreign savings increased substantially, settling at levels that are high by international standards and seem uncomfortable (figure 3).




Over the last couple of decades the main New Zealand story has been about the substantial increase in private debt; taken on by farmers, non-farm businesses, and households alike. …

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