Public capitalisation of Kiwibank won’t impact government borrowing

While recent Treasury advice appears to promote privatisation, publicly capitalising Kiwibank provides a pathway to beating bank superprofits without impacting the cost of government borrowing.

Recent Treasury advice suggests that publicly capitalising Kiwibank will raise public debt and “may displace other Crown-funded priority policies”. The heavily-redacted document then goes on to suggest that “the natural progression for Kiwibank in raising capital in the medium term is through an IPO.”

Between weighty redactions and prevailing perceptions over public indebtedness, it appears that Kiwibank privatisation is being pitched as the most sensible option to address our banking sector woes.

This seems a little off to me.

I’ve heard that the best way to rob a bank is to own one, and that our Big Four banks have paid dividends of almost 50 billion to their shareholders over the past decade. They seem to benefit from bank ownership.

Maybe there’s some detail being left out here?

Debt and net worth

Publicly capitalising Kiwibank does more on the government’s books than just increasing net core Crown debt. The same financial liabilities would also appear on the government’s balance sheet as financial assets: shares in, or lending to, Kiwibank.

The government’s overall net worth – assets minus liabilities, or its balance sheet value – would be unaffected by this borrowing, because the increase in debt has a corresponding increase in the value of Kiwi Crown Holdings, which holds the Crown’s 100% shareholding of Kiwibank.

The way we report and measure indebtedness influences how we think about it. If we want it to look big, we would use a “gross” debt measure, which simply shows government borrowings. This measure reached $176 billion in the year to 30 June 2024, or 42.6 percent of GDP.

The coalition government changed how we report on debt, moving from a “net debt” measure to a “net core Crown debt” measure. Unlike the “gross” figure above, these “net” measures offset debt with the value of some publicly-owned assets.  

In the year to 30 June 2024, net core Crown debt reached $175.5 billion (42.3 percent of GDP) while net debt was substantially lower at $82.2 billion, (19.9 percent of GDP). While the latter is more widely used by other countries, Budget 2024 documents note the government was concerned that “the inclusion of the NZSF assets introduces too much volatility to a headline measure”.

As well as its low public debt, New Zealand is also one of the few OECD countries that has a positive net worth, at 46.2 percent of GDP. That means that our assets – both financial and real – remain much greater than our liabilities.

We can see these measures playing out in the Government’s latest full-year accounts. In the year to 30 June 2024, net core Crown debt increased by 3.2 percentage points of GDP – some $20.2 billion. That 20.2 billion in additional borrowing is part of a $34.6 billion increase in the government’s overall liabilities in the past year, bringing total liabilities to $379.8 billion – 91.9 percent of GDP.

However that increase in borrowing is almost entirely offset by a $34.2 billion increase to the value of the government’s stock of assets, to $570.9 billion – 138.1 percent of GDP. Those assets include real things like infrastructure, as well as financial assets, some of which generate revenue.

Despite the increase in borrowing, the government’s net worth has only decreased by a mere $423 million - 0.1 percent of 2024 GDP. Of course this isn’t great – and is probably slightly worse on a per capita basis, but we are in a recession (exacerbated by restrictive fiscal policy).

At 46.5 percent of GDP, our net worth is pretty healthy compared to our standard comparator countries, like Australia (2.1 percent), the United Kingdom (3.5 percent), Canada (3.3 percent), Germany (3.8 percent).

How much debt is too much?

This government has committed to reduce debt, with its Budget Policy Statement targeting net core Crown debt “on a downward trajectory towards 40 percent” of GDP over the next four years, setting a longer-term goal of ensuring it sits between 20 and 40 percent of GDP.

Almost all countries experienced a jump in indebtedness in 2020 as they dealt with the costs of the pandemic and cost of living crisis. Regardless, NZ’s post-pandemic public debt remained equal to or lower than most of our major comparator countries.

Many will be unconvinced by the open letter to PM Luxon and Finance Minister Willis sent by a group of eminent economists (and myself tagging along for the ride) last week that noted, “Bluntly, there is no government (or public) debt crisis in New Zealand.”

Perhaps they would prefer the advice given by Treasury to Cabinet for Budget 2024, which politely noted that “a net core Crown debt level of up to 50% is prudent”, and that pursuing “very low levels of public debt can involve forgoing opportunities for productive investment.”

Governments keep public debt is kept low for two main reasons: to reduce debt servicing costs, and to keep the cost of future borrowing low. Unless Kiwibank goes broke, public capitalisation will affect neither of these.

In 2024, the Government’s total interest expenses roses to $10.4 billion – 2.5 percent of GDP – a jump from the $7.5 million (1.8 percent) in 2023, off the back of higher borrowing rates. These costs are receding as the current inflation unwinds, and the government’s own capacity to borrow is stress-tested against big upswings.

If you’re unconvinced by Treasury’s view on “prudent” debt levels, perhaps the views of the agencies that “rate” government and corporate bonds, consider a whole range of measures (including both net core Crown debt and net worth) when they assess creditworthiness.

The excellent credit ratings of the NZ government debt - AAA from S&P, AA+ from Fitch and Aaa from Moody’s - means it’s a very low-risk investment, that enables the government to borrow very cheaply, generally much cheaper than the private sector. On 22 October 2024, for example, the Government sold $5 billion of bonds at 4.5 percent, below the current official cash rate of 4.75 percent. As interest rates lower, NZ government bond rates will follow suit.

In a recent interview with Bernard Hickey, S&P Global Director of Sovereign and Public Finance Ratings Anthony Walker – whose job is to rate NZ government debt – suggested that NZ had another 30 percent of GDP – some $120 billion – in additional borrowing before it risked a downgrade.

Needless to say, the weight put on their analysis means these guys tend to be quite conservative in their outlook.

I presume they would interpret an increase in net core Crown spending with no corresponding balance sheet impact as largely uninteresting. Given it’s likely the cheapest financing option available, it might even be seen as a commonsense decision.

A pubic Kiwibank to catalyse banking sector reform

When we see Treasury saying that the public capitalisation of Kiwibank “may displace other Crown-funding priority policies”, the real rub is that Government is actively ignoring the fiscal headroom it already has, underfunding its own “priority policies” by choice. As long as government chooses debt reduction over plugging the infrastructure gap, to say that public capitalisation Kiwibank would displace other priority policies misses the point.

NZ’s low public debt and positive net worth are the envy of many other countries. No other country, however, is jealous of our broken banking market, plagued by perpetual superprofitability. In each of the last three years the Big Four has cost us $6-7 billion in after-tax bank profits, distributing around 75 percent of profits earned over the last decade to their offshore shareholders as cash dividends.

The government has been advised by the Commerce Commission to use Kiwibank to “disrupt” the personal banking market. We already own it, and I think better use of the asset could significantly reduce the cost of banking services, undercutting mega bank profits.

A “more of the same” approach – in which Kiwibank is capitalised by profit-oriented investors with a view to securing a slice of those healthy NZ banking market returns – takes us from the “Big Four” to the “Big Five”. This alone will have only a small (albeit positive) impact on competition. There is no way to ensure that they will not play the same game as the Big Four – all their incentives will be to do so.

As I’ve argued elsewhere, consumers would get more competition mileage by rigging Kiwibank to run not as a profit maximiser, but as a competition maximiser, with a legislated obligation to provide lower net interest margins than its competitors, that pushes them to compete and innovate to retain their market share.

A publicly-owned pro-competition Kiwibank is crucial public infrastructure that would help stem the absurd flow of bank profits offshore, reduce housing costs and back Kiwi businesses to succeed.

We need to get over our fear of investing in our future. That should by no means invite profligacy. We have serious challenges in front of us - climate collapse, surging unemployment, crumbling infrastructure and rapidly-corroding public services. Ignoring our available fiscal headroom serious hamstrings our responses to these epochal challenges.