Balancing the books by Susan Grimsdell

Recently I’ve been thinking about Economics, a subject that I’ve never really understood.  What got me thinking about it was an announcement from the NZ government in August that we now have a very healthy surplus of $3.7 billion.  That sounds great.  Let’s go shopping!

Surplus and debt

However, I had a feeling that at the same time we have a huge national debt, so I looked on the web to find out.  Sure enough, I discovered that in 2008 New Zealand’s national debt was 16% of GDP.  Now in 2017 it’s almost 30%, and in dollars, approximately $85 billion.  I found this completely mystifying – surplus of $3.7 billion, while national debt is the worst it’s been for almost 10 years.

What helped me to understand this conundrum is to look at the housing market in this country, where house prices have sky-rocketed such that the average price of a house in Auckland is now over a million dollars.  By the way, I don’t know how ordinary people are affording these prices.

I realised that it’s actually similar to government finances.  If a person buys a house at $900,000 with a $100,000 deposit, they might be able to cover the mortgage outgoings as well as day-to-day living costs, out of their normal income.  They could even conceivably save a bit week by week. Thus at the end of, say, a year, this person could have some money in the bank for a holiday – a surplus in other words.  But looking on the other side, they are deep in debt, to the tune of $900,000.

Deeper in debt

Also, like governments, the individual who faces an unexpected need for a sum of money, for car repairs, let’s say, can increase the mortgage, take the lump sum, use it for whatever they need, and get on with life.  They perhaps might then save a little bit less, as their outgoings on servicing the debt would be more.  However, if by chance this person got a salary raise (in government terms, an increase in revenue through a new tax or some other way) they could end up with a surplus as before.  The debt however would have increased.

Voila – a simple explanation of how New Zealand can have a huge surplus while having a bigger national debt than ever.

Wilkins Micawber enjoying a happy life

Mr Micawber’s recipe for a happy life

Now that I think I understand it, it seems pretty scary.  I’m remembering what Charles Dickens’ character Mr Micawber said in the novel Great Expectations: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and sixpence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”  I hope for us all as individuals and as a country, that Mr Micawber isn’t right.  If he is, then we are well on our way to misery.

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