PhD student looks at the lie behind the political line: ‘NZ can’t afford it’

Sunday, 9 November 2025

A University of Otago PhD student has a simple wish: that New Zealand thinks differently about political promises and lines like “the country can’t afford” to have more hospitals or better public services.

To those who hear these lines as the election approaches, student Morgan Edwards (Ngāti Tūwharetoa) says, “look deeper”.

The idea of questioning Government spending decisions was sparked one cold Dunedin afternoon in 2022, when Edwards came across a paper that opened his eyes to the tenets of “Modern Monetary Policy (MMT).”

The paper, from the University College London, was called “The Self-Financing State” - and it lit the fuse that was to lead him into doctoral study.

It demonstrated to him a simple notion: that the UK Government created new money each day in order to pay the bills, rather than first being financed by taxation and bond sales.

At the beginning of each day, Treasury instructs the Bank of England (the UK’s central bank) to debit the the main government bank account with funds, the sums of which are decided by Parliament. These are subsequently used to settle spending by government departments into the economy via commercial banks.

Taxes and other revenue collected involves the reverse process, crediting the consolidated fund’s account at the end of the day.

This simply describes how money works , but it calls into question a number of things. It means strictly speaking, Parliament can always honour its commitments, unless a political decision to the contrary is taken.

Edwards believes a refresh in the way we look at public finance is timely as governments around the world, including our own, grapple with austerity budgets, tough decisions over public services and even unemployment, which recently hit a 9-year peak of 5.3%.

He intends to do his own digging, after being inspired by a look at the UK system.

“I thought to myself, ‘I wonder if anybody's looked at this process in New Zealand?’ - and no-one had,” he says. “That was PhD heaven.”

What he’s found

New Zealand’s system works pretty much exactly the UK way. “Core Crown” expenditure is a “start of day advance” from the Crown Settlement Account, paid each morning into the Government’s spending account at Westpac. Treasury analysts check to ensure the amounts are what have been budgeted for.

The end of day sweep consists of two aspects. First, taxation is collected - the reverse of the start of day advance - returning settlement cash to the CSA which offsets the start of day advance. The second aspect is that money in government (Crown and departmental) bank accounts is swept to the CSA overnight to protect it from Westpac default risk - and the RBNZ pays interest on these overnight balances too.

The sum of all these balances is called the Settlement Cash Level (SCL), and the central bank manages the total SCL through its operations, such as buying or selling government bonds. But this has no relation to actual spending, Edwards says, as this account is perfectly able to operate as it did during Covid, when, unbeknownst to most, it spent a long period “overdrawn”.

“The most incredible thing was that this account - from which all Government spending arises - was in overdraft for 24 days during Covid 19; in other words, and by conventional logic, the Government literally ran out of money, but was still able to meet its payment obligations regardless,” he says.

“Prior to Covid-19, the Government was talking a lot about budget responsibility and running surpluses and saving for a rainy day … but that didn’t matter much when government cash flows during Covid dwarfed what NZDM had forecast and what they were able to 'earn' through government bond issues.

“Yet, bond repayments and other government spending obligations (like the Wage Subsidy) were able to be paid,” says Edwards.

“Which proves the pleasing circularity to all of this, because the ‘overdraft’ demonstrates that the government can spend from zero, in the sense that it creates money when it spends.”

So what

As Edwards and economists like the UK’s Richard Murphy say, the issue is really one that calls into question what exactly constrains government spending.

Edwards says it is not financial at all, but the economy's real capacity to produce goods and services. While the New Zealand government cannot run out of money, the economy can run out of real resources, such as labour, raw materials and other productive assets, so spending beyond the economy's real capacity can cause inflation.

Likewise, the argument that “money printing” done over the likes of Covid as a driver of inflation and economic ruination are wrong, Edwards says.

“Those things increase the level of settlement cash through buying back bonds and so forth.. But it’s not really having an impact on the wider economy.”

As the UK’s Murphy famously said, MMT says “the economy of a country can be run at full employment without finding the money first… and therefore, what it makes clear is that if there are underutilised resources in an economy, and there are in the UK, they can be put to use without a risk of inflation.”

Assessment

Michael Reddell, who has held numerous senior roles at the RBNZ and the Treasury, and is currently an economic commentator and a Bank of Papua New Guinea board member, said MMT is not new, but an alternate way of enacting macroeconomic stabilisation.

“There isn't anything material that is technically incorrect in what they are saying, so the question is more one about what works best and why, including what is most resilient to shocks.”

He says Edwards is right that a government could, if the law allowed it, borrow indefinitely from the Reserve Bank, “but if it did that, and nothing else, we'd descend into very serious inflation problems.”

While any borrowing from the RBNZ could be offset by increases in the OCR - and higher interest rates and higher exchange rates crowd out private spending to make room for government deficit spending - very few countries in peacetime had done that, for good reason.

“It is about discipline. Governments don’t need to raise taxes but if they don't - and just rely on borrowing - there are no more real resources in the economy than there were before. The government can get access to those resources by borrowing from the central bank, which then raises the OCR to squeeze out private demand for the resources. Or it can have a direct conversation with its voters and set taxes to more or less align with spending plans,” he says.

“The latter seems a lot more honest to me - if you want more spending, go and make the case to voters for higher taxes and explain who will be paying them.”

So when politicians say there’s not enough money in the kitty, what they mean is that “voters as a whole aren't willing to give up more of their claims on real resources to enable more government spending to happen.

“It is a political constraint - but no less real for that - not a technical one.”

On the flipside

Economist and former productivity commissioner Dr Ganesh Nana agrees in essence with what Edwards is aiming to illustrate as he works through his PhD. He says the conflation of economics and finance has been “something I’ve railed against for ages - with little success, but I’ll continue.”

“The key element for me is that it reinforces the point that it is not financial considerations that constrain our activity, progress, wellbeing, prosperity… real resource constraints - workforce, skills, machinery, equipment, buildings, knowledge, land/water, other natural eco-systems, network infrastructure, community connections and so forth - are the fundamental drivers of prosperity and living standards, and - yes - productivity, and profitability.”

Nana says the timely example is that of free GP visits, recently mooted by the Labour Party as they seek to build momentum in their pre-election 2026 run.

“All good giving people free visits…but if there are no GPs able to take those appointments then our push for better health falls over at first hurdle,” says the economist.

“It's the real resources that matter, and that determine our destiny - not the 'what we can and can't afford' perspective. So, yes, Morgan's assessment is more than useful - and usable.”