I’m always looking for simple and effective ways to demonstrate the self-financing state.

This is in order to help readers escape incorrect ideas and understand that the constraints on government expenditure are real resources. The New Zealand government faces no financial constraints in New Zealand dollars.

This example is one of my favourites as it uses information sourced entirely from the Reserve Bank.

Through understanding one simple detail – an infinity symbol used on a figure in a Reserve Bank report – we can understand that the Reserve Bank has an infinite ability to facilitate government expenditure in New Zealand.

The Infinity Symbol

The Reserve Bank published this report in January 2023.

There is a figure on page three of that report which contains an interesting detail:

There’s an infinity symbol under the Reserve Bank of New Zealand in the top left of the figure.

This infinity symbol indicates that the Reserve Bank has an infinite ability to create New Zealand dollars to do whatever it needs to do.1 This includes an infinite ability to meet its liabilities.

What are some Reserve Bank liabilities? Well, two of them are depicted in the figure: settlement cash balances held by commercial banks in the Exchange Settlement Account System and the Crown Settlement Account.

Just like the Reserve Bank’s infinite ability to determine the settlement cash level, as shown by the line between Reserve Bank and the ESAS on the figure, it also has an infinite ability to ensure that expenditure arising from the Crown Settlement Account (which, to reiterate, is all government spending) can be fulfilled.

So, if there was ‘no money’ in the Crown Settlement Account (i.e., an overdraft) like the 24 days in 2020,2 government payment obligations would still be able to be met.

All of this comes from understanding one detail on a figure in a not so widely read Reserve Bank paper.

The ability to understand this simple yet profound point demonstrates to us all that the limits to government expenditure are not financial – the Reserve Bank has an infinite ability to create New Zealand dollars to meet their liabilities as they acknowledge themselves!

Remember that the money that the Reserve Bank creates – settlement cash – is the money used by government to facilitate spending. The New Zealand government doesn’t spend taxpayer dollars – it spends settlement cash.

A Symbol of Change?

Understanding that the Reserve Bank has an infinite ability to meet its liabilities, including all government expenditure, has the potential to fundamentally change New Zealand’s political economy.

The infinity symbol reinforces that the focus of New Zealand politics should be on the utilisation of resources and the provision of public goods and services, not that the government will run out of money.

The decisions around the use of resources lie with the public, who influence political choices and the expenditure of public money, through the voting process.

It is up to both the public and the politicians that represent them to correctly understand how government spending works and redefine the conversation around public policy.

All public money - government expenditure - arises from the Crown Settlement Account at the Reserve Bank.

The separation of government and the central bank, the myth of ‘central bank independence’, enables central banks, academics, commentators and the wider public to incorrectly view the central bank as some kind of actor outside of the government spending process.

This isn’t the case at all.

There is only one source of government finance, and it is the Reserve Bank.