People are already thinking about the bill of COVID-19, and how would it be paid. Just look up the Google mail and see the flood of articles. The New Zealand Minister said that the government will borrow to finance the deficit, but it is not as simple as this. At some point in time, a government, which may not be this government would have to raise taxes. The borrowing matters whether the public holds an interest-bearing government bonds or non-interest bearing bonds. The latter type is like the US Treasury Bills. They are non-interest bearing bonds or zero-coupons, which are bought at a discount price of their face value i.e., they pay no interest, but eventually sell at the par value, therefore, they bring about a positive yield to holders.
What's the difference between these bonds and what is the effect on the economy?
On this issue, I remember a paper that I read when I was a graduate student preparing for my PhD exams, Robert Barro (1974) wrote in the Journal of Political Economy "Are Government Bonds Net Wealth?" This issue is pertinent to the situation we and others are facing.
Barro argued that government debt, which is held by the public could increase or decrease in real terms when the price level changes. So if the price level falls for whatever reason (the situation now with a near zero interest rate means that people are indifferent between holding money or bonds), the real value of government debt increases, and economy's level of wealth increases too. However, if the government finances the budget deficit with interest-bearing bonds, and people anticipate an increase in future taxes to finance the deficit, an increase in the real value of government debt outstanding will also imply an increase in the present value of future tax liabilities. Therefore, government debt cannot be considered a net wealth increase for New Zealanders.This bond buying business may not stimulate the economy as much as the government thinks.
The NZ government bonds are low interest bearing bonds as shown in the this statement, but not a zero-coupon. Therefore, holding these bonds cannot be net wealth.
Financing the budget deficit with a non-interest bearing bonds (zero coupon bonds), on the other hand, could be a net wealth to New Zealanders. The reason is that the increase in the real value of the debt outstanding is not associated with an expected increase in tax liabilities.
I seems like a great idea to buy government bonds while working and cash them to finance retirement, if they were zero-coupon type of bonds. In this case government debt is net wealth to Kiwis, and the government can finance its deficit and lower income tax on people's labor income. One can see how such fiscal policy can increase labor productivity.