The seeds of the next global financial crisis have been sown and could blossom if governments are not prepared, according to a new report from the free market think tank, the New Zealand Initiative.
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Entitled "Walking the Path to the Next Global Financial Crisis" the report said the steps taken by countries, including New Zealand, to counter the economic impact of Covid-19 have masked and in some cases exacerbated the risks.
"The Covid-19 financial support package has kept Kiwis off of the dole queue and saved many businesses from bankruptcy," report co-author Bryce Wilkinson said.
"However, the Government should promptly repay those debts in order to be prepared for the next financial shock. Failing to prepare now for the next financial crisis could destroy New Zealanders' nest eggs and threaten their livelihoods."
He said governments had been spending money they did not have to spend and central banks had been acting as "bottomless ATM machines".
A common approach around the world has been for governments to roll out expensive support packages for households and businesses, borrow heavily, while central banks have loosened policy and printed money, driving interest rates lower and fuelling property and sharemarket prices and inflation.
However, the report said policy makers would have difficulties in unwinding the "extreme" measures, and there could be dire consequences as a result such as higher unemployment, company crashes, and the destruction of New Zealanders' nest eggs and livelihoods.
A former chair of the Reserve Bank, Arthur Grimes, echoed the concerns in a foreword to the report.
"Central bank actions through the pandemic … have placed New Zealand at greater risk of an asset price collapse with ensuing economic pain; the risk is heightened by the unsustainable fiscal and monetary policies globally."
In an online discussion about the report, former Prime Minister Sir John Key stopped short of predicting another GFC, but said high public debt might be a factor in another crisis, and that required the government to be careful with spending and borrowing.
"The simple reality is they present the ingredients for what could be a very dark time in our economic future if we're either not careful [or not] lucky."
