The Government has announced it will ease up on its self-imposed debt target and give itself flexibility to loosen its purse strings from 2021/22.
Delivering a pre-Budget speech on Thursday morning, Finance Minister Grant Robertson said he would aim to keep net Crown debt at between 15% and 25% of gross domestic product (GDP) from 2021/22.
This signals a move away from the approach he adopted in his Budget Responsibility Rules of reducing debt to 20% of GDP within five years of taking office.
The Government has already hit its 20% target, as Ministers have been running “prioritisation exercises” to cut spending that doesn’t align with the Government’s priorities.
Targeting a range rather than a set number looking ahead would enable the Government to be more flexible with its spending.
National’s Finance Spokesperson Amy Adams said the move was not about creating "wriggle-room," but was a "blunt admission" the Government couldn't manage its books properly.
While she said Robertson wanted to "spend up on big wasteful promises," Treasury in its Half Year Economic and Fiscal Update released in December, forecast debt to GDP to rise a little in 2019 before tracking down.
Treasury will provide an update on these forecasts in its Budget Economic and Fiscal Update to be released with the Budget on May 30.
It is worth noting GDP growth has undershot forecasts in recent quarters. On the flipside, capacity constraints have curtailed some government spending.
Credit ratings agencies in April also told interest.co.nz the Government had “ample room” to borrow more before its ratings would be affected.
Kiwibank's chief economist, the OECD and IMF have also been among those who have commented that loosened monetary policy (central banks cutting interest rates) has done a lot to spur economic growth since the 2008 global financial crisis, so in some economies it’s time for fiscal policy (government spending) to do a bit more.
Politics, promises and magic numbers
Robertson said a move to a debt range gives governments more capacity to act in accordance with the country’s circumstances – “circumstances that change over time”.
“It establishes boundaries within which debt is kept to sensible and sustainable levels and where fiscal choices are driven by impact and value,” he said.
“For example, a government may choose to move higher up the debt range to combat the impact of an economic recession, or where there are high value investments that will drive future economic dividends.
“At other times it may be prudent to reduce debt levels to the lower end of the range to provide headroom for future policy responses.”
Robertson said the 15% to 25% range was based on advice from the Treasury and was consistent with the Public Finance Act’s requirement for fiscal prudence.
He acknowledged spending to GDP had averaged at around 30% over the past 20 years.
Adams criticised the target, saying “you can almost guarantee” it would see the Government hike debt to the 25% upper limit.
“This is an admission of defeat from a Finance Minister who has repeatedly used these rules to give himself the appearance of being fiscally responsible,” she said.
“This decision will mean billions of dollars more debt… “Debt isn’t free. It will have to be paid for by higher taxes in the future.”
Adams said she wanted the debt to GDP ratio below the 20% mark, but couldn’t provide a target point nor target range.
While she identified the Provincial Growth Fund, fees-free first year tertiary education, and slushie machines for Corrections staff as wasteful spending, she didn’t say these spending commitments would be reversed if National was in government. Adams didn’t identify other ways of cutting spending, but stressed the importance of spending wisely.
Robertson acknowledged his 20% target had attracted some criticism, but said he’d been “comfortable” with it given the capacity constraints (particularly around construction) facing the economy.
For him, it was a “question of balance”.
“We have made, and will continue to make, significant investments in our future, but we also know that the volatility of the world, be it economically or through natural disasters, biosecurity incursions or unexpected events, is never far away.”
Adams concluded: “It took the last Labour Government two terms to lose its fiscal discipline. This Government has given up in 18 months. This confirms you simply can’t trust Labour with the economy.”
82 Comments
This is where it gets interesting. Are we going to borrow more to fund opex and channel money into vote-winning ideas that ultimately add little long term value?
Or are we going to borrow while money is cheap and build infrastructure for a productive future that makes everyone better off in the long run?
As much as I trust Robertson, I'm worried that a huge amount of this will end up as either ad-hoc pork barrel PFG style spending for coalition partners, without anywhere near as much going into the huge infrastructure catch-up we need to be funding from 2020 to 2030.
Agree, borrowing and spending on useful stuff is probably a good idea while we can issue govt bonds at <2% rates. Borrowing and building in more and more structural deficits by using that money as handouts in the form of more social welfare payments is a potential disaster. Lets hope Labour does better than I expect and does more of the former than the latter.
Labour's borrow and spend instincts coming to the fore now that they have managed to puncture the economy's wheels with only 1.8% annualised growth in last half year. Would have helped if they hadn't wasted $5-6billion on no-benefit student bribes, PGF, Kiwibuild, Billion Trees, Winston's embassy spend up, massive public sector growth, and Green's crazy white elephant public transport megaprojects... Also would have helped if they hadn't killed off things that help the economy (better roads and motorways, lowered tax, less onerous employment law)
Foyle - I think it's what we have come to expect from Labour over the years. While our debt is low and Interest rates are very low I can't help feeling that extra borrowing could easily be flittered away by the COL.
Australia is about to embark on massive tax cuts in July perhaps some relief may happen here.
Perhaps this is the 13 billion dollar hole appearing before their eyes with a large drop in tax revenue expected due to a falling GDP.
NZ GDP is ~300billion so 5% is actually $15 Billion. Looks like Labour are finally having to acknowledge the huge fiscal hole Joyce pointed out in 2017. Labour's assumed 4-5% growth forecasts were always garbage despite the appalling bias displayed by media at the time.
Worst thing is that the Coalition have shown such appalling judgement in their spending decisions and management, this extra debt will inevitably be accrued with very little to show for it - just teenagers on a (vote buying) spending spree.
Foyle,
Even from someone as Rightwing as you,that is scraping the barrel. There was NO fiscal hole and you know that. Not one economist supported Joyce's assertion and he couldn't back it up.
There is nothing magical or sacrosanct about any one figure for debt/GDP. If you look at the ratios for any other developed nation,they would bite your hand off for a figure of 25%. It may have escaped your blinkered attention,but we have serious infrastructure deficiencies even an additional figure of $15Bn won't go very far. The last national government very deliberately underfunded many things to make the figures look good and were intent on reducing the ratio to 15%-quite disgracefully in my view.
Will this lot make mistakes,spend money poorly? Of course they will,ALL governments do that,but I much prefer their more humane view of the world than National's.
Publicly disclosed Crown debt is one measure of tax payer liability, but there is a glaring failure to pull back the veil on infrequently discussed and publicly undisclosed government off-balance liabilities associated with PPP and SPV related spending projects.
Twyford said the plan was to build on work done by National in establishing Special Purpose Vehicles, or SPVs, to fund government infrastructure.
“It’s a balance sheet that’s not council, it’s not government, it’s a kind of public purpose hybrid if you like and that’s one of the keys to unlocking this whole area,” he said.
Twyford then confirmed that money could be borrowed heavily using a SPV as it did not count as local government debt or core Crown debt.
Good memory! Yeah that was another shady $3billion in borrowing to be hidden off the govt balance sheets.
https://www.stuff.co.nz/national/politics/106704499/billions-borrowed-f…
The hole just gets bigger and bigger. Yay coalition!
I know you don’t understand by just what you have written. All sovereign countries create their own money - States do not. And nobody in MMT says money is printed with impunity. Nobody. All I can suggest is you read, read and read again. There is plenty of articles on the internet to help you.
Really? All sovereign countries create their own money?
There seem to be some pretty big (sovereign) countries in Europe without that power..
"And nobody in MMT says money is printed with impunity."
True. They hide behind the guise that "so long as there is (aggregate) production, you are fine." Like I said; fairy land stuff.
Well. Tell us. Exactly what productive potential does NZ have to offset the inflationary pressure of increasing the money supply, given that pretty much every infrastructure project in NZ will require a huge amount of imported resource and services. Or do we just ignore that fact and consistently inflate the currency to pay for those goods and services for the next 10 years and hope it has no implications for the subsequently extremely mismanaged domestic economy in the meantime?
11% labour under-utilisation for starters. MMT does not prescribe military Keynesian style spending in already inflated full-capacity sectors. It suggests a Job Guarantee offering basic minimum wage jobs to anyone who wants one that can't find one in the private sector. Money should first be spent on idle labour. Spend on the bottom first.
Sensible deficits and their correlation with supposed currency depreciation or imported inflation in countries like NZ are not clear or proven at all. See Bill Mitchell on twin deficit hypothesis http://bilbo.economicoutlook.net/blog/?p=11527 - link between TWI and budget deficit levels in Australia AWOL.
Sovereign governments issue IOUs (bonds) which are monetised by banks writing up both sides of their balance sheet ledgers via the public tender process. Thereafter, banks distribute the interest bearing IOU's to private entities. Government issued fiat money stagnates while the outstanding amounts remain ~$6.8 billion and it is expensive for banks to store, hence they collectively limit themselves to retaining ~$638 million on their balance sheets.
Jesus wept. No sovereign government needs to borrow money to spend it. A sovereign Government creates the money then spends it. And New Zealand needs new infrastructure. The important thing is resources and that is NOT money
Ahh...drinking from the old MMT bottle. It's a fantastic notion. Somehow I'm not convinced that NZ can spend on infrastructure, much like Japan has done (partly to smooth the hangover from their own gigantic bubble). There's some key differences between NZ and Japan: one is a debtor and one is a creditor; one has large foreign liablitiles and the other doesn't; one is a raw commodity producer and the other is a manufacturer; one has a currency that thrives during speculative times and the other is a kind of safe haven.
The MMT wizards would probably say there's fundamentally no difference between NZ and Japan as nations with sovereign currencies and the ability to create money for public spending. I'm still not convinced. If NZ had the public debt that Japan has, I really cannot see how the nation could cope. My intuition tells me that Japan can get away with it because their industrial and produtive output is on a completely difference level.
Japan is doing a great job managing its economy considering the negative population growth. They've ridden the Industrial Revolution 4.0 as a front runner with massive investments in innovation and modern infrastructure. They have prepared themselves for a large uptake of robots and AI to make up for the rapidly dwindling workforce (double whammy of older population and fewer births since the 80s).
We, on the other hand, have relied on increasing our population base to grow our economy - clearly not because of more productive workers bringing essential skills to the economy, as successive governments want us to believe, but because we are expanding our consumption base and feeding low-skilled workers to low-value businesses.
Japan can get away with the ongoing fiscal deficits because, simply put, the spending does not cause inflation. After the foreign and private sectors in Japan have made their spending and saving decisions, there are idle resources (labour and productive capacity) that the Japanese government can purchase via deficit spending without causing inflation. It isn't bidding up prices because there is slack to buy. If the foreign and private sectors starting spending big time the government would have to stop spending so much otherwise inflation would take off as businesses struggled to compete to attract labour and resources became scarce. NZ might hit inflation earlier than Japan. But right now, in NZ there is slack. When you visit Japan you see how wonderfully well-staffed things like train stations are and the efficiency for the consumer this creates. How many cleaners there are etc. You can't help thinking this is all a government job guarantee in disguise. Then you go to Europe or the UK and see the dirty trains with no one to help you... and the cancellations... and the delays.... no wonder Japanese workers are productive - they can get to work on time! Try that in London.
Why not 15-20% or a max of a 10% overrun from 20 to 22%. Typical Labour govt. style, tax and spend whereas National is tax and don't spend. All those creeping taxes during Nationals last term especially the hidden capital gains on most overseas shares. The Cullen fund (NZ Super fund) must contribute hugely to the tax take but is a "hidden " capital gains tax and it doesn't hit kiwis directly in the pocket
The 2008 PREFU (opening of govt books pre-election) predicted a decade of deficits lifting debt from 17% to 30% of GDP as a result of Clark govt's profligate spending! National held it to 25% and in 2014-2017 debt to GDP dropped from 25.5 to 21.7%. If you are going to claim that National were frivolous in wake of Labour's irresponsibility, GFC, Chch earthquakes then you are being indefensibly partisan.
No one forecast what China would do for NZ looking at it from 2008.
They all thought that NZ would suffer same as rest of OECD.
Also, no one forecast that OECD would double its government debt and some, and private debt would rise 50 trillion too. There was a silly assumption that debt was cause of last GFC and so needed to go down. But we got extend and pretend instead and now it will be GFC again, except worse due to corporate debt bubble at BB+ grade
thank you national for selling me stakes in the power companies, where did that money go, offshore to some foreign development bank, to a Saudi farm,
both sides are inept when it comes looking after the books
and you can go back in history for mistake after mistake from both sides that have cost us in the long run, muldoons howler with super is a classic
or labour selling off government companies cheap which some they had to buy back as they almonst went belly up, air NZ
the only sure thing is while (which ever side) hold the purse strings they will spend on there constitutes to make sure they are relected next time
I find myself agreeing with the National Party more and more often these days. I don't like the National Party so this is starting to annoy me. Perhaps if the Labour Party wasn't spending all their time covering up all of the stupid things they have done, and instead tried to meet their election promises. That's unlikely though as they keep giving up on anything that could be worthwhile. Perhaps Labour could seek competent advice from the business community rather than depending on career Government employees who are running everything into the ground.
and she is engaged. My New Years predictions are looking alright 6 months in.
From https://www.interest.co.nz/news/97512/will-current-prosperity-last-will…
"8. Jacinda will get engaged with the intent to wed, in 2020 (depending on their polling figures of course)"
Perhaps Labour could seek competent advice from the business community rather than depending on career Government employees who are running everything into the ground.
Which parts of and what people in the business community? The board of Fonterra? Fletchers? Zero? The Howick Village Business Association?
To me it looks like Jacinda is following on closely to the John Key model, point out the bleeding obvious, get elected and then ignore all promises.
Immigration - no real change here
House prices / build more - regardless of what is said in the media about a buyers market prices are still too high and not enough are being built
CGT - yes with the coalition it was hard but why did she state "never". NZ needs to join the real world
Child poverty - has anything changed?
Mental heath - has anything changed?
My guess is that the PM's Business Advisory Council is in complete agreement with this move;
https://www.airnewzealand.com/press-release-2019-pm-business-advisory-c…
Other recommendations in the report include: undertaking targeted research on the impact of automation on Māori; creating a compulsory digital and technology curriculum; creating lifetime learning accounts; and establishing a Future of Work Unit at the highest level in Government to drive needed systems-level change.
They have definite plans for areas of new government expenditure.
The PM has already taken advice from these fake business leaders, and all to somehow magically address business confidence. Pretending to talk to businesses is no way to go through life.
Despite all the meaningless catchphrases I am quite interested to see how the PM wants to automate Maori.
Fake business leaders?
The majority of BAC companies have signed up to the Pledge and are joined by some of the country’s largest businesses, “We think with current signatories, there are over 100,000 Kiwi workers who will potentially benefit from this commitment” said
Jacqui Coombes, BAC member and Bunnings Director of Group HR & New Zealand.As the largest workforce in the country, with around 400,000 workers, the BAC is hopeful that the public sector will also sign on.
https://api.pmbac.co.nz/wp-content/uploads/2019/05/Press-Release-PM-BAC…
Yes they are fake, and do not represent the majority of businesses.
Not referring to the companies criticised by other commentators: David McLean from Westpac. Westpac was the first bank to be caught using an unapproved IRB model, which I believe was based on inappropriate use of AirBnB revenue. Hardly a shining example of good business practice.
We also have Bunnings where people complain on this site regularly about the virtual building supplies monopoly.
AirNZ where I don't see their advice will be of much use as they won't want another competing airline.
Rocketlab: while I like Rocketlab they are being criticised for having substantial revenue from military research (DARPA). Are we supposed to have multiple start ups going after US military spending?
They do not represent most of NZs economy. Instead of fake I could instead call them businesses with special interests that want to influence the Government at the expense of all other business models.
Lets not kid ourselves... it might sound prudent moving to a range of 15-25% but what it means is a lifting of the cap from 20% to 25%.
Robertson says it allows flexibility to respond in an economic recession... yup, ok... but if we are not in one then surely we should be currently targeting lower than 20% at this point in the economic cycle. It has to be interpreted this way and every day the debt to gdp ratio is above 20% says the government of the day believes we are in or heading toward a recession.
I had hoped S&P might consider upgrading NZ to AAA... guess that has sailed now.
We should also remember the debt now held by SOE's such as Housing NZ does not count to this cap and costs NZers more in terms of interest relative to core debt. He has been fudging his compliance with the 20% cap for sometime... as National say, today he has just given up.
OECD average government debt is 75% plus of GDP.
What is this finance religious dogma re 20%?
Government does not have enough money because taxes are too low or revenue base too narrow.
Despite 3.5% growth for last 5 years, now retreating.
Industry likes to whinge about infrastructure and cannot do it itself. Then when government wants to do it, they whinge about tax and borrowing
Because we don't want to waste 1.5-2.5% of our GDP on interest payments on 75% of GDP debt. - we would rather use that tax money for things that actually improve peoples lives. Even at 20% of GDP we are paying about $2Billlion per year in interest. More than $400 per NZer that we can't spend on useful stuff. At this point the west is incapable of building infrastructure affordably due to inefficiencies created by heavy regulation. The next wave of infrastructure innovation is all about finding ways to bypass fixed infrastructure bottlenecks. Eg flying taxis and drone deliveries to bypass roads, fast road tunnelling to bypass Nimbies, pv on roof and power delivery via battery to home to bypass grid infrastructure, satellite internet to bypass fixed cabling. Expect that home water and waste processing will come eventually too.
GDP is also growing. It's the debt:GDP & GDP per capita is that matters. A sensible objective for the government might be to invest in projects that either create overseas revenue, or reduce our purchasing of widgets from overseas. That would be one step towards making us a wealthier nation.
He expects less growth in 2020-22 plainly. Quite sensible. Borrow to invest too would be good mantra.
However, without a better tax base, NZ will not be able to reach standards of schooling and NHS that EU has. Local government control of too many things also wastes money and gives results like water poisoning by cows pollution. As China develops its own industries in primary terms, NZ needs to look at its dependence on earnings this sector and change tack. Borrowing is not the big evil and pension funds want something safe to invest in. I notice National never say no to more private debt despite it being at end of chain now (interest rates cannot go lower for ever) and despite it being a detraction from disposable income and a massive risk in destruction of wealth when bubbles deflate (as now)
Given that 60% of welfare is going on super I couldn't agree more. If that 60% doesn't want to work then their benefit should be cut off.
With respect to infrastructure spending I'm not sure if the Government can focus for long enough to add enough infrastructure projects. They are needed given the poor condition of the economy going forward.
How would you feel about working hard your whole life, paying millions in tax, so that other's who haven't worked can get a pension, while you are denied it. I agree means testing super is sensible and necessary, but politically its death for any party who proposes it.
Whenever people attack beneficiaries they are attacking pensioners. That's why I parody it.
You may also want to consider that all those that paid tax also voted for parties that didn't put any money aside to pay super, instead they ran it as a pyramid scheme, and now all working tax payers are now funding their pension, the super fund, a kiwisaver account and paying off student loans. So how should working age people feel about paying for everything that the previous generation failed to put money away for, and instead ran up large debts?
Ha ha that's hilarious!
Key reasons we are in this hole in terms of education, housing and infrastructure are:
1. Due to Key's pro-high immigration policy and
2. Due to the lack of action on housing, which has pumped up our housing crisis to epic proportions and now (unfortunately) massive government intervention to build is needed
PS. It wasn't just Key. Clark wasn't any better
The problem is, they are NOT building them. They are doing this 'buy off the developers' larky.
They NEED to be building them.
For the editors of this fine website - can you please do some digging on the Unitec redevelopment? Hardly heard anything about it in the last 6 months.
There's some big issues that this country is well overdue addressing.
Education and housing are two of the biggest.
The pressures would be relieved in both these areas if the country bloody well stopped pumping so many immigrants into the country! PS. I am not anti-immigration. There are some key areas where we do really need immigrants. But the policy is still not targeted enough.
In addition to reducing immigration, there is no other option but to pump more money in both education and housing. For teachers, both workloads and pay are issues. We need a lot more teachers, and they need to be paid more (disclaimer - I am not a teacher, neither is my wife or any of my family)
similarly the government also needs to pump a lot more money into building social and affordable housing.
So, who's going to pay?
1. We need to borrow more; and /or
2, More tax revenue is needed
For number 2, we need a land tax, and we need to increase personal tax rates on individual earning over 100K (and yes that affects me)
And thinking back to 2010 (GST 12.5% raised to 15%) and considering the economic environment at that time probably higher GST is on the cards too down the track a ways. When you have become reliant on a GST as part of your income, how bigger impact does it have when consumption stops or slows considerably?
I'd be interested to know how much GST the govt collects from housing. It must be very large. That's a risk for govt revenue, if there's a bust.
If reducing planning regulations meant 30-50% more housing built per annum in Auckland what would that mean for gst revenue? Quite a lot I imagine.
For example another 3000 homes in Auckland per annum each paying 70k in gst = $210 million extra in revenue
I've always been interested in what the redistributive effect would be in an income tax free bracket up to a certain income (perhaps whatever the NZS income for an individual superannuitant is on an annual basis) with a corresponding rise in GST. It would seem a more elegant solution than WFF and all the other redistributive mechanisms we have in place presently (e.g., accommodation supplement, winter energy payments, etc).
Yes it is more efficient not to collect tax in the first place than it is to tax and redistribute, as tax processing eats up a few percent in admin costs. BUT Politicians derive greater power and influence from taxing and redistributing to their mates, turning them into 'clients' who are more likely to vote for them, so it is politically unattractive to them.
Yes, but I doubt it could ever happen - because, rural and Maori land. Even if you gave rural land a massively significant differential to urban (i.e., much, much lower as a % by land area), the sector would still really dislike it - just like they dislike rates - as tax would then become an unavoidable/fixed cost.
I like the idea of a land tax at 5-10x rates, super easy to administer, and would bring land values down to sensible territory and encourage efficient utilisation of land (eg would see less economically inactive people displacing workers from transport-efficient housing near the CBD). Would need to be implemented gradually over a decade or two to prevent too much immediate hardship and allow prices to re-balance
LOL - you must be speaking to the wrong "socialists" :-)!
It is Green Party policy;
Introduce a tax-free threshold at the bottom of the income tax scale first and then reduce and simplify rates in the middle bands of the tax scale.
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