National’s disciplined spending would 'get debt under control' while still investing in health, education, and infrastructure, Nicola Willis says

Nicola Willis says National’s fiscal plan will outline lower budgets and debt than Labour, while still increasing spending on health, education and long-term infrastructure.

In a speech to the KangaNews NZ Debt Capital Markets Summit on Wednesday, the party’s finance spokesperson said the amount of Government debt was “worrying”. 

“New Zealand has long maintained the view that as a small, exposed trading nation we should stick to low levels of debt so that we are in a strong position to withstand an inevitable rainy day”. 

“The blow-out matters because it means we will have less room to move should disaster befall us again. It also means we will be forking out a lot more as a country to pay the interest costs on our debt”.

On Tuesday, the NZ Treasury forecast that net debt would climb to 22.8% of gross domestic product in 2025 before declining to 21% two years later. 

Even this elevated level of net debt would still be comfortably below Labour’s self-imposed ceiling of 30%, as broadly recommended by the Treasury in 2022. 

Willis said the previous debt limit was that net core Crown debt should not exceed 20% of GDP. That measure will rise to 43.6% in 2025 and fall back below 40% in 2027. 

Most of NZ's government debt is bonds denominated in the NZ dollar issued to local and overseas investors for fixed terms. NZ's domestic currency sovereign credit rating is the highest possible 'Aaa' from Moody's and 'AAA' from S&P Global Ratings, and the second highest 'AA+' from Fitch. All have stable outlooks. (See credit ratings explained here).

Treasury's Pre-election Economic and Fiscal update put 2022/23 annual core Crown finance costs at $6.6 billion, more than doubling due to increased borrowings and higher interest rates. That $6.6 billion is equivalent to about 1.7% of the March-year's $385 billion Gross Domestic Product. (For those wanting more detail on NZ government debt, there are two episodes of interest.co.nz's Of Interest podcast on it here and here).

Debt anchor 

In 2019, Treasury said its reading of international evidence was that the upper limit for net core Crown debt in New Zealand should be about 50% to 60% of GDP.

Above that level, the marginal costs would outweigh the benefits, although an actual debt crisis would not be likely until a much higher level was reached. 

This upper limit should be protected by a 20% buffer in normal times, so governments had room to respond to economic crises without breaching the ceiling. 

New Zealand’s debt increased by 20% of GDP after the Global Financial Crisis and the Canterbury earthquakes and will have increased by roughly 25% after the pandemic.

The Treasury suggested, in 2019, that keeping net core Crown debt below 30% of GDP in normal times would be “prudent” although noted it was ultimately a government decision.

In her speech on Wednesday, Willis said the cost of servicing increased debt would hit $11 billion in 2027 and become the fourth biggest area of spending. 

“It’s vital that we get debt under control, and the next National Government will ensure we do”. 

She said it was not credible that Labour’s Grant Robertson would stick to the $3 billion future operating allowances he had told the Treasury to bake into its pre-election update.

Willis’ way 

The likely-to-be future finance minister said National would take a “disciplined approach” to economic management, although didn’t provide any specifics about fiscal strategy.

She said the party’s economic plan could be summarised by five themes: more disciplined spending, lower taxes, fewer regulations, better education, and more infrastructure.

An alternative fiscal plan would be released ahead of the election and would include “more disciplined budgets in future years” that would “lead to lower debt over time”. 

It was not immediately clear if Willis meant lower than was forecast in the pre-election update, or simply lower than what she believes Labour would deliver. 

The plan would invest more in frontline services, including annual increases to health and education, and in the long term infrastructure assets needed for productive growth. 

National would have an ongoing commitment to driving out waste and making sure public money was being directed towards its most effective purpose. 

“Yes, this means we will trim back wasteful spending in the Government’s own back office and we will stop wasteful projects like Auckland Light Rail”. 

Targets would be set for things like health waiting times or education results, and would be reported on every six months.

$25 a week

Despite the tight fiscal forecasts, Willis was confident that National could still deliver its tax cuts.  

“This is essential, not only to compensate for the ravages of inflation, but also to send a clear signal to New Zealanders that under National hard work will be rewarded”.

The plan “did not require a single dollar of borrowing” as it was funded by new taxes and repurposed spending. This claim has been questioned by a range of economists. 

It will deliver a median income worker an additional $25 a week, an average income couple $50, and a family with small children up to $125.

Willis said the party would also cut complex regulations such as centralised wage bargaining, the Credit Contracts and Consumer Finance Act, farming regulations, and fast-track renewable energy consents.

Finally, National would deliver a “complete revamp” of how infrastructure was funded and built. This would include work more closely with local councils, fast-tracking consents, and bringing in “major investors” to finance projects.