How far has Grant Robertson shifted the goal posts on government debt?
Friday, 13 May 2022
EXPLAINED: New forecasts will be released in the Budget on Thursday predicting how high the Treasury expects government debt will climb over the next few years.
Net core Crown debt stood at $127 billion at the end of March, an amount equivalent to just over 36% of the country’s annual GDP, and is currently projected to peak at just over 40% of GDP next year.
But the new Treasury forecasts will show a much smaller ‘headline’ figure, as the Government is changing the way it presents its debt.
It has also switched from setting a target for government debt to setting a ‘ceiling’ for it, but if anyone assumed that was a line that could never be crossed – think again.
Why should I care about government debt?
The Government needs to pay interest on its debt and the main ways to get the money to do that are through taxes or by taking on more debt.
Either way, in the long run, the bigger debt, the more we are all likely to be taxed and the less room there is for additional government spending.
And as these are big numbers, they matter a lot.
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Credit ratings agencies seem comfortable with the level of government debt.
But as the size of that debt rises, so too does the risk it won’t be repaid, and therefore also the interest rate that lenders (buyers of government bonds) are likely to demand to lend the Government money.
Finance Minister Grant Robertson said on Thursday that government debt was set to peak at about half that of Australia, about a third that of the UK, and about a fifth that of the United States’ “based on comparable measures”.
There is an opinion we need more headroom than most countries, mostly because of our economy’s vulnerability to natural disasters.
How has government debt been calculated up to now?
The main measure has been net core Crown debt.
That is the sum of the debts owed by government ministries and departments and the Reserve Bank, minus the financial assets of those entities, but not including those of the NZ Superannuation Fund.
It also does not include the assets or liabilities of Crown entities or state-owned enterprises or the value of ‘advances’ made by the Government.
And the new method?
The Treasury will switch to a new main measure for government debt that should more than halve the headline number to less than 20% of GDP.
The biggest change is that will count the value of investments made by the NZ Super Fund ($57b) as an asset.
It will also count the value of advances, such as the money owed to the Government in student loans (book value of about $10b) and the value of loans made by the Reserve Bank under its Funding for Lending programme (also about $10b).
Those changes will make the government debt seem smaller than before.
Against that, the new measure will include the debts and financial assets of Crown entities such as Kāinga Ora (Housing NZ has more than $7b of financial liabilities) and transport agency Waka Kotahi (total liabilities about $4b), which will bump the debt back up a bit.
Why the change?
Robertson says the new measure more closely aligns to the main measure of government debt used by the International Monetary Fund, so it will be easier for economists to compare our government debt to that of other countries.
The ‘downside’ is the new measure can’t easily be used to compare government debt with past debt.
But Robertson says the Government will continue to publish figures for net core Crown debt as they would have appeared under the old measure, still allowing those comparisons to be made.
Is there an ulterior motive here?
Let’s say it’s a ‘happy coincidence’ that the new measure makes the government debt look smaller, especially at a time when inflation is running high and government spending is under the spotlight.
As the size of the NZ Super fund has built up over the years, the change may have become more politically tempting.
But to the extent that the new measure makes government debt look better internationally, we might all expect to benefit as, superficially, the change may make New Zealand appear a more appealing place in which to invest.
National Party finance spokesperson Nicola Willis is not crying foul over the switch, although she is uneasy about the separate changes to the fiscal rules.
Which are?
The Government is setting a ceiling on government debt at 30% of GDP under the new measure, which translates to about 50% under the ‘old’ core Crown debt measure.
It has also set a target of running annual budget surpluses of up to 2% of GDP from July 2024.
The switch from a government debt target to a ‘ceiling’ is tougher, surely?
Well, not really.
In 2019, before Covid messed up the Government’s accounts, Robertson set a target of keeping core Crown debt in a range of 15% to 25% of GDP from July 2022 onwards, superseding the previous target of getting it under 20% of GDP.
Notionally then, the Government could now increase debt from its current level of about 36% of GDP under the old measure, to 50%, without driving through any amber lights.
But at least we have now a ceiling above which debt can’t go
Maybe a ‘ceiling’ isn’t quite the right word.
Robertson has made clear that government debt could spike “significantly higher than the ceiling” in the event of a ‘one in 100 year’ economic shock”.
In fact, Treasury documents show that the 50% ceiling has been calculated by working out how much debt it thinks the Government could take on in the event of a large shock while still being confident of making its repayments and getting debt back under the 50% ‘ceiling’ within 20 years.
It estimated that the Government could cope with its debt rising to 90% of GDP on that measure and that it might need to cope with a shock that upped its debt by 40% of GDP, and worked back from that to get to the 50% debt ceiling.
So is the 50% figure a ceiling or not?
Remember, by the way, it’s 30% of GDP under the new debt measure.
Think of it more like a sunroof in your car.
It’s sort of part of the roof of your car, so a bit like a ceiling.
But if a meteorite crashed through it, or it gets really stuffy in the car – like ‘once in 100 years’ stuffy – you could stick your head through the sunroof, right?
What you might call the ‘actual cap’, the amount of debt that the Government could take on in a deep crisis and still confidently recover from, has been estimated at 90% of GDP under the old measure, or about 70% of GDP under the new one.
What is a ‘one in 100 year’ economic shock, anyway?
Coincidentally, it seems we have just had one of those. Robertson has previously described Covid as a ‘one in 100 year’ economic shock, which would indicate that we might only expect about another nine similar-sized shocks by the year 3020.
Let’s all hang on to that hope.
Being realistic, you might need 1000 years of comparable economic data to say with any confidence what a ‘one in 100’ year economic shock actually was, so let’s just call it ‘something pretty bad’.
Anything else gnarly?
Including NZ Super assets in the main debt measure means government debt is less within the Government’s control, as the value of NZ Super’s investment portfolio jumps around as share markets rise and fall.
That is one explanation the Treasury has previously given for not including NZ Super assets in the core Crown debt calculation.
In 2014, it warned that the “varying and volatile nature” of the fund’s assets could “complicate communication of a net debt target”.
And as the value of the fund increases, movements in the value of its assets can be expected to throw the debt figure around more and more.
Robertson says that “the management of debt includes a recognition that the value of the Super Fund changes over time and this will have an impact on the debt ceiling and new fiscal rules”.
That seems to acknowledge that there might be a situation, for example, in which the debt ceiling might be breached because of a major crash of global stock markets that slashed the value of the fund.
National’s Nicola Willis said that was the sort of issue she would like to discuss with Treasury officials.
“The real concern we have here is, ‘is there enough in these rules to constrain the minister from continuing a path of spending that doesn't come back into balance?’ And we do want to ask Treasury more questions about that.”
Willis said Labour MPs on Parliament’s Finance and Expenditure select committee had blocked a request for a briefing from the Treasury, which she labelled “anti-democratic”.
Bottom line?
There will be a ceiling on debt of 30% under the new measure or 50% under the old, unless something ‘really pretty bad’ happens such as the Alpine fault going, or a big global economic depression, or perhaps unless a future government sails a bit close to the line and there is a pretty decent stock market crash.
That would give this and future governments room to borrow up to about an additional $48b above the current debt in ‘normal times’ while sticking within the new rules.
That’s a limit not a target, but Robertson said on Thursday the ceiling would give the Government “room to make infrastructure investments, investments that will enhance our productivity, help us meet the challenge of climate change and are of high quality”.
That does suggest he sees the new rules as providing more space for planned spending.
Willis notes the Treasury only recommended the new ceiling “if there was also a commitment to fund projects with a positive cost-benefit ratios based on rigorous business cases”.
If, on the other hand, there was a high risk of projects being funded “without a rigorous assessment based on sound analysis”, the Treasury made clear it would have recommended a lower ceiling.
Expect the political debate over government debt and the quality of its spending to ramp up, not die down, on Budget day.