What’s really going on with the Government books?

Wednesday, 6 March 2024

Nicola Willis says NZ in same position as a household living beyond its means.

Hearing Finance Minister Nicola Willis and predecessor Grant Robertson talk about the state of the Government books, you might think they were talking about two different sets of numbers. SUSAN EDMUNDS breaks down what you need to know.

While Nicola Willis has talked about being “concerned by the scale of the financial challenges” left by the Labour Government and referred to nasty financial surprises, Grant Robertson said the economy had been well run in difficult circumstances, while pointing to international experts backing him up.

So what’s really going on?

Interim financial statements for the six months to the end of December showed net Government debt was at $87.07 billion and gross debt $156.8b.

In the year to June 2021, Government net debt was $51.6b.

But the operating deficit of $2.7b was less than the $4b forecast in the half-year fiscal update (HYEFU).

Westpac chief economist Kelly Eckhold said whether the books were in good shape or not depended on what benchmark was used.

“In absolute terms, the fiscal situation is not bad. It’s actually very good. Compared to many of the countries we would normally benchmark ourselves with, particularly if we’re talking about the debt situation of the government, net debt is very low.”

Nicola Willis has talked about encountering nasty surprises in the books.

Eckhold said net debt as a proportion of gross domestic product (GDP) was at about 20% and in the bottom quarter of the advanced economies that New Zealand would often compare itself to. The United States and United Kingdom were near 100%.

“In that sense there’s not a very pressing fiscal problem. It depends on what metrics you want to use. The previous Government had a set of fiscal rules they were trying to stay within.

“Net debt to GDP had to stay below 30%, which is not particularly binding, but the requirement to be running a surplus within the forecast horizon is. That in particular is where the fiscal situation is very challenged.”

HYEFU forecast a very small surplus in 2028 but other forecasts are more pessimistic.

Eckhold said the country was likely to still be running a deficit in 2028.

“Those concerned about the fiscal situation, that’s what they’re concerned about. There’s no near-term path back to surplus.”

He said that could be a concern for a country with an ageing population facing higher superannuation costs.

“If we want to keep our debt relatively in control, we need to be maintaining reasonably balanced books now so we can afford to pay that extra money in future.”

He said there were also questions about New Zealand’s resilience to shocks such as those which could come from climate change.

“The expectation is that we will continue to get those sorts of shocks as climate change comes and there is plenty of potential there for the government debt trajectory to get knocked off course as some of these things happen to us.”

How do you feel about the state of the Government books? Let us know in the comments.

Independent economist Shamubeel Eaqub said the Government had only raided its emergency fund through the pandemic.

“That’s the reason for having that capacity, that’s your rainy day fund. If you don’t use it on a rainy day, what’s the point?” he said.

Cameron Bagrie says the Government is in a difficult spot.

“At the same time, when times are good you should get things back in order, but I’m not entirely sure times are good. We’re in the middle of an economic downturn, retail spending and house sales are down. New Zealanders are doing it pretty tough.”

Another independent economist, Cameron Bagrie, said there were “elements of truth on all sides”.

He said, while the level of debt was low by international standards across the board, when compared to similar economies, it was not so positive.

“We’re a small, open economy running one hell of a current account deficit, we need to be squeaky clean.”

A current account deficit is when the total value of goods and services a country imports is more than what it exports.

New Zealand’s was $30.6b, or 7.6% of GDP, in the year to September 30.

Bagrie said another concern was the rate at which debt had been accumulated.

“When you have rapid rates of change, you need a rapid response on the other side but rapid responses are hard and involve very big shifts in fiscal policy settings.

“The other big thing going on is that it’s questionable whether the books tell the full story. What we know at the moment is that New Zealand has got huge deferred liability in key areas, we know we’ll be on the hook for that at some stage. You have to look at the deferred investment in regards to roading, Three Waters… like it or not someone is going to have to pay. Central Government will have to deal with it in some shape or form.”

Inflation was also making it more expensive just to keep up with existing commitments, he said.

“We’ve kicked the can down the road too much for too long in a whole lot of areas. Everything is coming together at precisely the wrong point and there is real pressure on the books with the economy stumbling along.”

Eric Crampton, chief economist at the NZ Initiative, said there was broad agreement that tax and spending needed to be better aligned.

“If you’re happy with a slow path to balanced books, and are not particularly worried about core Crown spending being on track to remain above 31% of GDP for the foreseeable future, then you might think the books are in decent shape.

Any change to the tax cut policy could be difficult politically.

“But remember that core Crown expenditure in 2019, the year of the first Wellbeing Budget, was 28% of GDP. It was 27.3% of GDP in 2018, when Labour set its first Budget. And it was forecast only to be 28.8% of GDP in 2023, accounting for all of the bits of spending that were part of the Wellbeing Budget.

“Of every $100 of economic activity, Government spending for 2024 is forecast to be $5.40 more than it was in 2019 – again, the first Wellbeing Budget that was to solve all of the country’s problems.

“If you don’t think it’s a problem for core Government spending to be substantially higher than it was even in the first Wellbeing Budget, and to stay very high for a very long time, and for inflation to keep pushing people into higher tax brackets to help balance the books, then you might think the books are ok. If you want to get spending back to where it was before Covid, well, things look a bit different.”

Will the Government need to change its plans?

The Government has already embarked on a programme of cuts but Eckhold said it was “very plausible” that bigger reductions in spending could be required, or the Government would need to find additional revenue from somewhere.

“The message for six months now has been the fiscal situation looks quite parlous if we continue to believe we need to run a surplus within the forecast horizon.”

That could mean significant changes to Government activity, he said. “Not just cutting at the margins.”

Or it could mean questions about the tax cuts proposed. “Whether they continue in the form they were campaigned on… Those tax cuts are not massive, half a per cent of GDP, but that accumulates over a three- or four-year period and adds up to reasonable amount of money.”

He said it would probably be politically unpalatable to delay the tax cuts that were campaigned on but it would provide the space needed to hit a surplus.

“I don’t expect the Government to come out and say it’s going to be OK to run a deficit for five years. That being the case, they can do it by cutting spending or getting more revenue. They’re already cutting spending reasonably aggressively.”

He said how the Government responded would also affect the Reserve Bank’s decision-making.

“There will be a degree of focus from the Reserve Bank on what the Government does in the May Budget. That will determine how quickly the share of Government in aggregate GDP falls. If it doesn’t fall as fast as they currently hope it will tell them that monetary policy will have to do more work to balance the economy and bring down inflation.”

He said it would help the Government if interest rates fell. “If they were able to be more fiscally austere somehow that will give the Reserve Bank more room to reduce interest rates and their funding costs would be lower. There’s a virtuous circle there as well.”

Bagrie said the Government would not want to talk about austerity but if it was to hit its targets and stick to its tax cuts, there would be no escaping it.

“What we’re facing at the moment is the impossible trinity. We want to maintain core government services, throw a bit at infrastructure, at the same time make some pretty big promises regarding fiscal management and put some money in pockets in the form of tax cuts.”

However, Eaqub said now was not the time for austerity.

“The Government should be going on and doing the things that need doing, fixing infrastructure and those sorts of things. There’s a collision between ideological, historical context and international comparison. All are important, I don’t think you can just go ‘it’s terrible or amazing’. I don’t think either of those things are true.”