Crisis or control? The competing views on New Zealand’s national debt

Wednesday, 20 May 2026

New Zealand is heading into its next Budget with its debt-to-GDP ratio sitting at a 30-year high of 41.8%, prompting the National-led Government to promise aggressive public sector spending cuts.

Unlike economic giants like the US or Japan, New Zealand's small, peripheral economy relies heavily on looking stable.

Experts argue the raw numbers matter less than what the money is used for, noting a critical difference between borrowing to fund future-focused infrastructure versus borrowing to cover everyday operating deficits.

While fiscal conservatives push for immediate belt-tightening to maintain a crisis buffer, policy analysts counter that New Zealand’s real issue isn't excessive spending, but rather a lack of revenue.

Analysis: The question of New Zealand’s national debt is again in the headlines as we hurtle toward another Budget.

Have we borrowed too much? Have we invested enough in infrastructure? Are we paying down debt fast enough? What does responsible spending actually look like? Do we need to be more austere right now?

The question of how much debt a nation should take on has never had a right answer.

In its early days economics was rooted in moral philosophy, and even today the question of how much debt we should takes on remains contingent on what we think a good society looks like.

The pre-budget speech from Finance Minister Nicola Willis provided a curtain-raiser to her view on the form prudent financial management should take in the current context.

She described New Zealand as a small nation, “already carrying high levels of debt,” heavily exposed to the volatility we’ve seen around the world over the last five years.

“We’re still carrying a deficit from the Covid spend-up, and international credit rating agencies are watching us closely,” said Willis.

“The interest bill on our debt has soared to about $9 billion a year, unemployment has only just started falling, and Kiwis are, fairly, focused on what it will take to make life more affordable in this country.”

The Government has promised to slash public sector spending to improve our financial position.

New Zealand’s debt-to-GDP ratio (the nation’s debt versus its annual economic output) currently sits at 41.8%, the highest level in roughly 30 years.

This is lower than what we saw in the late 1980s and early 1990s, when the ratio hovered between 60% and 70%, but it’s still high enough to encourage belt-tightening by the current Government.

But is this really that bad?

New Zealand’s debt-to-GDP ratio is often compared to the United States (120%), Japan (230%) and Singapore (170%), but caution should be exercised in making such comparisons.

Darren Gibbs, senior economist at Westpac, notes New Zealand can’t really be compared to these countries.

“No one needs to invest in New Zealand,” Gibbs says, pointing out that it’s important for investors to continue viewing this country as a safe and compelling option that’s well managed.

In contrast, says Gibbs, investors will always need exposure to giant economies like the United States or Japan, which gives them greater leeway to take on more debt.

New Zealand, being small and peripheral, has to work much harder to look stable and attractive to international investors.

This is why Willis’ comments on the ratings agencies are so important.

Two major global ratings agencies have downgraded New Zealand’s economic outlook to negative, expressing concern that the country has not been able to reduce debt as quickly as it has in the past.

Gibbs explains that because the government has repeatedly pushed out its target for a fiscal surplus, these agencies are effectively expressing concern that the New Zealand economy is no longer as effective as it once was at fixing financial imbalances.

It’s essentially a credibility issue. Do the ratings agencies trust the New Zealand Government to manage the finances appropriately?

Neither of these agencies has thus far downgraded New Zealand’s rating, but even the threat has been enough to encourage the National-led Government to maintain our reputation as prudent financial operators.

Gibbs says it won’t be the end of the world if we were downgraded, noting there are many affluent countries with lower ratings from the credit agencies than we have.

'If we have a lower rating than we do today, there will be some classes of investors who will not invest in us because they'll only touch triple-A rated paper,” says Gibbs.

“If you decrease the universe of people that want to invest in you, then you'll probably end up having to pay more for your debt because there's less demand for your debt.”

But Gibbs says this wouldn’t have as significant an impact as some suggest.

“It might be a few basis points on a government bond at most,” he says.

“It might mean that the exchange rate could be a little bit weaker than it otherwise would, but it wouldn't be disastrous.”

Good debt versus bad debt

The debate on this issue is often lost in the percentage attached to our debt-to-GDP ratio, but Jeremy Sullivan, investment adviser at Hamilton Hindin Greene, says it’s important to distinguish between good debt and bad debt.

“The key question is not simply whether debt is high or low,” says Sullivan.

“It’s whether the Government is borrowing for productive investment, whether operating spending is under control, and whether debt is expected to stabilise or keep rising.”

If debt is rising because the Crown is running operating deficits, that’s different from borrowing to fund infrastructure that lifts productivity in the future.

This is akin to the difference between using your credit card to buy weekly groceries and taking on debt to pay for your university fees. Both are forms of debt, but one will benefit your future whereas the other will just be a burden.

Sullivan says that New Zealand’s debt levels are not alarming today, but adds it would be imprudent to think this is guaranteed to remain the case.

“We do not need panic, but we do need discipline,” he says.

“The danger is allowing a manageable fiscal position to become structurally harder to fix over the next decade.”

How big should our buffer be?

New Zealand could take on more debt to fund major infrastructure projects today, but much of it comes down to how much risk we’re willing to take as a country.

The Budget Policy Statement forecast debt-to-GDP ratio peaking around 46.9% of GDP in 2027/28 and 2028/29, which puts us close to Treasury’s prudent limit of 50%.

Max Rashbrooke, the research director at policy think tank the Institute for Democratic and Economic Analysis, says Treasury prioritises maintaining a solid buffer to ensure that the country has enough funds available in the event of a crisis.

Under Treasury’s prudent limit of 50%, New Zealand would still have a buffer of approximately 40%, which Rashbrooke describes as the effective cost of two Covids.

Depending on how you look at the world, that buffer might appear too conservative, particularly when you factor in that major shocks generally only boost the debt-to-GDP ratio by around 10%. For context, the combination of the GFC and the Christchurch Earthquake saw our debt level jump from 5% in 2008 to 25% in 2015.

Rashbrooke adds that in discussions on debt we often also forget the other side of the equation: our tax take.

“We have this view that we need to keep the tax take much lower than most of the European countries whose public services we admire,” says Rashbrooke.

“Basically, the problem is not excessive costs. The problem is insufficient revenue.”

While there is growing concern about New Zealand’s rising superannuation and healthcare costs, Rashbrooke counters the panic by referencing Treasury’s long-term fiscal strategy, which explained that if New Zealand simply taxed its citizens at the rate of a standard, middle-of-the-road European country, these future costs would be easily covered.

Something also needs to be said about the way we tax large multinational corporations and the amount of potential revenue that is lost when these companies send their earnings abroad.

Once again, so much of this comes down to your philosophy on what a fair society should look like.

So are we taxed too much? Do we have too much debt? Are we investing enough in infrastructure?

As has always been the case, it depends who you ask.

Tell us what you think of New Zealand’s national debt levels in the comments - too high, too low, or just about right?