Treasury: New agency may be needed to scrutinise ratcheting government debt

Thursday, 10 April 2025

Finance Minister Nicola Willis has clashed with the Treasury over the desirability of a new agency to scrutinise government debt.

The country’s existing institutions, including the Treasury, may not be strong enough to prevent the ratcheting-up of government debt to unsustainable levels, Treasury Secretary Iain Rennie warned.

At a seminar announcing consultations on a draft report on the long-term fiscal challenges facing the country, Rennie said it could make sense to create a new organisation to “scrutinise and report on the sustainability of fiscal policy”.

Willis slammed the idea.

“My message back to Treasury has been ‘get stronger’. This is your job. It is your responsibility, and I back you to do it,” she told The Post.

Rennie noted that at 42.4% of GDP, core Crown debt was already “not too far off” the 50% marker that the Treasury had advised was the “maximum prudent level of debt in relatively normal times”.

The Treasury has projected government debt will rise to 70% of GDP by about 2040, based on current polices and demographic trends, which include the ageing of the population.

The 50% limit is designed to ensure the Government would retain sufficient headroom to deal with a crisis, such as a major natural disaster, without the risk of having to default on its debts.

Independent authorities have been set up in several other countries to fulfil the role the Treasury was suggesting, Rennie noted.

These include the Office for Budget Responsibility in the UK.

“The benefits of an independent fiscal institution producing economic and fiscal forecasts or undertaking long-term fiscal sustainability analysis may be more limited in New Zealand than some other countries, given the Treasury already produces and publishes such forecasts independently of the Government,” Rennie said.

“However, there may be merit in establishing such an institution tasked with providing even more public scrutiny of the Government's fiscal policy than the Treasury is currently charged with,” he said.

“The bigger point here is that given the pressures that we've seen on fiscal policy over the medium and long term, we need to ask the question about whether institutions are strong enough to lean against the pressures.”

Willis gave that short shrift, saying the Treasury had “an extraordinary level of independence” in its forecasting function when compared with other similar institutions around the world and it should have the courage of its convictions.

“What I have read into some of their statements in their Long Term Insights briefing today is that they struggled during the Labour years to have their views listened to and that they have formed a view that a more independent institution, not responsible to a minister, would be better placed,” she said.

“I think that's the wrong approach. Instead of building another bureaucracy, we should ask the Treasury to step up.”

The Treasury had not been “as blunt as they could have been”, about “reckless” debt accumulated by the previous government, she said.

Willis clarified she still favoured a new “policy costing unit“ to provide independent advice on the financial implications of parties’ policies ahead of the next election.

The exchanges take place six weeks ahead of the Budget, when all eyes will be on the Government’s ability to chart a course to lower debt and stick within its spending envelope while avoiding substantial sacrifices in public services.

Rennie noted there was a tendency in many counties to loosen fiscal policies to deal with crises and shocks, but they could be harder to tighten to pay back debt in an upturn.

“This can lead to government debt levels ratcheting upwards over time, and New Zealand is no exception,” he said.

Periods of economic stability might become fewer and further between, Rennie also suggested.

“While it may have seemed during the post-cold war ‘great moderation’ that stability had broken out, we've been reminded that economic turbulence is much more the norm.

“So far, this century has seen the ‘.com bubble’, the GFC, the Covid pandemic, Russia's invasion of Ukraine, the Canterbury and Kaikoura earthquakes, droughts in early 2023 and North Island weather events, and it's very easy to see similar shocks continuing into the future.

“And as we all know, geopolitical tensions are growing.”

Rennie was speaking on the day US President Donald Trump flip-flopped again on tariffs - pausing most tariffs he planned to impose for 90 days but increasing the tariffs on China to 125%.

The Treasury secretary said New Zealand could reduce the risk of letting debt get out of hand by being prepared “at least in terms of having broad processes and systems in place” to deal with shocks.

“Being prepared allows faster responses, more effective targeting and better fiscal management, including better ‘value for money’.

“A shared understanding of which tools might be used and the different impacts on the wider economy” should also help set expectations and help the Reserve Bank in its monetary policy-decision making, he said.

The draft Long Term Impacts statement, which the Treasury hopes to finalise by the end of June, suggested “lump sum cash payments” might be the best way for the Government to provide financial assistance in a crisis.

That was because such payments could be “timely, temporary and targeted”.

Other forms of assistance, such as wage subsidies, additional or higher benefits, soft business loans or guarantees and extra spending on infrastructure failed to tick more than two of those boxes at best, it suggested.

Willis said on Tuesday that the Government intended to beat the Treasury’s December fiscal forecast by delivering a Budget surplus in the year ending June 2028, if ACC’s deficit was excluded.

While apparently intended to emphasise the Government’s prudence, that has created a divergence between the Government’s narrative on future debt levels and the Treasury’s independent official forecasts.

Responding to the question of whether current times could be regarded as “normal” for the purpose of the 50% core Crown debt limit, given current tariff turmoil, Rennie said the term was relative.

“Maybe we're are in a ‘new normal’. So ask us tomorrow,” he joked.