Market Commentary

03 May 2022 |

Government not Comparing Apples with Apples Under new Debt Ceiling Criteria

Finance Minister Grant Robertson announces debt ceiling - NZ Herald 3 May 2022



But this new debt target comes with a catch: Treasury will now measure New Zealand's net debt by taking into account a wider range of Crown assets like the NZ Super Fund, and liabilities like the debt held by Kainga Ora.  Overall, this has the effect of reporting a lower net debt metric than currently, however Treasury will still continue to publish the current measurement, so that historical comparisons can be made.


This is not the first time New Zealand has changed the way it calculates and publishes its debt levels. A change was made in 2009, which switched to the old net debt measure. As of the end of February, New Zealand's net core Crown debt stood at 35 per cent of GDP, or about $125 billion under the current measurement.  Under the new measurement, net debt is about 20 per cent of GDP.  Robertson said the recommendation had come from the Treasury, and would make New Zealand's debt metric more internationally comparable. Under the old system, the new debt ceiling would work out to be 50 per cent of GDP.


Robertson took a swipe at the previous Government which had decided to roll out debt reduction targets, which aimed to reduce debt to a certain level by a certain date. Robertson's first debt target did this too: aiming to reduce net core Crown debt to 20 per cent of GDP by 2021/22.  Robertson said it marked a "shift in position for Treasury to recommend such a change", to a ceiling, rather than a point in time target.


"They have noted that a low point target has been set well below a fiscally sustainable level.


"These targets can lead to decisions to not fund critical infrastructure in a timely manner. It is timely to move away from that."


Using IMF comparators, New Zealand's net debt as a percentage of GDP of 20 per cent would compare with rates of 37.5 per cent in Australia, and 76.1 per cent in the UK.


Robertson made the announcement at a pre-Budget speech in Wellington.  He said the Government would not be increasing the amount of money it spent on capital projects, in light of inflationary pressures.


"In light of current inflationary pressures and capacity constraints we will not be increasing the planned multi-year capital allowance in Budget 2022. This will give time to ensure that we are making future investments in the most effective and efficient way possible, in line with the Infrastructure Strategy".


Robertson is also changing the way the Government targets surpluses. He said that once the Government had reached surplus, it would target a surplus of 0-2 per cent of GDP over time.  "The range is based on advice from the Treasury and is the same as the forecast ahead of the 2017 election under the previous Government's spending plans for the coming years."  


Robertson said the "surplus rule" would be "the primary rule that controls our spending decisions and require value for money".


It would mean "current spending is paid for from current revenues. It means the current generation is paying for its own consumption, taking pressure off inflation, and putting the country in a better position to invest in infrastructure for future generations".


Treasury will publish new economic and fiscal forecasts at the Budget.


Robertson admitted these would show a worsening fiscal position in part. The books were meant to return to an OBEGAL surplus in 2024/25. This is one year later than was forecast in December, when the Treasury published its most recent forecasts.


Robertson put this down to deteriorating global conditions.

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