Coronavirus has upset many people’s plans, but nobody’s more than the New Zealand finance minister’s.

Last December, Grant Robertson was sitting pretty: he’d enjoyed a fiscal surplus of more than NZ$7 billion in the year to June 2019, he was expecting further (although smaller) surpluses as far as the eye could see, and net government debt had dipped below 20% of GDP, which put New Zealand among the least indebted developed economies.

And now? The 2019 surplus has turned into a 2020 deficit of more than NZ$23 billion, ongoing deficits stretch over the horizon, and debt is heading for over 50% of GDP, putting us more in the middle of the international pack.

Should we be worried about our abrupt turnaround from a paragon of fiscal prudence?

In the short run, no.

Why the NZ government debt isn’t a worry

Every government in the world has provided very substantial pushback against the impact of COVID-19, often in the 5% to 10% of GDP area, and rightly so.

That’s exactly what fiscal policy is meant to do – support economic activity through tough times. New Zealand’s version does not look at all disproportionate: this month’s Australian Budget delivered a very similar level of fiscal oomph, for example.

“That’s exactly what fiscal policy is meant to do – support economic activity through tough times.”

Even after all this support, New Zealand’s economy is expected to have shrunk by some 3% in the year to June 2020, and will barely grow (by 0.5%) in the year to June 2021, according to the forecasts in the government’s Pre-Election Economic and Fiscal Update, the PREFU.

And even if you were worried about ongoing deficits and rising debt, you’d be unwise to start rolling back the support before the economy was strong enough to go cold turkey.

The PREFU expects that the unemployment rate will still be 7.6% in June 2022 and 6.6% in June 2023: that’s not the sort of economy where you’d want to be cutting spending and raising taxes.

There’s also the point that our deficits are self-evidently creatures of the pandemic, and will largely go away when it does.

In the year to June 2021, New Zealanders are looking at a fiscal deficit of 10.5% of GDP. Of that, 3.4% reflects the effect of a weak economy on government receipts and expenditures. The rest, 7.3% of GDP (I know, the numbers don’t quite tally, talk to Treasury), consists of COVID-fighting initiatives such as wage subsidies and new infrastructure.

In more normal circumstances, if the economy was in good shape and COVID programs stopped, we’d actually be running a small fiscal surplus.

While that sounds like ‘but for the hole in the hull the Titanic was fine’, the first rule of examining the fiscal books in any country is to try to strip out the cyclical noise and expose the underlying picture.

As of now, it’s OK, but over time it will require tweaking, as the current small underlying surplus, left to itself, will deteriorate to a deficit of some 1.5% of GDP.

You can’t go running underlying deficits indefinitely and it’s interesting that, in their radically different ways, both ACT New Zealand and the Greens have costed their preferred ways of paying our way. (ACT via lower tax and even lower spending, Greens via higher spending financed by new taxes).

Different tonics for the NZ economy

The other issue to tackle is what to do about the accumulated debt. Labour’s plan in the PREFU is to keep spending about the same level of GDP, and let growth in GDP replenish the tax revenues, gradually reducing the deficit and eroding debt as a proportion of a higher GDP.

The National Party would do things somewhat faster: a fiscal surplus from 2028, achieved by spending control, and net debt at 33% of GDP in 2034 when Labour’s trajectory would have it at 48%.

To be honest, there isn’t an economist in the world who knows for sure what a safe level of debt looks like.

“There isn’t an economist in the world who knows for sure what a safe level of debt looks like.”

There’s an argument that with interest rates very low, governments can afford to carry more debt, and more investment projects become viable. But who can be certain that borrowing costs will remain so low? And who knows what crisis down the track might require us to have borrowing headroom, and not already maxed out?

A CA ANZ policy principle rightly says that policies should be fiscally robust: the major parties’ plans to gradually work debt down again aren’t politically exciting, but they look like useful insurance. 

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