- New Zealand’s government is giving itself more flexibility on self-imposed net debt levels.
- It’s not just the size of public debt but what it’s spent on that matters.
- Should the Australian government follow the New Zealand government’s lead?
New Zealand’s government thrust public debt back into the limelight when it announced in May it was giving itself more flexibility on self-imposed net debt levels.
The idea that a government would take on more debt to fund investment was a welcome break from the orthodoxy constraining long-term prosperity on both sides of the Tasman.
The fixation on public debt levels over the past 30 years ignores a point that’s regularly made about private debt – it’s not just the size of the debt but what it’s spent on that matters.
Public debt is neither good nor bad in or of itself. It depends on what governments choose to do with what they have borrowed. Debt is a means to an end. Its merits should be judged on how it supports prosperity, including the wellbeing of future generations.
“Public debt is neither good nor bad in or of itself. It depends on what governments choose to do with what they have borrowed.”
Since the 1980s, public debt has been politically weaponised. Any attempt to raise the level of public debt is attacked as an act of fiscal profligacy and irresponsibility, forcing proponents onto the back foot.
This knee-jerk reaction has constrained the debt programs – and spending – of governments around the world, sometimes needlessly. Left-of-centre governments, often seen to lack the fiscal conservativism of their opponents, in particular have felt obliged to campaign on and implement strict spending and debt controls.
The hard line on debt has resonated with voters because it makes sense from a personal budgeting perspective. But governments are not like households. There are obvious limits but governments, unlike households, can raise taxes or print new money to repay debt. Government solvency is usually not in question.
New Zealand widens its debt target
This fixation with public debt as a percentage of GDP has meant governments have taken their eye off the big picture and perhaps lost focus of the long-term wellbeing of all citizens.
It was a relatively brave move by New Zealand’s government to risk reigniting the public debt debate by announcing in May it was changing its net Crown debt as a percentage of GDP target from 20% of GDP by 2022 to a target range of 15-25%.
A couple of developments will have given it some comfort in that decision. One may be that the public debt dragon has retired to its cave.
Ahead of New Zealand’s Wellbeing Budget in May 2019, Chartered Accountants Australia and New Zealand (CA ANZ) asked New Zealanders if (among other things) government debt was a priority issue for them. Fewer than 10% said yes. Healthcare, housing and poverty were much bigger concerns.
In a further cause for government comfort, Treasury has also recently calculated that a “prudent” debt limit is about 30% of GDP.
Should Australia follow suit?
At the time of the May announcement, Finance Minister Grant Robertson argued that the new flexible debt range gave governments freedom to act according to the country’s changing circumstances.
That’s similar to the argument – albeit for Australia – that CA ANZ made in our Public Debt and Deficits paper: The emphasis on achieving surpluses and eliminating debt makes it harder to progress policies aimed at longer term prosperity and fairness.
Like New Zealand, Australia has low levels of public debt by international standards. When it comes to net debt, the two nations are roughly similar (20% of GDP for New Zealand and 18% for Australia).
The bottom line is that governments must be able to fulfil their financial commitments on an ongoing basis.
However, managing the books carefully and living within our means should not distract our governments from ensuring fiscal policy decisions meet society’s objectives, including long-term prosperity.