Breaking: Robertson sets new debt rules
Finance Minister sets new fiscal rules for budget surpluses and net debt, including running regular surpluses of 0-2% of GDP on average; new net debt ceiling of 30% of GDP; new definition of net debt
TLDR: Finance Minister Grant Robertson has announced a new set of budget and debt rules for the Government to be applied from Budget 2022 on May 19.
The new rules will force Government to run Budget surpluses of 0-2% of GDP on average over time, and to have a new net debt ceiling at around 30% of GDP, although a new definition of debt being used means the Government is currently 10 percentage points below that level and that measure of debt is forecast to fall to 16.4% over the next five years.
That new 30% net debt limit, which now includes assets such as the NZ Super Fund and debt from Kainga Ora and other Crown agencies, translates into 50% under the old net debt limit definition. That limit has been around 20% for the last 20-30 years, formally and informally. So the new limit is effectively 30 percentage points higher than previous limits, but the Government is choosing not to use about 15 percentage points of it over the next five years.
To that end, Robertson announced the Budget will include a freeze on the current capital spending allowance plans, which will see the new net debt measure fall to 16.4% of GDP by 2027.
Essentially, the Government has chosen to freeze its infrastructure growth plans to keep interest rates low, despite saying there is an infrastructure deficit of over $100b.
In my view, it is choosing today’s older asset owners over tomorrow’s young renters.
Robertson said the new surplus target and the new net debt limit would give fiscal headroom to invest in infrastructure to try to fill an infrastructure gap estimated in a report by Sense Partners for Te Waihanga-The Infrastructure Commission at $104b now, with a further $106b in 30 years time. Sense Partners estimated in the report that more than $1t would have to be spent over the next 30 years to ‘build our way’ to solve the current and expected deficits. Robertson said yesterday in a speech to a Te Waihanga conference that Aotearoa-NZ could not afford to build its way out of the deficit.
However, Robertson decided not to use that fiscal room in the Budget due for delivery in 16 days.
“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 also give time to ensure that we are making future investments in the most effective and efficient way possible.” Grant Robertson in a speech at a Rabobank NZ event in Wellington.
He made the announcements in a pre-Budget speech this morning in Wellington, which I’m attending. I’ll update this article with more detail, reaction and a podcast with my questions and answers for Robertson at a news conference expected after the speech.
Here is the current forecast table from the IMF of New Zealand’s net debt forecast using the new definitions, which ally with the definitions of net debt used in these other countries. Robertson said the Budget’s figures would not differ much from the IMF’s forecasts.
Here’s the full release from Robertson:
Finance Minister Grant Robertson has unveiled new fiscal rules to ensure New Zealand continues to maintain a world-leading Government financial position.
“The Government was able to use our strong fiscal position to support New Zealanders through COVID with programmes like the Wage Subsidy Scheme. As we move to a new normal post the peak of COVID, it is the right time to resume a set of fiscal rules to carefully manage costs while planning for the future,” Grant Robertson said.
“Just as the previous National Government ran six annual deficits and increased debt following the Global Financial Crisis and Canterbury Earthquakes, we have done the same to protect New Zealanders from the effects of COVID-19.
“Add in the impact of the war in Ukraine, and the ongoing supply chain disruption as a result of continued COVID responses around the world, we are faced with running five years of deficits compared to National’s six. The first surplus since the 2018/19 year is expected in 2024/25.
“Once we reach surplus, the new fiscal rule will see the government committed to maintaining a small surplus in the range of zero to two percent of GDP over time. The range is based on advice from the Treasury. Surpluses will be measured using the operating balance before gains and losses (OBEGAL).
“That means as we enter the new-normal, the spending required to operate government services won’t be adding to Government debt. There will be allowances for significant shocks, and it is an average percentage so as to allow additional investment in a particular year if required.
“The surplus target will also be the primary rule that controls our spending decisions and will require a careful and balanced approach.
New debt measure
“Over a number of decades, the Treasury has published a suite of debt indicators and depending on circumstances the Government has focused on one of these indicators to formulate its fiscal strategy. The main headline measure has been net core Crown debt. Another one has been net core Crown debt including the assets of the New Zealand Superannuation Fund.
“The Treasury has now recommended that New Zealand starts using a headline measure closer to the international norm, that is more reflective of the real state of our fiscal position and so that we can accurately compare ourselves against others. The new measure includes a wide range of government assets (like the Super Fund and advances) and liabilities (including debt held by other Crown agencies like Kainga Ora).
“The new measure gives a headline net debt figure about 20 percentage points lower than the current one, but is more internationally comparable.
“I will ensure that the Budget documents continue to publish the old measure alongside the new measure for transparency and the ability to make historical comparisons for the time being,” Grant Robertson said.
The introduction of a debt cap
“Based on advice from the Treasury, the other aspect of our new fiscal rules will be a net debt ceiling for the Government that will ensure New Zealand maintains some of the lowest Government debt in the world,” Grant Robertson said.
“Under the old measure of net debt, the Treasury has recommended the ceiling be 50 percent of GDP. When we translate that to the new measure, so we can better compare it to other countries, that cap is 30 percent of GDP. It is a limit rather than a target, and again is flexible enough to allow a buffer against short-term shocks, while providing greater room for productive investment.”
The interaction of the two fiscal rules means that the additional debt cannot be used for day-to-day spending as that is limited by the surplus rule. This leaves the debt ceiling to guide capital investments needed in infrastructure to keep our economy moving.
“While this rule still gives us a comparably low level of net debt, it will provide fiscal space to fund high quality capital investments that improve productivity and wellbeing. As the Infrastructure Commission made clear yesterday, New Zealand has a gaping infrastructure deficit. In the past our debt targets have led to under investment in critical infrastructure. Our new approach means we be able to invest in long term, transformational projects that will support productivity and give certainty and security to businesses and households.
“In light of current inflationary pressures and capacity constraints we will not be increasing the planned multiyear capital allowance in Budget 2022. This will also give time to ensure that we are making future investments in the most effective and efficient way possible, in line with the Infrastructure Strategy,” Grant Robertson said.
I will update this article with more analysis and reaction later today.
This feels like one step forward, and two steps backwards, or a pre election fiscal responsibility marketing spin, perhaps a kernel of reality in the capacity restraint narrative though
Kainga Ora and NZ Super are added into the calculation of government debt which is a 'good thing' as it hopefully stops all these off-balance sheet efforts to play with the numbers to produce a desired political answer.
However what about debts that don't exist (yet) but are potential because of what might be called a gov't guarantee. Air New Zealand, Three Waters and bank bailouts are three that come to mind.