The Government will miss its 20 percent debt target by point six of a percent of GDP if NZIER’s forecast of slower economic growth is accurate, but economists are unworried.
Slightly slower economic growth and lower-than-expected tax revenue will see the Government fail to meet its self-imposed debt target by around $2 billion, predicts NZIER.
The debt target is one of the Budget responsibility rules which the Labour and Green parties signed up to in 2017 and which the Government has sworn to adhere to.
The rules commit the Government to reducing debt as a share of GDP to just 20 percent by 2021/22. NZIER’s latest round of quarterly projections shows the debt-to-GDP ratio will be 20.6 percent in 2022, representing $67 billion of debt.
That is also higher than Treasury’s forecast delivered in May’s budget, which projected the ratio to fall to 19.1 percent by 2021/22.
This is a result of projected GDP growth being revised downwards, meaning the GDP share of the ratio is smaller than it would otherwise have been, combined with a lower than expected tax take, also a result of slowing growth.
National leader Simon Bridges said the report showed the Government was not spending taxpayers’ money wisely.
“The Government has been spending up large and hoping the next rainy day doesn’t happen under its watch – but its own anti-growth policies are putting a handbrake on the economy and causing debt forecasts to rise,” Bridges said.
Finance Minister Grant Robertson said the projections of around 3 percent growth over the coming years were in line with projections from Treasury and the Reserve Bank.
“Our focus is on transforming the economy to make it more productive sustainable, and inclusive,” he said.
There was a pre-election scuffle over former-Finance Minister Steven Joyce’s claim there was an $11.7 billion fiscal hole in Labour’s budget.
The claim was roundly discredited, but National argues $6 billion in off-balance sheet borrowing and $2 billion in extra crown debt shows Labour’s numbers are less sound than they were claimed to be before the election.
Independent Economist Cameron Bagrie said he didn’t like to use the term “fiscal hole” to describe the number.
“Using the term because net debt is going to be 20.6 percent of GDP as opposed to 19.1 percent is ridiculous,” he said.
Bagrie believed the Government’s debt record was still strong.
“The numbers with regard to debt look absolutely world class,” he said.
This position is backed up by the three major rating agencies, which have all confirmed to Newsroom the Government could borrow significantly more as a share of GDP without sounding warning bells.
One, Standard & Poors, told Newsroom the Government could push its debt target out to 30 percent of GDP – equating to roughly $35 billion in additional borrowing – before it looked at revising its credit rating.
‘Don’t sweat it’
Bagrie said the Government should accept the growth figure was weaker than originally flagged, but it should not worry about hitting its debt target.
“Just relax. Stop making it a fixed target,” he said.
But the Government has doubled down on its commitment to meeting the Budget responsibility rules. Prime Minister Jacinda Ardern told an audience of business leaders this week the rules were not a “nice to have” but “a firm guide as to how we want to manage the economy”.
“Some people have called for us to relax our borrowing rules or simply spend more,” Ardern said.
“We won’t. The rules are an important part of ensuring long term fiscal sustainability,” she said.
NZIER’s Principal Economist Christina Leung, who compiled the indicators, told Newsroom the Government could still hit its debt target by rearranging its priorities.
“The Government can decide to have an even lower surplus and put more of it towards repaying debt so that it meets its 20 percent target by 2022,” she said.
NZIER was forecasting a $6 billion surplus that meant the Government could “comfortably” reach its 20 percent target by 2021/22 if it decided to divert the surplus into paying down debt.
But this would come at the expense of spending in other areas, particularly infrastructure.
This would be politically awkward for the Government at a time when it has made a commitment to plug the yawning infrastructure deficit.
Slowing GDP growth to blame
Leung said the revision to the debt figure was a result of softening GDP growth, meaning the debt appears larger as percentage.
The most recent statement of Government accounts show current net debt to be 20.1 percent of GDP, equating to $57.5 billion – and ahead of the target of reducing net debt to 22.9 percent by the end of the 2018/19 financial year.
The Government projects the figure will rise slightly as it spends more in the near term, before dropping again to hit the target in 2021/22. NZIER projects the end of this financial year will see net debt hit 22.1 percent of GDP, still ahead of the target, before tracking down to 20.6 percent in 2021/22.
This excludes the Government’s borrowing off the core balance sheet, which could be as much as 2.2 percent ($6 billion) according to Treasury’s Pre-Budget Economic and Fiscal Update.