The Government has reached its debt target four years early, giving Grant Robertson plenty of wriggle-room to invest, writes Thomas Coughlan

The Government opened its books on Tuesday, and the news was even better than expected. A growing economy and revenue that exceeded expectations saw net debt plunge to just 19.9 percent of GDP at 30 June 2018.

Debt even reduced in nominal terms, dropping $2 billion over the last year to $57.5 billion. Economic data produced for the May Budget had debt increasing over the same period, reaching 20.8 percent of GDP. 

Finance Minister Grant Robertson pledged to reduce debt to 20 percent of GDP by 2021/2022. Having reached his target four years early, he faces stark political choices: open up the books and invest in the economy, or continue to hold out for a rainy day. 

Time to invest 

The data gives Robertson plenty of wriggle room. Robertson attributed the results to the “strong economy”.

Corporate tax revenue was up, owing to profits for both large and small businesses being higher than Treasury forecast in Budget 2018. 

Strong employment data and rising wages also contributed to higher than expected tax revenue. 

On the other side of the ledger, Crown expenses also came in dramatically lower than forecast in the Budget. Crown expenses were 27.9 percent of GDP, 1.4 percent below the forecast and 2.1 percent below the Budget Responsibility Rules’ target of 30 percent.

Treasury cautions that the variance was mainly due to “timing issues” and that delayed spending would reverse out in next years’ accounts – but Government accounts have come in better than forecast for the better part of a year now and there is every chance the trend could continue. 

No fiscal hole, in fact there’s an extra $10 billion

But the main question now hanging over Robertson is not operational expenditure (the money the Government spends day-to-day to run services) but capital investment. 

Robertson noted that his Government had increased capital investment in the last year.

“Net capital investment of $5.9 billion in the year was the highest since 2009 and an increase of $2.2 billion from the previous year,” Robertson said. 

“This included investments in hospitals, schools, and state highways while also reflecting the coalition Government’s move to resume contributions to the NZ super fund,” he said.

But the level of capital investment is still low. $800 million was invested by the Ministry of Education in school property, $500 million by the Ministry of Defence for equipment.

Just $300 million was invested in hospitals, in spite of information from Treasury showing one in five are now in poor or very poor condition.

But Robertson has wriggle room, even within the strict budget responsibility rules to seriously increase investment through borrowing. Forecasts from Treasury’s Budget Economic and Fiscal Update expect GDP to reach $350 billion in 2021/22, meaning net debt could increase to roughly $70 billion by 2021/22 and still come within the Government’s rigid rules. 

This would allow the Government to borrow an additional $12.5 billion over the next four years. 

Robertson said he was committed to “balancing” the need to invest with his desire for maintain fiscal headroom for the event of an international shock. He said Treasury forecasts for the future were either “neutral or to the downside”.

Robertson said there was still “plenty of room to stimulate the economy”.

“Let’s see where we end up at the half-yearly [economic and fiscal update],” he said.

Treasury’s Half-Year Economic and Fiscal Update or HYEFU will be published in December and include the Treasury’s forecasts for the economy. 

A winter spend-up

The Government says has made infrastructure investment a priority, but it has faced challenges from a number of economists and international organisations who argue it should increase investment to plug New Zealand’s gaping infrastructure deficit. 

Newsroom spoke to the big-three ratings agencies earlier in the year. All confirmed the Government could borrow significantly more without harming its credit rating.

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