National’s $80 billion debt hole?
Analysis: The Government is claiming that National will have to drastically cut public services to meet its strict debt reduction target. Is that accurate? Marc Daalder reports
Is this déjà vu? New Zealand is just weeks out from an election. The Government has accused the Opposition of not properly costing its policies, leaving a gaping hole that will have to be filled with higher-than-expected debt or slashed expenditure. The Opposition is sticking to its guns and economists are split.
In a seeming redux of the 2017 fiscal hole saga, Minister of Finance Grant Robertson says National's pledge to drastically reduce the Government's debt either can't be met or would require massive cuts to public services. The debt hole, if you will.
Except, this time, the alleged hole is about seven times wider - Stuff's Thomas Coughlan reported that National would have to cut $80 billion of spending over the next decade to reach its target.
Paul Goldsmith, National's spokesperson for finance, insists that the target is achievable under a National government that spends responsibly and implements policies that kickstart economic growth.
"It is complete nonsense [to say there is a debt hole] and they know it is," he told Newsroom.
Is he right? Is Robertson right? Or is it a matter of perspective?
The debt target
Let's start with the debt target in question. As it stands, the Government has borrowed billions of dollars to fund the wage subsidy and jobs programmes out of Budget 2020, in an effort to buffer New Zealand against the global economic crash and kickstart the recovery.
Labour campaigned on reducing debt to below 20 percent of GDP and successfully did so in 2018, when debt fell to 19.9 percent of GDP. The next year, the country's debt slumped further, to 19.2 percent - the lowest since 2010.
That gave the Government ample room to borrow to face off the Covid-19 crisis. Right now, the Government's debt is over 30 percent of GDP and that figure is expected to rise to 44 percent by June of next year. It will continue surging until it peaks in 2023 and 2024 at 53.6 percent, before slowly declining. By the end of the 2030/31 fiscal year, net core Crown debt is expected to be 46.2 percent of GDP, or $234.01 billion.
National wants to cut that figure by more than a third. In comments to finance experts in July, Goldsmith seemed to indicate that the party would commit to reducing net core Crown debt to 30 percent of GDP by the end of the 2030/31 fiscal year - $82 billion below Treasury's projections. For context, the Government's entire spending for the 2018/19 fiscal year was $87 billion.
Before proceeding, it's important to note that Goldsmith qualified his statements at the time, saying the target was not for exactly 2030.
"Our sense is we need to demonstrate a path back below 30 percent, in the first instance, within a decade, give or take a few years," he said.
Since then, Goldsmith has sought to further clarify his comments, telling Newsroom that the 30 percent figure was a "goal" or "a sense of direction", not a hard target to be achieved at all costs.
Nonetheless, Goldsmith says the goal - debt around 30 percent of GDP within the next 10 or so years - is achievable.
The figure is a fraction, meaning it can be reached through flexing the numerator, the denominator, or both.
On the bottom half is GDP. The more the economy grows over the next decade, the smaller the Crown's debt will become in comparison. If GDP spikes to $780 billion instead of the anticipated $506 billion, then government spending could go on as planned by Treasury's projections.
Of course, a jump of that size won't happen, but Goldsmith believes he could bring growth up by a percentage point each year in the latter half of the decade. As it stands, the Treasury figures indicate growth will rise to 8.59 percent in the 2021/22 fiscal year and fall quickly to around 2.5 percent by the middle of the decade. For the next five years, it declines slowly until it reaches 2.02 percent in the 2030/31 fiscal year in question.
"I wouldn't get out of bed in the morning if I thought we couldn't, under a National government, return to 3 percent growth like we have had in the past," Goldsmith said.
However, Brad Olsen, a senior economist at Infometrics, says he thinks Treasury's projections are optimistic. Improving on them would be even more optimistic.
"We already view some of Treasury's nearer term growth figures as a little bit optimistic. So I would just caution that growing the economy at a faster clip than even what we are expecting to be optimistic would be a challenge. I'm not saying it's unachievable - and again that highlights the variability in what assumptions you choose - but it would be a challenge," he said.
Goldsmith is sticking to his guns.
"Like I say, I wouldn't get out of bed if I didn't think we could do better. We can - and that requires a focus on productivity growth and investment and all those things, but we should back ourselves to be able to do that," he said.
He's backed up by Cameron Bagrie, a former chief economist for ANZ and now head of his own economics consultancy firm, Bagrie Economics.
"Good policy will turn the dial up on economic growth, bad policy will turn the dial down," he said. In other words, pumping GDP is doable.
Shamubeel Eaqub, an economist at Sense Partners, thinks that governments generally can't move the needle on growth at all. These patterns are too deeply engrained in the way advanced economies operate, he says, for the policies of an individual government to make a difference.
"That they're responsible for the growing economy is complete and utter bullshit, right? The average rate of economic growth in New Zealand has been trending lower over the past decades. And that's true of pretty much all advanced economies," he said.
"To say somehow that I've got this magic thing that's going to create more economic growth, well, why didn't you do it in the last 40 years?"
Even if the decline in growth stops at 3 percent in the year ending 2025 and stays there through the 2030/31 fiscal year, that will only drive up that year's GDP by $22 billion and push the debt-to-GDP ratio down to 44.3 percent.
The rest will have to come from the numerator - spending more to pay down debt and correspondingly less on government services.
Some of that could come from, Goldsmith suggests, freezing superannuation payments for a decade ($21 billion) or ending the Government's fees-free programme ($4 billion).
"There are different ways you could go about doing it, none of which involve slashing and burning core government spending. One way of doing it, and I'm not saying we would do it, would be to say if you were to temporarily suspend the Super fund contributions for the entire 10 years, that takes out $20 billion," he said.
He also sees room to cut spending in the projected operating allowances over the next decade.
Those average out at $2.3 billion per year and Goldsmith figures he can trim them down to $2 billion.
"The 10-year fiscal plan that the Government has allows for an average of roughly around $2.3 billion every year. If you reduce that to $2 billion a year, that makes a big difference over the period," he said.
Bagrie went further, saying that operating allowances could be cut to $1.5 or $1.6 billion a year through the end of the 2030/31 fiscal year. It would mean tightening our belts, but it would be doable, he said.
Nonetheless, even those cuts wouldn't fill the debt hole. Goldsmith's would save $17.6 billion while Bagrie's would save $45 billion. Goldsmith said he figured he could keep the operating allowances at $2 billion for 11 years instead of just a decade, which would save a total of $21 billion by June 2032.
Bagrie took a further look at the projected capital expenditures for the Government over the 2024-2030 period, which Treasury figured would be about $3 billion a year. That's low, even by National government standards, he said.
"In order to hit those fiscal numbers, you've got to be incredibly tight in regard to capital spend. And the capital expenditure assumption that's wound into those [Treasury] fiscal forecasts is tighter than what we saw under the [last] National government."
Should it be done? Can it?
On the face of it, it looks difficult for National to fill the debt hole. Even if they manage to lift growth to 3 percent, freeze super payments, axe fees-free and limit annual operating allowance increases to $1.5 billion and spend the savings on paying down debt, Goldsmith's balance sheet will still have a debt-to-GDP ratio of around 31.1 percent.
"I just can't see that being achievable at all," Bagrie said.
"I can see a tighter operating expenditure assumption being achievable. I cannot see a $3 billion net capital spend assumption being stuck to for the next 10 years. Based on that, I'm not optimistic at all that we can get net government debt back down below 40 percent of GDP [by the end of the decade]."
Eaqub concurred, saying it couldn't be done without slashing billions from core services.
"If you're not going to raise taxes, what other choice do you have [to fill the hole]?" he said.
"We know from the experience of the post-GFC that austerity at all costs is not a good strategy."
Regardless of the outcome, Olsen said it was good that the issue was being discussed. The Government is taking on an immense amount of debt and how we pay that down should be a matter of debate, he said. Even if an arbitrary target isn't achievable, reducing debt is still worthwhile.
"One of the more important elements to this conversation is that there is a focus, at least, from National around that debt repayment. I think that is important that we have that. It has opened the conversation," he said.
For his part, Eaqub says debt isn't a threat to New Zealand like it may have been in past decades. With interest rates low, the cost of servicing the debt is hardly intimidating.
"While you've got the Reserve Bank pretty much standing in the market, guaranteeing you low interest rates, it's not like we have that gun to the head [to repay debt] like we did back then."
Bagrie disagreed, saying the issue wasn't about the cost of the debt but about positioning New Zealand to respond to a future crisis.
"One of the arguments for 30 percent being sort of in the right zone is that, if we go through another shock - whether it be of the earthquake variety or a Covid derivative - you probably need a buffer of 20 percent of GDP [free for borrowing]. And once you start getting up in excess of 50, a few red flags are going to start to flash," he said.
In other words, if we don't want to exceed net debt as 50 percent of GDP and we need to have about 20 percent of GDP free for borrowing to head off a future crisis, then 30 percent is a good goal to strive for - even if not in the next decade.
That's Goldsmith's point too.
"Purely and simply, there will be another crisis. It is important that New Zealand has a track to get on top of the debt and it's not acceptable just to let it stay at relatively high levels."
So, is there a debt hole? Probably, yes.
How big is it? That depends entirely on how rosy your view of the future economy is.
Either way, it's probably worth thinking about how we might pay down some of the debt we've taken on to respond to Covid-19, even if we don't adopt quite as ambitious a "direction of travel" as National proposes.
After all, you never know when the next pandemic might be lurking right around the corner.
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