Labour’s leadership is sending mixed messages about how closely it will follow the fiscal rules the party established during its last term in office

Labour leader Chris Hipkins says he won’t pre-commit to keeping core net debt below Treasury’s recommended 50% threshold until Labour forms a fiscal plan for the 2026 election.

This comes after his finance spokesperson, Barbara Edmonds, told The Post that Labour would observe the cap, intended to maintain a fiscal buffer for a crisis, unless Treasury advised otherwise.

The previous Labour Government set a non-binding net debt ceiling at 30% of gross domestic product, equal to 50% of net core Crown debt, in 2022 based on Treasury advice.

Edmonds said she would continue with the cap and also aim to return the Crown accounts to surplus before the end of the forecast period. That target moves out by one year with each budget.

But Hipkins walked back her comments on Tuesday, telling reporters he wasn’t ready to commit to the target while the Coalition still had two budgets to deliver.

“I think us being asked to crystal-ball-gaze that far into the future, when we don't know what the government will decide between now and then, is a bit unreasonable,” he told reporters.

“We haven't formulated our fiscal plan for the next election. But insofar as the previous positions that we've had, I was perfectly comfortable [with them].” 

In a rare National Party-branded press release, Finance Minister Nicola Willis said Labour’s position on fiscal policy was “becoming less clear by the day”.

The party had opposed all the savings measures and committed to reinstating locally made school lunches, half-price public transport, and pay equity laws, she said. It also promised to spend more on health and education but hasn’t said which taxes are on the table to fund it.

 “Just last week in his pre-budget speech, Hipkins attacked those who argue for a more sensible approach to debt and said we need a ‘more mature conversation about debt.’

“He could start with a conversation with his own caucus about what on earth Labour’s position is,” Willis said.

New Zealand’s net core Crown debt is expected to reach $192.8 billion, or 45.1% of GDP, in the fiscal year ending June 2025 and remain at that level through to the end of the forecast period in 2029.

Government debt is dominated by bonds issued by New Zealand Debt Management (NZDM), a Treasury unit. Interest.co.nz spoke with NZDM Director Kim Martin in this episode of the Of Interest podcast about how NZDM operates.

Let the debate begin

Economist Cameron Bagrie told Stuff that high levels of debt were unavoidable, and net core Crown debt sitting at around 40% to 45% would become “the new normal” as the Government fills in the infrastructure deficit.

Dennis Wesselbaum, an associate professor of economics at the University of Otago, said New Zealand government debt had increased during the pandemic but remained lower than in many other countries.

“Lowering debt and creating fiscal space are legitimate goals. But they should be viewed as a means to an end, not an end in itself,” he wrote, in April. 

Research shows that debt-to-GDP ratios above roughly 80% tend to be associated with lower growth, while below that level, higher debt can sometimes be linked to stronger growth.

“It is clear that deficits are neither always bad for economic growth, nor that they always lead to inflation, when combined with a credible fiscal strategy to return to surpluses in the future,” he wrote. 

Treasury and other institutions argue that New Zealand needs room on the balance sheet to absorb economic shocks, such as the 2011 Christchurch earthquakes and the 2020 Covid-19 pandemic.

Fitch Ratings cited National and Labour’s “similar” and “prudent” fiscal plans as factors in its decision to confirm New Zealand’s AA+ credit rating ahead of the 2023 election.

“A commitment to return to fiscal surplus and putting the ratio of government debt/GDP on a downward trajectory was an important factor in our affirmation of the sovereign rating,” it said. 

Miles Workman, a senior economist at ANZ, said the Government would need to keep delivering tight budgets if it wants to correct what he called Labour’s “debt-funded spending spree”.

“Structural deficits are likely to be forecast for years to come, with flip-a-coin odds that the debt to GDP ratio will be a decent clip above its pre-pandemic level when the next big global crisis or natural disaster comes along.”

Rising health and superannuation costs from an ageing population, the need to address historic underinvestment in infrastructure, and rising debt-servicing costs are all “major challenges” that will be hard to overcome without broadening the tax base, he said.