Treasury believes New Zealand’s government debt levels are manageable, but the issue of debt targets should be revisited once the country is out of the COVID-19 woods.
Speaking to interest.co.nz, Chief Executive and Secretary to The Treasury, Caralee McLiesh, said: “Given the uncertainty in the economy, our view [is] that it is not an appropriate time to be setting new debt targets. Our view is that debt levels are within prudent levels and that debt levels are manageable overall.
“We think that it would be appropriate to revisit the question of debt targets once the economy stabilises; once we’re certain we’re closer to full employment levels. At that point there will be choices for government as to how they wish to manage debt.”
Asked whether McLiesh believed net core Crown debt at 30% of Gross Domestic Product (GDP) was a prudent upper limit longer term - as her predecessor Gabriel Makhlouf said as recently as 2019, McLiesh said: “I think there’s no one single optimal number.
“Treasury’s previous work was about a framework for understanding prudent levels of debt. We’re still operating within that framework.”
The Public Finance Act 1989 sets out the framework that governs New Zealand’s approach to fiscal strategy.
Net core Crown debt fell below Finance Minister Grant Robertson’s 20% target pre-COVID. As at January, it sat at 31.3%. Treasury expects it to peak at 52.6% in 2023.
McLiesh said, “The sorts of things that matter include the sustainability of debt servicing payments - and we know now with interest rates low, and expected to remain low, that servicing payments are within acceptable bounds.
“We also look at market access - so the ability to access debt. And we have a strong investor base, and debt levels for New Zealand are quite favourable compared to other countries.
“And then importantly, we look at intergenerational welfare. So really. The question is, the trade-off between the benefits of additional debt now, versus the cost of debt for future generations.
“In a time of global pandemic, where there’s a possibility of severe loss of lives, but also the possibility of severe economic scarring, our view [is] that the increase in debt is appropriate and still remains within prudent levels.”
McLiesh didn’t know off the top of her head how much of the $52 billion allocated towards the COVID-19 response (of a $62 billion pot made available for the response) had been spent. The Auditor General earlier this year estimated $18 billion, with much of this funding being for the wage subsidy.
Options available as to how govt debt is repaid
As for who bears the burden of repaying the debt, McLiesh said this was a decision for government to make.
“There are choices in terms of increasing revenue. There are choices in terms of managing expenses - reprioritising expenses so that the pressure on expense can be managed at lower levels, and also strategies around growth - driving productivity,” she said.
She said the question of who bears the cost of repaying this debt is separate to the question of how the debt is structured.
Asked whether Treasury would consider issuing a 100-year bond to push the cost of repaying the debt out to the future, all the while inflating much of it away, McLiesh acknowledged this would reduce refinancing risk.
However it would likely come at a higher cost to the Crown, as investors would need to be paid a premium to take account of the risks associated with such a long-dated bond.
McLiesh made the point: “Issuing a 100-year bond is broadly equivalent to issuing a 10-year bond and rolling it over 10 times.”
In deciding how to structure debt, she said Treasury would need to consider investor interest, the impact on investor diversity and how developed markets for that particular debt instrument were.
Asked whether some of the issues could be worked around by the Reserve Bank (RBNZ) buying the 100-year bond directly from Treasury, McLiesh said: “We don’t see a need for money financing at this point…
“Monetary financing does have the potential to erode the institutional arrangements - the independence of monetary policy and the independence of inflation targeting. And also, the possibility of eroding fiscal discipline as well.”
Note, the bond-buying the RBNZ is currently doing through its Large-Scale Asset Purchase programme is through the secondary market. It is also being done with the purpose of boosting inflation and employment in line with the RBNZ’s monetary policy mandate. It isn’t being done to finance government expenditure.
See part 1 of the interview with McLiesh here.