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As Treasury reaches out, external panel questions 20% debt target, notes Cullen-era surpluses required for a decade

As Treasury reaches out, external panel questions 20% debt target, notes Cullen-era surpluses required for a decade

By Alex Tarrant

As Treasury taps outside expertise to help it form policy, its assumptions about the government's long-term fiscal position and future costs of an ageing population are being put under the microscope by a panel of external advisors.

And already, 'fresh' ideas are being served up by economists outside the ivory tower at Number One The Terrace, which could lead to a change in the policy stance held by the government's central agency.

Policies like the government's aim to reduce and then stabilise net debt at 20% of GDP have been questioned, with the panel wondering whether this target is still too high, given New Zealand's vulnerability to economic shocks and its high private sector debt.

If so, that could mean bigger surpluses required post-2014/15, or whenever the government gets its books back in the black.

A bigger chunk of those surpluses would need to be put towards debt reduction at the same time the government wants to restart contributions to the Super fund and lessen the squeeze on public services.

Treasury may also be underestimating future female participation rates in the workforce, and net migration flows, while another underestimate could be around future tax revenue from investment income as New Zealand's population aged, the panel said recently. 


Treasury secretary Gabriel Makhlouf said in a speech on Thursday that Treasury staff had been changing the way they engaged with outsiders and "reaching out" to benefit from other public and private sector expertise.

"A very good case in point is the way we’re developing the next statement on the Crown’s long-term fiscal position, which we are required to produce at least every four years," Makhlouf said. 

"These statements provide 40-year plus projections on the Crown's fiscal position, identify challenges that will face future governments, such as those arising from society's ageing population, and provide the government, members of the public and their representatives in Parliament with information on evidence-based options for meeting those challenges," he said.

A short while ago, I spoke to Professor Bob Buckle, who is heading the panel of external advisors questioning and testing Treasury's long-term fiscal assumptions, which are set to be released next year. See the interview in the video above.

The panel is meeting four times to discuss Treasury's assumptions, and will hold a public conference in December on the long-term fiscal challenges facing New Zealand.

Debt target still too high?

In papers published following the panel's first meeting in August, the government's target (also used by the Labour Party during the 2011 election campaign) of reducing net public debt to 20% of GDP, and then sustaining it at this level, was questioned.

While it is outside the scope of Long-Term Fiscal Statements to make policy recommendations about suitable debt levels and fiscal policy adjustments, for modelling purposes Treasury examines alternative scenarios which constrain net government debt to 20% of GDP on average over time while also examining the sensitivity of fiscal projections to lower or higher net debt targets of between zero and 40% of GDP.

"The Treasury proposes to continue to use a 20% net debt target as a proxy for prudent debt levels in its 2013 Statement. It will need to explain why it assesses this to be a realistic and credible anchor over the next 50 years, given the historic propensity for the Crown’s financial position to be adversely affected by various economic and financial shocks, natural disasters, and the history of a relatively high level of private sector debt," the panel said.

"The Panel questioned whether 20% net government debt as a proportion of GDP was a sufficiently low “sustainable debt” target for New Zealand," it said.

"There is no simple rule for how to set such a target, but several issues are relevant. Factors such as the level of indebtedness of the private sector, the strength and composition of the government’s balance sheet, and the denomination and ownership profile of sovereign debt all affect the government’s ability to rely on debt to provide a fiscal buffer to accommodate adverse shocks.

"The financial position of the private sector is particularly important to consider due to the speed with which economic circumstances in the private sector can flow through to the government’s finances. Ireland was cited as an example where, during the Global Financial Crisis, general government net debt rose dramatically from 11% of GDP in 2007 to over 100% in 2012, due in part to the structure of the Irish banking sector and the role the government played in supporting the private banking sector," the panel said.

"The Panel felt that given New Zealand’s high levels of international indebtedness, the concentration of this debt in the private sector, and its propensity to experience large commodity price and other shocks, an average net debt target of lower than 20% across the cycle might be more appropriate."

Cullen-era surpluses needed for 10 yrs

The panel said Treasury’s current projections (which were still preliminary) indicated that to stabilise net Crown debt at 20% of GDP would require future governments to run small budget surpluses on average over time:

Treasury had run some projections that indicated: 

• If fiscal adjustment starts in 2015 (building on the current programme of fiscal consolidation) then governments would need to run budget surpluses equal to 1.9% of GDP a year for a decade to stabilise net debt at 20% of GDP; 

• A delay to this adjustment until 2020 would require average surpluses thereafter of 2.2% of GDP to reach the debt target within a decade; and 

• Delaying adjustment until 2030 would require average annual surpluses thereafter of 2.3% of GDP to reach the debt target within a decade.

"To put these figures in context, during the decade from 1997-2006 when there was strong revenue growth, governments ran average budget surpluses of 2% of GDP. Delaying fiscal adjustment, in addition to requiring a greater degree of eventual fiscal adjustment, also exposes the wider economy to increased vulnerabilities and risks," the panel said.

Ageing population and the tax take

The panel suggested Treasury revisit is assumptions on the effects an ageing population might have on the government's tax take.

"Population ageing might be expected to have an impact on income tax and GST revenue due to the variation in income and consumption over life cycles, and through the impacts of population ageing on labour force participation rates, especially among women," the panel said.

"However, recent Treasury research suggests that while we might expect some compositional changes within the tax base, projections for aggregate income tax and GST revenue taking into account population ageing are not expected to make a material difference from the aggregate level of taxation if, as was assumed in the past, taxation is maintained at some constant ratio of GDP," it said.

"The research suggested that while ageing was likely to reduce aggregate income tax revenue, increased revenue from the projected effects on participation rates could more than offset this."

"It should be noted that these estimates are highly sensitive to changes in the overall rate of change in wages, which is a major determinant of tax revenue growth, along with assumptions around indexation of income tax thresholds relative to wage inflation," the panel said.

Who will be working in the future?

The panel also suggested Treasury might be underestimating future female participation rates in the workforce, as well as future net migration rates.

"The female labour-force participation rate was one area where it was noted that the central projection might be underestimating future changes. The central projection assumes a relatively constant female participation rate across the projection period, reflecting a view that the growth in female participation experienced recently is unlikely to be sustained into the future," the panel said.

"While it was noted that the wide upper- and lower-bounds for the stochastic projections reflected the degree of uncertainty around this projection, it was suggested that the Treasury should test the sensitivity of their fiscal projections to changes in this assumption," it said.

Net migration was another area where it was suggested that the central projections might be too low.

"The level of net migration has fluctuated markedly over the past 40 years and is particularly hard to project. However, it can play a strong role in the level and age-composition of population growth, with net migration contributing roughly half of New Zealand’s population growth between 2001 and 2006," the panel said.

"The Panel wondered whether there were any factors in the coming decades, such as the return of the Kiwi diaspora or a rise in New Zealand’s attractiveness to skilled foreigners, which might raise the level of migration above current projections," it said.

Future changes around Maori and Pacific Islander demographics were also acknowledged as areas that may not be fully captured in the headline population projections.

"A number of factors particularly relevant for Maori and Pacific Island communities were noted as having a greater degree of uncertainty. For example, possible future societal changes affecting the prevalence of smoking could be particularly beneficial to the mortality rates of these communities," the panel said.

"Also, longevity improvements could be particularly beneficial for female labour force participation in these communities where elderly tend to play a greater role in raising children," it said.

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Good points. I would add that we should check for how much of both private and public debt is in foreign currencies; so who carries the risk in the event of a devaluation?

My understanding is that very little of it is; that most of it is hedged in some way. Is that back to today's prices; to whatever is the prevailing value at the time; or somewhere inbetween.

On government expenditure generally including debt servicing; a key score to me is what is the percentage of GDP spent on each main category of spending? And how does that compare to our peers; and to our history? As long as we are not materially higher (and so crowding out the private sector), then the fiscal deficit is not that material; noting that many of our peers are almost certain to either write off or just ignore the debt they hold to themselves through QE. Similarly, we can never run out of NZ dollars as a government.

The current account deficit is far more material (as you suggest), because that is real loss of wealth, and there are no shortcuts to paying it off, either in higher rents or interest rates.

The Treasury seems blindly focussed on the fiscal deficit; which seems to explain a lot.


If you bothered to think, Hughey, the 'debt' is what sinks your rear-view-clinging hypothesis.


The question is whether Treasury know we're into a permanent paradigm-shift, but I doubt that. Too conventionally-trained, and too removed from reality (science).


The bigger question for the rest of us is, given that incomes (in terms of real buying power - ability to purchase bits of the planet) must reduce, should we divest debt now, or wait for it to inflate away? Or will it sink us en route? Or will the system crash - after all, nothing has changes since '07-8.




"There is no simple rule for how to set such a target, but several issues are relevant. Factors such as the level of indebtedness of the private sector, the strength and composition of the government’s balance sheet, and the denomination and ownership profile of sovereign debt all affect the government’s ability to rely on debt to provide a fiscal buffer to accommodate adverse shocks."

The simple rule was: Save as much as you can as a buffer for "rainy days." The peddling of debt management is pure legerdemain. The trick is to keep everyone focused on debt, so one can consume as much as one's little heart desires, whilst others manage their wealth by avoiding debt all together, and some built their wealth on OPD (Other Peoples' Debt). One Mans' Debt is Another Mans' Asset. Or more applicable today yet: The majority's debt is the minority's wealth! Hence, debt management for the masses! Besides, who will pay 'Sovereign Debt' off? Certainly not the sovereigns, but the debt slaves! Hevi Groswaite

Agreed, totally...

"One Mans' Debt is Another Mans' Asset."  I prefer One Mans'  hunger is Another Mans' extra mansion"

Private debt is being used to defer or remove tax...ergo we need to stop that as it loads the PAYE's who already pay the rump of tax and increases systematic risk.





identifying challenges, so OK identify Peak oil 7 years too late and uh what do we do and uh whats the impact.

Bet they wont even mention it despite the evidence of risk and huge impact, otherwise it will look like Haloween but for scary!!!!

Black swan anyone?

LOL, clowns.

Sack them all....



Oh and smoke this guys, lowering top tax rates make no (improved) difference...

"“The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie,” the report said. “However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”…