The Government has announced it will ease up on its self-imposed debt target and give itself flexibility to loosen its purse strings from 2021/22.
Delivering a pre-Budget speech on Thursday morning, Finance Minister Grant Robertson said he would aim to keep net Crown debt at between 15% and 25% of gross domestic product (GDP) from 2021/22.
This signals a move away from the approach he adopted in his Budget Responsibility Rules of reducing debt to 20% of GDP within five years of taking office.
The Government has already hit its 20% target, as Ministers have been running “prioritisation exercises” to cut spending that doesn’t align with the Government’s priorities.
Targeting a range rather than a set number looking ahead would enable the Government to be more flexible with its spending.
National’s Finance Spokesperson Amy Adams said the move was not about creating "wriggle-room," but was a "blunt admission" the Government couldn't manage its books properly.
While she said Robertson wanted to "spend up on big wasteful promises," Treasury in its Half Year Economic and Fiscal Update released in December, forecast debt to GDP to rise a little in 2019 before tracking down.
Treasury will provide an update on these forecasts in its Budget Economic and Fiscal Update to be released with the Budget on May 30.
It is worth noting GDP growth has undershot forecasts in recent quarters. On the flipside, capacity constraints have curtailed some government spending.
Credit ratings agencies in April also told interest.co.nz the Government had “ample room” to borrow more before its ratings would be affected.
Kiwibank's chief economist, the OECD and IMF have also been among those who have commented that loosened monetary policy (central banks cutting interest rates) has done a lot to spur economic growth since the 2008 global financial crisis, so in some economies it’s time for fiscal policy (government spending) to do a bit more.
Politics, promises and magic numbers
Robertson said a move to a debt range gives governments more capacity to act in accordance with the country’s circumstances – “circumstances that change over time”.
“It establishes boundaries within which debt is kept to sensible and sustainable levels and where fiscal choices are driven by impact and value,” he said.
“For example, a government may choose to move higher up the debt range to combat the impact of an economic recession, or where there are high value investments that will drive future economic dividends.
“At other times it may be prudent to reduce debt levels to the lower end of the range to provide headroom for future policy responses.”
Robertson said the 15% to 25% range was based on advice from the Treasury and was consistent with the Public Finance Act’s requirement for fiscal prudence.
He acknowledged spending to GDP had averaged at around 30% over the past 20 years.
Adams criticised the target, saying “you can almost guarantee” it would see the Government hike debt to the 25% upper limit.
“This is an admission of defeat from a Finance Minister who has repeatedly used these rules to give himself the appearance of being fiscally responsible,” she said.
“This decision will mean billions of dollars more debt… “Debt isn’t free. It will have to be paid for by higher taxes in the future.”
Adams said she wanted the debt to GDP ratio below the 20% mark, but couldn’t provide a target point nor target range.
While she identified the Provincial Growth Fund, fees-free first year tertiary education, and slushie machines for Corrections staff as wasteful spending, she didn’t say these spending commitments would be reversed if National was in government. Adams didn’t identify other ways of cutting spending, but stressed the importance of spending wisely.
Robertson acknowledged his 20% target had attracted some criticism, but said he’d been “comfortable” with it given the capacity constraints (particularly around construction) facing the economy.
For him, it was a “question of balance”.
“We have made, and will continue to make, significant investments in our future, but we also know that the volatility of the world, be it economically or through natural disasters, biosecurity incursions or unexpected events, is never far away.”
Adams concluded: “It took the last Labour Government two terms to lose its fiscal discipline. This Government has given up in 18 months. This confirms you simply can’t trust Labour with the economy.”