New fiscal rules for new normal

Finance Minister, Grant Robertson has unveiled new fiscal rules he says will ensure New Zealand maintains a world-leading Government financial position.

“The Government was able to use our strong fiscal position to support New Zealanders through COVID with programmes like the Wage Subsidy Scheme,” said Mr Robertson.

“As we move to a new normal post the peak of COVID, it is the right time to resume a set of fiscal rules to carefully manage costs while planning for the future.”

“Just as the previous National Government ran six annual deficits and increased debt following the Global Financial Crisis and Canterbury Earthquakes, we have done the same to protect New Zealanders from the effects of COVID-19.

“Add in the impact of the war in Ukraine, and the ongoing supply chain disruption as a result of continued COVID responses around the world, we are faced with running five years of deficits compared to National’s six. The first surplus since the 2018/19 year is expected in 2024/25.”

The Minister said that once surplus is reached, the new fiscal rule will see the government committed to maintaining a small surplus in the range of zero to two percent of GDP over time. The range is based on advice from the Treasury. Surpluses will be measured using the operating balance before gains and losses (OBEGAL).

“That means as we enter the new-normal, the spending required to operate government services won’t be adding to Government debt. There will be allowances for significant shocks, and it is an average percentage so as to allow additional investment in a particular year if required,” he said.

“The surplus target will also be the primary rule that controls our spending decisions and will require a careful and balanced approach.

New debt measure

“Over a number of decades, the Treasury has published a suite of debt indicators and depending on circumstances the Government has focused on one of these indicators to formulate its fiscal strategy. The main headline measure has been net core Crown debt. Another one has been net core Crown debt including the assets of the New Zealand Superannuation Fund.

“The Treasury has now recommended that New Zealand starts using a headline measure closer to the international norm, that is more reflective of the real state of our fiscal position and so that we can accurately compare ourselves against others. The new measure includes a wide range of government assets (like the Super Fund and advances) and liabilities (including debt held by other Crown agencies like Kainga Ora).

“The new measure gives a headline net debt figure about 20 percentage points lower than the current one, but is more internationally comparable.

“I will ensure that the Budget documents continue to publish the old measure alongside the new measure for transparency and the ability to make historical comparisons for the time being,” Mr Robertson said.

The introduction of a debt cap

Based on advice from the Treasury, a net debt ceiling for the Government will ensure New Zealand maintains some of the lowest Government debt in the world, Mr Robertson said.

Under the old measure of net debt, the Treasury has recommended the ceiling be 50% of GDP.

“When we translate that to the new measure, so we can better compare it to other countries, that cap is 30% of GDP. It is a limit rather than a target, and again is flexible enough to allow a buffer against short-term shocks, while providing greater room for productive investment.”

The interaction of the two fiscal rules means that the additional debt cannot be used for day-to-day spending as that is limited by the surplus rule. This leaves the debt ceiling to guide capital investments needed in infrastructure to keep our economy moving.

“While this rule still gives us a comparably low level of net debt, it will provide fiscal space to fund high quality capital investments that improve productivity and wellbeing. As the Infrastructure Commission made clear yesterday, New Zealand has a gaping infrastructure deficit. In the past our debt targets have led to under investment in critical infrastructure. Our new approach means we be able to invest in long term, transformational projects that will support productivity and give certainty and security to businesses and households.

“In light of current inflationary pressures and capacity constraints we will not be increasing the planned multiyear capital allowance in Budget 2022. This will also give time to ensure that we are making future investments in the most effective and efficient way possible, in line with the Infrastructure Strategy,” Minister Robertson said.

The IMF’s most recent net debt forecasts:

Source: International Monetary Fund, World Economic Outlook Database, April 2022