Architect of Public Finance Act says parties should drop focus on net debt

Finance Minister Grant Robertson delivers the 2020 Budget in May. Net debt targets have been at the centre of Labour's fiscal strategy before Covid-19. Photo / Pool

The accountant credited with reforms that led to the Public Finance Act says New Zealand politicians should shift their focus away from net debt, or at least measure it in a way which is "real".

This afternoon Treasury will publish the pre election fiscal update, the latest forecasts for how it expects the economy to perform over the next four years.

A large part of the focus is likely to fall on the path of core Crown net debt as a percentage of gross domestic product; both Labour and National have previously put net debt targets at the centre of fiscal strategies.

In its first term Labour has had two targets for net debt (below 20 per cent then below 25 per cent), although it dropped the targets when Covid-19 hit.

National's finance spokesman Paul Goldsmith has made a slightly vague commitment to attempting to get net debt down to 30 per cent of GDP within a decade.

Professor Ian Ball said that while a focus on net debt is not wrong, the measure ignores what is happening to the majority of the assets and large parts of the liabilities on the Government's balance sheet.

Ball was chief financial controller at the New Zealand Treasury until 1994. He was lauded by the International Federation of Accountants for the design and implementation of New Zealand's financial management reform process. This led to the passing of the Public Finance Act in 1989.

"Net debt ignores a huge chunk of assets that are not financial assets and it ignores a lot of liabilities that are not debt," Ball told the Herald.

Not only does the measure exclude liabilities such as insurance liabilities of ACC, net debt does not include some financial assets, such as the assets held by the New Zealand Superannuation Fund.

"Net debt is not in itself an inappropriate thing to look at, it's just not what is really core to a Government's fiscal position. That is much more comprehensively captured in net worth than net debt."

Net worth is the total assets of the Government less the total liabilities. Also expressed as a percentage of GDP, it is forecast to fall from around 47 per cent in 2019 to just over 10 per cent in 2024.

Ball said by focusing on the entire Government balance sheet would encourage better utilisation of public assets other than financial ones.

But the greater risk was that a focus on debt could encourage bad policy decisions. The privatisation of public assets, even if sold below their real value, would cut debt.

"To me, the bigger risk is the use of net core Crown debt as a sole focus, is it can encourage behaviours that are more transferal than real," Ball said, pointing to the fact the Government has allowed Kianga Ora (previously Housing New Zealand) borrow money on its own balance sheet, debt which does not appear in the net debt measure.

"Do you solve your net debt problem by having more of your borrowing through Crown entities?," Ball said. "Clearly that's as much a liability of the Government as it would be if it was sovereign issue debt."

National, meanwhile, has described stopping contributions to the New Zealand Superannuation Fund as a "low hanging fruit" to help it achieve its debt target. Last week it announced plans for a new infrastructure bank which would see debt for infrastructure projects excluded from the net debt measure.

Ball said net debt is not mentioned in the Public Finance Act, nor was it a defined accounting term "which means that the Government can basically make it what it chooses and in a sense it has by excluding the financial assets of the super fund".

The International Monetary Fund gives New Zealand a much lower net debt figure (16.4 per cent) than the Treasury does, because the IMF includes financial assets such as the Super Fund's.

"If it were my call, I would say that any Crown entity debt should be regarded as part of net debt," Ball said.

"It's not an internationally defined concept. It's idiosyncratic in the way that Governments have used it, and if we're going to use an idiosyncratic measure, let's make it as real a measure of the Government's debt as we can."

Ball suspected the Government's focus on net debt in large part because net worth included large movements which were outside of its control.

The measure typically used to measure the deficit or surplus - operating balance excluding gains and losses (Obegal) - excluded major shifts in the value of assets which in the 2020 Budget were forecast to be more than $10 billion.

"It's much harder for a politician to manage those losses," Ball said, with Governments of both parties preferring Obegal to the overall operating balance "but the operating balance is the better measure of your total performance".

Trying to avoid being responsible for the overall operating balance - which led to changes in net worth "is like saying they don't want to be accountable for the structure of the Government's balance sheet, and yet, there's nobody else" that taxpayers or voters could hold responsible.