Inside Economics: How much Government debt is too much? ... plus oil prices plummet

The Beehive and Parliament Building. Photo / Mark Mitchell

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

How much Government debt is too much?

Q: Hi Liam.

In a recent NZ Herald article from a left-leaning columnist, the following data was tabled:

As of 2024, New Zealand’s government debt-to-GDP ratio is approximately 47.2%.

This ratio is lower than that of several countries.

Notable examples include Japan, approximately 242%​, Singapore, around 158%​, Italy, approximately 113%​, United States, around 113%​, France, approximately 97%, Canada, around 95%, United Kingdom, approximately 92%.

This raises two questions for me:

1. It seems that many successful economies use a FAR higher debt ratio than ours, yet both Nicola Willis and the Opposition maintain we need to keep ours down in case of a major disaster (don’t ALL countries have major disasters?).

Surely it implies that those countries are investing in the very growth we so desperately seek?

2. If Governments can borrow more cheaply than others, how does it make sense to use PPPs?

With thanks and kind regards,

Allan M

A: Thanks Allan. Those numbers are from a recent Herald op-ed column by Dennis Wesselbaum – an associate professor at the University of Otago Department of Economics.

I don’t think he’d necessarily describe himself as left-leaning; he was pretty outspoken in taking the previous Labour Government to task for its post-Covid spending.

But it is fair to say that in this column, he is pushing back against the use of “fiscal austerity” to balance the Government’s books, especially at a time when the economy is already under pressure.

He argues that the Government should focus on boosting productivity and economic growth. That means investing in the economy, which means borrowing more (or repaying debt more slowly).

That’s a more Keynesian approach than we’re hearing from commentators on the right, who argue that New Zealand’s debt position is so serious that big Budget cuts are required.

Wesselbaum argues that “the idea that New Zealand’s debt-to-GDP ratio requires immediate and drastic austerity-like measures is not supported by the evidence”.

I won’t get too deep into that Budget debate now, having just written about it in my Sunday column: Are Kiwis about to be hit by an austerity Budget?

In that column, I tiptoe through the arguments for and against austerity and conclude that there are good points on both sides and I wouldn’t want to be the Finance Minister right now.

The debate about how hard the Government should be cutting the Budget – if at all – is likely to snowball as we head into the big day on May 22.

But let’s look at the points you raise about national debt.

New Zealand does have a relatively low level of government debt to GDP compared to other developed nations, many of which could be described as more economically successful.

It is important to acknowledge that New Zealand has a broader problem with private debt that makes it harder to run a very large Crown debt.

According to Reserve Bank and Treasury figures, in the year to May 31, 2024, New Zealand hit a total of $827 billion in debt.

That includes all private and public debt and it is about 200% of GDP.

About $316b of that is mortgage debt, which we mostly owe to Australian banks.

The interest we pay on that drains out of the country in bank profits and helps keep our current account in deficit.

International credit rating agencies technically focus on Crown debt when they decide on a nation’s lending risk.

But they also assess our ability to keep paying the debt.

So issues like our level of private debt and the size of our current account deficit are relevant and curb the ability of our Government to borrow as much as it might otherwise.

One reason that some countries, like Japan, can get away with such high levels of Crown debt is that they own a lot of it internally.

In other words, the Japanese citizens have very high levels of savings, which offset the debt, and much of those savings is actually held in Japanese government bonds.

Trust in Government

Your second question also raises a valid point. Technically, the Government can raise debt more cheaply than private companies. If we partner with private companies to build infrastructure, they’ll also need to pay a profit.

That means New Zealanders will eventually end up paying more for the access, either through taxes or user-pays charges.

I think the argument for Public Private Partnerships (PPPs) really hangs on the lack of trust in the Government’s ability to deliver big infrastructure projects efficiently.

If the Government spent all the money it borrowed well, on projects that boost New Zealand’s economic performance, then it would make sense for it to keep doing that.

New Zealand would be more productive, the economy would be more dynamic and tax revenue would rise, making it easier for the Government to repay debt.

But advocates for lower government spending just don’t believe the state has a good track record of delivering on big projects. They argue that involving private companies brings more discipline and financial incentive to deliver projects on time.

Ultimately, there is a political divide around government debt levels that doesn’t look likely to be solved anytime soon.

Another day, another downgrade

S&P Global Ratings has released its new economic outlook after the US tariffs announcements and the subsequent fallout.

What the S&P economists describe as “a seismic shift” in US trade policy has “roiled markets” and knocked 0.3 percentage points off the global outlook for 2025 and 2026.

US GDP growth falls by about 60 basis points (bps) over 2025-2026, taking it to just 1.5% this year.

China sees growth drop by 0.7 percentage points in 2025-2026, while Japan and India see a reduction of 0.2-0.4 percentage points.

More open Asia-Pacific economies (such as Malaysia, Vietnam, Thailand and Singapore) see the biggest decline in GDP growth, falling by 0.5-1.0 percentage points per year.

Eurozone GDP growth is about 0.2 percentage points lower over the next two years, with Germany taking the biggest hit among the major economies.

New Zealand, as this column has pointed out before, isn’t immune to the global slowdown.

Our annual GDP growth is expected to be just 1.3% in 2025. That’s a slight downgrade from what S&P was picking in March – 1.5%.

But it is a significant downgrade from its expectations last November, when it was picking 2.2% growth this year.

The trend is not good.

The S&P report notes that tariff actions appear to have settled for now (although it was released before this week’s film industry bombshell).

“Nonetheless, the resulting level of US tariffs has not been seen in over a century,” it says.

S&P economists calculate that the April 2 actions and the subsequent fallout raised the US effective tariff rate to about 24%.

They have “surpassed the level of Smoot-Hawley tariffs reached in the late 1920s, widely considered to be a contributing factor to the Great Depression”.

Effective US tariffs are approaching the peak reached under the McKinley administration in the late 19th century, the report says.

US President Donald Trump. Photo / Getty Images

It concludes that the economic fallout from the tariff shock has been limited “to drops in confidence indices and declines in nominal variables such as financial asset prices”.

The tariffs had yet to affect the real economy other than some advance buying of imports to beat the tariff deadlines.

S&P suggests that this may be starting to change as goods shipments from China have now begun to decline.

Several variables could lower growth, the report said.

“Uncertainty could lower or pause intended investment, as would margin compression due to companies absorbing some of the costs of the tariffs.

“Uncertainty could also pause discretionary consumption as households worry about employment prospects.”

Higher import prices would also lower US purchasing power and crimp demand.

Lower shipments to the US from exporting countries would hurt their income and demand.

More directly, lower real wages from tariff-related inflation could crimp spending, as would higher unemployment or fears about it.

S&P offers up a note of caution about its latest revisions, saying “we are in uncharted territory”.

“Large-scale changes in tariffs have potentially non-linear effects on our forecasts.”

I think that means that if Donald Trump swings dramatically one way or the other (which happens) then everything could change.

S&P also warns that estimates are based on “relatively small changes in tariffs and not the large changes implemented in recent months”.

“Escalation to a full-fledged trade war across an increasing number of economies, including reciprocal tariff hikes and an extension to tariffs on services, would exacerbate the factors contributing to these risks.”

We won’t have any real certainty about any of that until the 90-day pause on tariffs expires in early July.

Oil prices plummet

We did get some economic good news, of a sort, this week.

On Monday, oil prices dipped to the lowest they’ve been since the start of 2021.

Brent Crude – the benchmark for local petrol pricing – fell to US$58.91 a barrel and is off about 6% since its most recent peak last Thursday.

Oil prices on Monday dipped to the lowest they’ve been since the start of 2021. Photo / Bloomberg Creative

But it’s down almost 30% from where it was this time last year.

It was trading back.

The latest slump comes as Opec+ has decided to increase output, despite global demand falling as uncertainty about trade dampens growth.

“On Saturday, eight countries that belong to the oil cartel known as Opec+ said they would add about 411,000 barrels of oil a day in June,” the New York Times reported.

The move followed a similar step by the group to increase oil production at its April meeting.

Obviously, one of the big reasons for the price slump – lower global growth – is not a good thing.

But lower petrol prices will put downward pressure on inflation.

Local consumer petrol pricing site Gaspy shows the average price for 91 octane fuel around the country is now $2.52 – down 6.5% in the past four weeks.

If inflation stays subdued, it will make it easier for the Reserve Bank to cut rates lower and give the economy some stimulus, which it increasingly looks like it needs.

In arrears

Interest rates have already come down a fair way. But more will be needed to get some momentum back in the economy.

The Official Cash Rate (OCR) has fallen 200bps since August last year.

Fixed mortgage rates have dropped from above 7% to below 5%.

But that has yet to turn around a rising trend of mortgage holders falling behind in payments.

Figures from Centrix’s latest credit indicator report show home loan arrears exceeded seasonal expectations in March, with 24,000 accounts reported as past due, up 700 from the previous month.

Mortgage arrears were 7% higher when compared with March last year.

The percentage of mortgage accounts past due has risen from 1.39% in August to an eight-year high of 1.58% in March 2025.

Meanwhile, Reserve Bank (RBNZ) data shows banks’ non-performing housing loans rose a further $61 million between February and March to $2.412b.

Non-performing housing loans are up $647m since March last year, from $1.765b.

The percentage of non-performing housing loans is now 0.7%, the highest it’s been since April 2013 – but remains below highs of 1.2% after the Global Financial Crisis.

The RBNZ will release its latest financial stability report, breaking down where it sees areas of risk in the nation’s debt profile, later this morning.

We’ll also get a new official unemployment rate at 10.45am today, with most economists picking it to rise to a decade-high of 5.3%.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.

To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.