Why gross debt could explode a further $100b before election – Matthew Hooton

THE FACTS

• Successive Governments have borrowed heavily, worsening the country’s debt trajectory
• By next year’s election, Treasury forecasts gross debt will pass $239b – over $100b more than three years earlier.
• Net debt will have increased $63b through the Luxon Government’s first term to a record $199b.

Under fire when defending embattled Prime Minister Christopher Luxon at the Herald’s Mood of Boardroom breakfast on Wednesday, Finance Minister Nicola Willis quipped I have been writing the same column for three years. She’s right, except it’s more like 17 years.

The repetition reflects no action having been taken over those 17 years to tackle the fiscal and thus economic catastrophe Treasury has warned about since 2006.

Since 2008, each of the Key-English, Ardern-Hipkins and now Luxon Governments has done little if anything to reverse the country’s disastrous trajectory, as Willis acknowledged in publicly criticising Sir John Key.

Instead, our leaders have governed by slogan, not just during election campaigns but when bashing out their ever-less ambitious and increasingly meaningless policy platforms.

Rather than taking Treasury’s warnings seriously, they have enjoyed office while mainly accelerating New Zealand along the path to penury and third-tier living standards.

Don’t believe me? Within hours of the minister’s quip, Treasury again confirmed exactly what it and I have been saying for 17 years.

Treasury’s short-term economic forecasts often prove unreliable as events buffet the economy. Yet projections in its Long-Term Fiscal Statements have proven remarkably accurate and stable since 2006.

Changes have mostly been deteriorations, as successive governments borrowed and spent vastly more than officials imagined.

In 2006, net debt was 6% of GDP. That followed two decades of hard work by Sir Roger Douglas and Ruth Richardson to control spending, and Sir William Birch, Winston Peters and Sir Michael Cullen then achieving and maintaining surpluses to pay the debt back.

But Treasury warned the ageing population meant governments needed to finish paying back the debt and then start saving to prepare for a fiscal blowout around 2030 when the Baby Boomers retired and needed ever-more expensive medical attention in their final years.

Even in 2006, Treasury warned that without major policy change, borrowing would resume. Net debt, it projected, would pass 25% of GDP around 2030, 50% in 2040, and balloon above 100% of GDP in the early 2050s.

If only things had turned out merely that bad!

All along, Treasury argued that the sooner politicians got on to the job, the easier the ride for people in the present and future.

Yet, even in 2006, Treasury doubted politicians would be up for it.

Campaigning in 2008, Key declared New Zealand didn’t have a debt problem, it had a growth problem. Faced with the Global Financial Crisis and then the Christchurch earthquakes, he allowed Sir Bill English to blow out the operating deficit to 8.9% of GDP in 2011, a record of fiscal vandalism in my view that not even Labour’s Grant Robertson would beat in the middle of Covid, reaching “only” 7.3% of GDP in 2020.

National's former Finance Minister Sir Bill English blew out the operating deficit to 8.9% of GDP in 2011. Photo / Mark Mitchell

English never ran a cash surplus over eight Budgets, with gross debt blowing out from $31 billion in 2008 to $87b when Steven Joyce took over.

Under English, net debt had leapt from $10b to $59b, before falling in Joyce’s single Budget and Robertson’s first two – the only three fiscally responsible Budgets since Cullen’s.

Robertson then blew it, borrowing $52b cash in four years compared with the $56b English did in eight, taking gross debt to $136b by 2023. On net debt, Robertson was even worse, taking it from $58b in 2019 to $155b by 2023.

Despite Willis’ heroic efforts to control spending, Luxon’s arguably reckless election promises and other extra spending have meant she has failed to repay any of English and Robertson’s debt. To the contrary, by June 2025, gross debt under Willis had exploded by a further $74b compared with June 2023. Over the same two years, net debt soared $40b more.

By next year’s election, Treasury forecasts gross debt will pass $239b – over $100b more than three years earlier. Net debt will have increased $63b through the Luxon Government’s first term to a record $199b.

The combined profligacy of the Key-English, Ardern-Hipkins and Luxon Governments means that by 2026, we’ll enter the last straight towards 2030 with net debt of around $200b, or 44% of GDP, when – had there been no policy changes after 2006 – Treasury thought it would be only around $84b or 19% of GDP.

Former Finance Minister Grant Robertson's actions resulted in Labour-led Governments borrowing $52b cash in four years. Photo / Mark Mitchell

Compared with 2021’s long-term projections, Wednesday’s numbers reveal net debt didn’t go quite as high under Robertson as Treasury then feared. But Treasury also thought net debt would start declining after the 2023 election. It has instead soared, and there will never again be a cash or surplus operating balance before gains and losses (Obegal).

Treasury now projects net debt will be higher under Willis’ policies from 2026 than it feared in 2021 under Robertson’s and will stay on a higher track until the 2040s.

The only good news is that Treasury projects net debt will pass 100% of GDP under Willis’ policies in 2050, two years later than the 2048 doomsday projected under Robertson’s in 2021. Under Willis’ policies, according to Treasury predictions, net debt will pass 200% of GDP in 2065 compared with 2062 as projected under the previous Finance Minister. Terrific!

Partisans determined to defend one or more of the Key-English, Ardern-Hipkins or Luxon Governments point to various shocks since 2006 that prompted the extra borrowing, starting with the GFC and the Christchurch earthquakes, and including other earthquakes, floods, wars, terrorist attacks, Covid, US tariffs and financial troubles.

Treasury reports that Governments in that time have used such events as excuses to borrow about 10% of GDP more each decade. In contrast, Birch, Peters and Cullen resolved to keep the books in surplus even after the 1997 Asian Economic Crisis and 9/11 terrorist attacks and succeeded in doing so.

In fact, probably only Covid truly justified significant borrowing, albeit nothing like what Robertson charged up. All the other events used by the Key-English, Ardern-Hipkins and Luxon Governments to justify massive borrowing could have been handled the way Birch, Peters and Cullen coped with the crises they faced.

On Wednesday, Treasury boss Iain Rennie again urged the Government to get moving on addressing the post-2030 catastrophe, but his pleas are likely to prove as futile as those of his predecessors since 2006.

Despite having lost the confidence of the general public, as measured by polling, and of the business community, according to Mood of the Boardroom, Luxon insists defiantly that he’s not resigning. Nor does he plan personnel changes, declaring Willis the best Finance Minister that New Zealand will ever have. Nor does he signal any significant policy change.

Like all his predecessors since 2008, Luxon plans to carry on full speed towards the abyss.

That means I’ll be writing this column again next year, and the year after, and beyond – right until a Prime Minister finally resolves to take the necessary actions to avoid the disaster everyone in the political class has known about for at least the past 17 years.

Catch up on the debates that dominated the week by signing up to our Opinion newsletter – a weekly round-up of our best commentary.