It is unsurprising that at every turn the Government faces calls to spend more.

On the one hand, there are the unmet needs which have built up under the previous Government's tight fiscal rein. On the other, a stonking fiscal surplus of $5.5 billion or nearly 2 per cent of gross domestic product in the 2017/18 financial year, at a time when the Crown's debt levels are very low by international standards and its cost of borrowing very low by historical standards.

So why doesn't it?


There are several reasons why it should resist this clamour.

One is that while government debt is low by global standards, the same cannot be said for the private sector, especially households.

The most timely data we have on global debt levels is from the Bank for International Settlements. As of March this year, New Zealand's total debt (household, business and government sectors combined) at 202 per cent of GDP was well below the 271 per cent average for advanced economies.

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But private sector debt — at 173 per cent of GDP — was higher than the advanced economy average of 163 per cent. And household debt in particular — at 92 per cent of GDP — was way above advanced economies' average of 73 per cent. Moreover, it has grown by 4 percentage points over the past four years in contrast to a 2 percentage point decline for rich countries as a whole.

New Zealand households have a chronic negative saving rate — spending more than our collective income. There is cost and risk attached to being as reliant as we are on importing the savings of foreigners in order to pay each other ridiculous prices for housing.

A second reason for the Government to go easy on the borrowing is that the (sensible) way in which we fund superannuation and healthcare means the ageing of the population will have an outsized effect on public finances in future.

The International Monetary Fund's latest fiscal monitor, released this month, estimates that by 2030 NZ Superannuation and public health spending between them will cost 3.6 per cent of GDP more than they do now. To calibrate the scale, core Crown expenditure is currently running around 28 per cent of GDP.


The third and most compelling reason for fiscal caution is the risk that the "rainy day" Finance Minister Grant Robertson likes to talk about will prove to be more like Noah's flood than the downpours we are used to.

In that connection, a paper delivered this week by former Reserve Bank governor Graeme Wheeler, to a conference in Washington of government debt managers from around 80 countries, makes sobering reading.

He paints a picture of a global economy marked by high and rising debt levels, slowing growth in potential output (the supply side) and mounting risks of recession, in the face of which central banks have far less scope than they did 10 years ago to cut interest rates, and governments' finances are lying much lower in the water.

Government debt-to-GDP ratios in advanced economies are the highest they have been — apart from a brief spike after World War II — since the 19th century.

Global debt levels are at all-time highs, driven by government debt in the advanced economies and private sector (especially corporate) debt among emerging market economies, notably including China.

Government debt-to-GDP ratios in advanced economies are the highest they have been — apart from a brief spike after World War II — since the 19th century.

One in three advanced economies, Wheeler tells us, have (gross) general government debt above 85 per cent of GDP, which is the IMF's sustainability threshold for advanced economies; in the US it is projected to rise to 117 per cent of GDP by 2023.


Meanwhile, their trend economic growth is slowing as the population ages and labour productivity growth declines.

Long-term consensus growth projections (six to 10 years ahead) for the advanced economies are between half and two-thirds of the pre-GFC trend growth rate, and between a fifth and a half lower for emerging market economies, Wheeler says.

Against that background there is the risk of a "recession triggered by one or more of the following factors: a tightening in monetary conditions as more central banks begin to normalise monetary policy; the impact of the US fiscal stimulus begins to wane; a sharp adjustment occurs in the price of financial assets; a slowdown in the volume of world trade takes place; a sharp and prolonged increase in oil prices is triggered by geopolitical developments in the Middle East; and an increase in business and consumer uncertainty linked to political outcomes (eg Brexit) reduces aggregate demand in key countries."

If the advanced economies face a recession in the next few years, much of the burden for stimulus will fall on fiscal policy, Wheeler says. The scope to cut interest rates is limited as policy rates in several countries remain at or near historic lows. Countries accounting for a quarter of global GDP have policy rates at or below 0.5 per cent, whereas policy cuts in recessions have often been of the order of 5 percentage points.

"In such a situation central banks would rely on additional quantitative easing and governments would face considerable pressure to expand their budget deficits through spending increases and/or tax cuts."

Wheeler is not alone in taking a darker view of the global outlook. The IMF has downgraded its global growth forecast for this year and next year, and a Reuters poll of 500 economists released at the weekend also records a downgraded outlook for 18 of the 44 countries covered.


At the start of the year optimism about a robust global economic outlook was almost unanimous among the survey's respondents.

But lately, concerns are mounting about trade protectionism and the impact of rising interest rates in the United States, particularly for emerging markets which have filled their boots with US dollar-denominated debt.

To Wheeler's list of concerns one might add the prevailing mentality, not least but not only in Washington, of beggar-thy-neighbour, pull up the drawbridge, might is right, multilateralism is a mug's game, that could make concerted international response to a global financial crisis harder to accomplish.