Nicola Willis has warned of a "debt ceiling", a claim that needs closer scrutiny, Toby Moore writes.
Nicola Willis has warned of a "debt ceiling", a claim that needs closer scrutiny, Toby Moore writes.
Opinion by Toby Moore
Toby Moore is a member of the Labour Party’s policy council. He previously was a senior adviser to former Finance Minister Grant Robertson
THREE KEY FACTS
Finance Minister Nicola Willis warns of debt issues, citing Covid-related borrowing and potential future challenges.
Critics argue the debt ceiling concerns are overstated, risking underinvestment in essential public services.
Treasury estimates that by 2061, healthcare spending will account for 10.6% of GDP, up from 6.9% in 2021.
As the Government comes under pressure for the cruel and abrupt cuts to pay equity – redirecting billions of dollars that was otherwise expected to boost the pay cheques of historically underpaid women in New Zealand – it has shown an increasing tendency towards fiscal alarmism.
Inrecent weeks, Finance Minister Nicola Willis has escalated the rhetoric around the Government’s fiscal position, presumably in part to make otherwise unpopular cuts appear necessary. In her pre-Budget speech, Willis focused on Covid-related debt and warned about the ongoing cost of servicing it.
The minister went further last Tuesday, stating that “New Zealand is now approaching its debt ceiling” and that if a significant shock occurred requiring further borrowing, it would be “very challenging to pay that money back, and we could enter an interest rate and debt spiral”.
Such concerns have often been used to justify otherwise unconscionable cuts to public services. But claims about New Zealand’s “debt ceiling” deserve closer scrutiny.
More debt typically means higher interest costs, but there is a notable divergence between the debt taken on following Covid-19 and the actual costs of servicing it. Net core Crown debt rose to similar levels to the mid-1990s, a period in which New Zealand was paying in excess of 4% of GDP in finance costs.
Current core Crown finance costs are around 2% of GDP, up from less than 1% in 2021.
According to data from the Half-Year Economic and Fiscal Update, core Crown finance costs are currently around 2% of GDP, up from less than 1% in 2021. Even more strikingly, in real terms (i.e., adjusted for inflation), the economic burden of debt servicing has actually been negative since the start of the Covid-19 period. Interest rates have since risen, but real finance costs remain just slightly above zero over the forecast period.
More troubling is the minister’s claim that current debt levels could make it difficult for New Zealand to respond to future shocks – a claim that appears less credible once one examines how the sustainability of debt levels has been understood.
It is generally sound fiscal policy to fund day-to-day spending from ongoing revenue, while borrowing to invest in long-term assets that benefit future generations. The idea of a debt ceiling was meant to enable more capital investment – and avoid situations where a fixation on a particular target for debt led to underinvestment in infrastructure.
The previous Labour Government’s adoption of a 50% debt ceiling in 2022 was based on Treasury advice, which estimated the levels of debt the Government’s books could recover from in the event of a major fiscal shock. (I was an adviser to the previous Minister of Finance at the time, although I did not contribute directly to this work.)
That Treasury modelling included extremely conservative assumptions – even by the standards of a generally conservative institution. The 50% debt ceiling is the outcome of an estimated maximum sustainable debt level of 90% of GDP, with a 40% of GDP buffer applied in the event of an extraordinarily severe shock. To put that in context: a 40% GDP buffer is equivalent to experiencing two simultaneous Covid-19-scale crises – or more than 23 Cyclone Gabrielles.
New Zealand’s economy has consistently grown faster than interest rates, challenging traditional debt and GDP projections.
The modelling also assumed a world in which interest rates exceed GDP growth by three percentage points. In reality, since the early 2010s, the long-term interest rate on New Zealand bonds has generally been lower than the economy’s growth rate. Under such conditions, debt becomes more sustainable over time because GDP (the denominator in debt-to-GDP) grows faster than the debt itself.
That dynamic has shifted slightly, but current conditions remain far from Treasury’s conservative assumptions – and we haven’t had this sort of interest rate differential prevailing since the mid-1990s. The current Government has shifted to targeting a band between 20-40% of GDP for public debt. Implicitly, this incorporates even more conservative assumptions.
New Zealand does face genuine fiscal pressures in the years ahead, but they are not the ones the Government appears inclined to confront. Treasury estimates that by 2061, healthcare spending will account for 10.6% of GDP, up from 6.9% in 2021. Meeting these future needs will almost certainly require a larger public sector and the revenue to support it.
But funding alone is not enough. We also need trained professionals to deliver those services. Simply throwing billions at the health system without having the skilled workforce to meet that demand is likely to lead to little improvement in outcomes at a much higher cost. Seen through this lens, current cost-cutting measures in the health system risk worsening the very fiscal pressures they purport to address.
Without skilled workers, health funding risks becoming an expensive illusion. Photo / Michael Craig
Not employing graduate nurses, or cutting large numbers of IT roles within Te Whatu Ora, might lead to short-term savings. But we are going to need those skilled workers – and more – in the years to come. The system doesn’t account for the future costs of trying to meet demand for healthcare when these workers have since left for overseas opportunities. This can only be described as a funhouse-mirror version of fiscal responsibility.
It is sadly ironic that, in erecting barriers to further pay equity claims, the Government is undermining precisely those workforces – often female-dominated – that will be most essential in managing the future fiscal pressures on our public services.
