Pointing fingers, tracking debt levels

Christopher Luxon. Photo: Peter McIntosh
Christopher Luxon. Photo: Peter McIntosh
Prime Minister Christopher Luxon, in his recent State of the Nation speech, and a press conference soon after, described New Zealand’s economy as "fragile", and echoed Finance Minister Nicola Willis’ misleading mantra that the Labour government left the economy in a mess, with recklessly high public debt levels. He claimed that government debt increased from $5 billion in 2017 to a projected $100b.

In fact, as the National-led government’s last financial year end (April 2018), nominal government debt was $81.8b. With growth in the economy, and in the country’s needs, over seven years, plus costs incurred in supporting the country through the Covid pandemic (including business support endorsed even by bodies like the Taxpayers Union), a potential $18b rise in debt would not be unreasonable.

Apart from Covid, much spending by the 2017 and 2020 governments was to deal (partially) with the legacy of three National-led government’s lack of capital and operational investment in infrastructure, the public health system, education, public housing and defence.

Ability to service government debt depends on debt-to-GDP ratio. During previous National-led administrations net government debt reached 48.14% of GDP in 2011, 51.66% in 2012 and slowly declined to 38.66% in 2017. Under Labour it dropped to 32.75% in 2019, rising to 50.99% in 2021 with Covid (still below 2012), and returning to near pre-Covid levels in 2013.

The real experts — the international rating agencies — are relaxed about our economy. Just after the 2023 election Standard & Poor’s (S&P) sovereign ratings director Martin Foo said the country’s AA+ rating, upgraded in 2021, reflected the [Labour] government’s handling of the pandemic, low debt, discipline and economic growth, and there was no reason to change, given that Labour and National had broadly similar fiscal approaches. Official debt had risen recently, but New Zealand still had one of the lowest levels in the world among developed economies.

S&P Global head of government ratings Anthony Walker said the nation’s finances a were not fragile and there was the equivalent of 30% of GDP ($120b) borrowing headroom left before there was any danger of a credit rating downgrade.

Investors agree. Treasury’s $4b 30-year bond issue on February 21 elicited a record $19b worth of bids, yielding 5.09%, just one basis point over the secondary market price of the closest maturity (May 2051) bond.

But the National Party always tries to foster the delusion that Labour taxes and spends profligately, and National’s the party of prudence.

That is rubbish.

Where there is likely to be public debt problems is with local bodies. Repealing Three Waters legislation has put responsibility for water infrastructure back on local bodies, with no government guarantees for debt to fund it. Investors will not be keen, for liquidity and security reasons, to buy local government bonds, except at much higher interest rates, and S&P is about to review downwards the credit ratings of 15 councils. Any fragility in public borrowing will be due to the present, not the last, government.

Independent economist Cameron Bagrie says the state of the nation is not "fragile", but "underperforming".

"Infrastructure, poor across the country, and education, are key indicators of where we’ll be in 20 years ... We’ve got a repair job ahead of ourselves ... you need those social metrics: education, health and infrastructure are critical ingredients towards getting the economy back on track."

What’ is needed is increased borrowing to fund infrastructure (including schools, hospitals, rail, ferries) catch-ups, tax-cuts for the poor and higher taxes for the well-off (Australia has an effective top income tax marginal rate of 47%, plus a capital gains tax) to fund operational costs of public services, such as health, education and defence properly.

The IMF, OECD, and World Bank advise New Zealand to tax capital gains, reduce climate emissions more rapidly and avoid austerity.

Why not listen to the experts?