New Zealand's debt legacy

02:43, Mar 18 2014
Bryce Wilkinson
Dr Bryce Wilkinson, Senior Fellow at The New Zealand Initiative.

Fiscal surpluses are in sight, export prices are extraordinarily high relative to import prices, national income growth prospects look brighter than for many years, and this is a general election year.  

This sets the stage for unsustainable increases in government spending - or for tax cuts or some combination of the two.

But not in Budget 2014, at least not materially.  

When National won the 2008 general election it faced fiscal deficits for the foreseeable future.  

This year will be the sixth in a row in which the government annual budget has reflected the Prime Minister and Minister of Finance's commendable determination to restore fiscal surpluses.  

These gentlemen are not for turning on the goal of achieving a fiscal surplus in the year ended June 2015.


This week, trading on the Victoria University of Wellington's iPredict platform puts the probability of achieving that goal at 94 per cent.

The expected surplus will end six successive years of fiscal deficits, starting with the year ended June 2009.  But the effects of those deficits will endure.

One legacy is greater ongoing public debt.  

The government's 2013 budget projected that net core Crown public debt in June 2015 will be $68 billion, up from a low point of $10b in June 2008.   

That $58b increase represents about $33,000 per New Zealand household.

Future ministers of finance are saddled with higher ongoing interest costs and future taxpayers are saddled with higher taxes to cover those costs.

So what caused these enduring fiscal deficits and what lessons might be drawn?

A key lesson is the desirability of finding a way to check the tendency of all governments to increase spending just because the money is there to spend.  

That is what happened in New Zealand between the 2003 and 2009 government budgets.

In the year ended June 2004, core Crown operating spending was about $35,800 per household in fiscal year 2013 dollars, yet the government still had a fiscal surplus of 3.8 per cent of GDP.  

By the year ended June 2009, the government had lifted spending per household by 21 per cent to $43,400, in the same dollars, and there was a fiscal deficit of 2.1 per cent of GDP.  

Electioneering spending enticements, such as interest-free student loans, Kiwisaver subsidies and working for families, were part of this spending transformation.  

Despite recession and tax cuts, core Crown tax revenue in the year ended June 2009 was almost exactly the same, at $37,100 in fiscal year 2013 dollars, as in the year ended June 2004.  

On these statistics, the switch from fiscal surplus to deficit between 2004 and 2009 was caused by an unsustainable spending splurge.

Based on the 2013 Budget night figures, the small fiscal surplus in the year ended June 2015 will be achieved with core Crown operating spending of around $41,700 per household and core Crown tax revenue of around $37,500 per household, both in fiscal year 2013 dollars.  

That level of spending per household is still 16 per cent higher than the year ended June 2004 level and likely higher than in any year prior to the year ended June 2009.

In a nutshell, the National-led governments will have achieved a fiscal surplus in 2014-5 after years of hard grind in holding down the growth in real spending, while population growth reduced real spending per capita and per household fractionally.  

In so doing, it has preserved most of the increase in government spending per capita achieved by the Labour-led governments between 2004 and 2009.

This ongoing level of spending is much higher than would be necessary to fund the provision of current goods and services of a nature that only government can provide, such as immigration services, police, the courts, defence and public administration generally.  

Statistics New Zealand's estimated spending on collective consumption items in the year ended March 2013 amounts only around $7,200 per household.  

This level of spending is so small as to make it almost irrelevant to discussions as to how best to deal with the future balance between government spending and revenue.  

Instead, the burning fiscal issue today and into the future is the size of the redistributive State and the electorate's collective willingness to fund it.

New Zealanders have choices, albeit the ones that are exercised indirectly through our parliamentary representatives.  

Between 2004 and 2009 the Labour-led government chose the higher government spending route. What if it had chosen differently?  

Suppose that it had decided instead to hold real operating spending per capita at its year ended June 2004 level, and reduce real taxation per capita as surpluses permitted.  

This would still be a high-spending scenario in relation to earlier years.

Under this scenario, the total Crown account would not have needed to be in an operating deficit in any year except the year ended June 2011 (don't forget the Christchurch earthquake spending).  

By the year ended June 2015, tax revenues could have been lower by almost 5 per cent of GDP, without pushing this account into deficit.  

That scenario would have allowed much more competitive income tax rates, encouraging savings and investment, and thereby facilitating income growth.  

It could have avoided the big lift in the public debt.

This, and more middling scenarios, indicate the paths not taken during that 2005-2008 spending splurge.  

What path might the electorate have chosen given the clear choice?  

We shall never know the answer to that question, but we could change that for the future if enough of us wanted to.

Back in 2004, this writer put forward a proposal for parliament to require the government of the day to get the prior approval of the public by way of a referendum if it wanted to increase a broad measure of government spending per capita by more than the rate of inflation.  

That rule, if in place at the time, might have avoided some of the deficit/debt difficulties of the last six years.  

Of course, there might be superior options, or lesser options that are more achievable.  

But in the absence of better arrangements, there is little to stop a future government from blowing out government spending in good times just because the money is there to spend.