N.Z. Government Raises Debt Ceiling, Sets Surplus Limit

  • In Business
  • 2022-05-02 22:52:20Z
  • By Bloomberg

(Bloomberg) -- New Zealand's government will set a target for budget surpluses and introduce a new cap on debt that's higher than previous limits, allowing greater investment in infrastructure.

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Surpluses will be kept within a band of 0-2% of gross domestic product over time, Finance Minister Grant Robertson said in a pre-budget speech Tuesday in Wellington. A new, broader measure of net debt will be introduced to bring New Zealand more in line with other countries, with a ceiling of 30% of GDP, he said. Under the previous measure, that equates to 50% of GDP.

"It is a limit rather than a target, and again is flexible enough to allow a buffer against short-term shocks, while providing greater room for productive investment," Robertson said. "The interaction of the two fiscal rules means that the additional debt cannot be used for day-to-day spending as that is limited by the surplus rule. This leaves the debt ceiling to guide capital investments needed in infrastructure to keep our economy moving."

A report from the Infrastructure Commission this week showed New Zealand has failed to build the houses, hospitals and roads required to match its growing population, and that even more investment will be needed to achieve its aspirations of 100% renewable power generation and net-zero carbon emissions in coming decades. The existing infrastructure deficit is about NZ$104 billion ($67 billion), Robertson said.

"I am not prepared for our country to be on the back foot any longer when it comes to infrastructure," he said. "Our fiscal approach means we can plan for the future. We can rip off the band aid approach to infrastructure and invest properly to future proof for future generations."

The new debt ceiling is much higher than previous limits. In 2019, Robertson introduced a net debt target range of 15-25% of GDP, which replaced a goal of 20%. Those fiscal responsibility rules were ditched during the pandemic, when the government borrowed heavily to stimulate the economy. Net debt is forecast to be about 38% of GDP this fiscal year using the old measure.

"A low, specific, set target can end up leading to perverse behavior where you don't invest in things that you need to," Robertson said.

The government is tracking well below the new debt ceiling, which gives fiscal headroom for future investment starting in the 2023 budget, he said.

Still, with inflation running at the fastest pace in more than three decades and a general election due next year, the government is likely to take a careful approach to spending and maintain a significant buffer below the debt ceiling for any future shocks.

Budget Surplus

"Fiscal discipline has become important in an electoral sense, and they are reinforcing that this discipline is still there," said Stephen Toplis, head of research at Bank of New Zealand in Wellington. "They have committed to keep running surpluses and to keep debt under control. I don't think the framework has been designed specifically so that they can spend more."

The budget will return to surplus in the 2024-25 fiscal year, a year later than Treasury projected in December, he said. That reflects the impact on global growth from the Ukraine war and supply chain disruptions. The budget will be delivered on May 19.

The target for the surplus will apply once it is achieved and will be the primary rule that controls spending decisions.

"It means current spending is paid for from current revenue," Robertson said. "It means day-to-day government spending is not adding to the net debt we have as a country."

The target will have flexibility "to dip temporarily into a technical deficit" from time to time, such as the government having to book up-front costs for a infrastructure project, or for a program responding to an unexpected fiscal shock, he said.

The new debt measure will include more assets such as the New Zealand Super Fund, and more liabilities like debt held by state-owned housing provider Kainga Ora. It will paint a more accurate picture of the government's position but could also be more volatile, particularly because of the variability in the Super Fund's value, Robertson said.

(Updates with Robertson comments throughout)

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