Govt needs a plan to get its debt under control after spending spree finishes
Monday, 30 March 2020
OPINION: Net government debt looks to be headed well above 50 per cent of GDP and is on an unsustainable path.
A lot of other countries are in a worse predicament, but they don't carry the same level of private sector debt.
The best way to turn an unsustainable debt trajectory into a sustainable one, and restore the Government's war chest for the nest rainy day, is by improving New Zealand's economic performance. That is going to require an extensive economic shake-up not tinkering.
For now, it's crisis management. Leveraging off the Government balance sheet to mitigate the depth of the recession is the correct policy response in the near-term and can continue for a while yet.
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But the Government does not have unlimited capacity to write cheques.
The Reserve Bank is trying to keep bond yields down by buying bonds, but as the supply of bonds (more Government debt) ramps up there will be pressure heading the other way. Rating agencies and investors will start paying attention to debt metrics.
Net Government debt surged to more than 50 per cent of GDP 1990/91. It forced a harsh fiscal policy response to fix the books. We are headed higher this time around.
A time will come to get the books back in order. We don't want a repeat of the early 1990s policy prescription but will need to make some tough decisions.
Net core crown debt was projected to go from close to zero to around 30 per cent of GDP in the 2009 Budget. An economic downturn hit tax revenue, the operating balance and profile for Government debt. Forecasts for nominal GDP dropped from $211.8 billon to $191.5b between the 2008 and 2009 Budgets. That carved $26 billion out of tax revenue over four years.
The starting position for net debt this time is 20 per cent of GDP. Pencil in 50 per cent of GDP straightaway. The size of the nominal economy was projected to lift from around $300b to almost $400b by 2024 in the December Half-Year Economic and Fiscal Update. That underpinned cumulative tax revenue of almost $500b over five years.
The economy will not be anywhere near $400b, nor cumulative tax revenue over the period $500b. Even a modest downturn will shave tax over the projection period by $50b. This one doesn't look modest.
Then we need to start adding up what is likely to be the roll-out of more Government support to keep businesses and households afloat, and account for rising numbers on the benefit. There will need to another ramping up in infrastructure spending to help with the recovery.
Too put the scale of the holes the Government is trying to cover in perspective, consider the following. Total sales across the economy were in excess of $600b in 2018 according to the Annual Enterprise Survey. The survey covers economically significant businesses that operate within New Zealand.
Total business income in 2018 was almost $700b. Operating profit around $85b. Salaries and wages paid more than $100b. Firms and households need income to service $480b of debt. Those numbers give an idea of the hits we will take with the economy effectively shut down. For some sectors, such as international tourism, that shut down is likely to be for a long time.
The Government will continue to have the economy's back. Fiscal policy is the correct tool to ramp up. Money is flying out the door as it should. But we need to be looking towards the other side too.
A massive fiscal repair job is going to be required down the track.
Don't use Covid-19 as an opportunity to pursue a political spending agenda. Beyond improving our health capability and border controls, now is not the time to be cementing more money in government spending baselines that will prove difficult to extract and unwind when needed. Tough times demand tough decisions.
The priority needs to be transitory support for households and businesses, and a boost to some with more of a medium-term emphasis such as infrastructure. It also means raiding some spending from other areas including the Provincial Growth Fund.
Soon we will need blue-sky economic planning for the future.
New Zealand is going to need a ruthless obsession with lifting its economic performance if we are to avoid a large drop in our living standards and get the Government books back in order. It will be a tall order to address the latter.
The right people need to be cajoled into many places. We are going to need a big and bold vision, and the ability to execute around it.
Cameron Bagrie is the managing director of Bagrie Economics. His views do not constitute financial advice.