There are some basic conditions for getting debt down. The first is achieving growth. We can tick that box.
The key is not just getting the economy back on track though. What matters is the trend for growth and the trend rate is open to debate, particularly with the economy embarking on a so-called transformation which will invariably involve transitional costs.
A better trend means more tax revenue. Underpinning the Treasury's Budget projections and return to surplus is an expectation that potential growth for real GDP is 2.5 per cent per annum.
Potential growth is the economy's capacity to grow without putting excess pressure on inflation. It is the combination of productivity, labour and capital inputs, technology, and natural resources.
The Reserve Bank's estimate for potential growth is below 2 per cent.
The difference between the Treasury's and Reserve Bank's view of potential growth is worth $500 million in tax revenue per year and $2 billion over four years.
The Treasury is projecting growth in real gross domestic product of 3.3 per cent per year on average between 2021 and 2025.
That is very strong for an economy that is hitting capacity constraints, showing signs of being at maximum sustainable employment and the tailwind from housing is fading.
Reducing debt will require spending restraint. The 2021 Budget flagged it on two levels.
The first was smaller Budget packages in the 2022, 2023 and 2024 Budgets relative to what we have seen in the 2018 to 2021 Budgets.
The future Budget allowance was set at $2.7b per year for each Budget.
The packages in the past four Budgets have averaged $3.4b. The 2021 Budget was a $3.8b package (times four over four years).
The 2018 Budget set an operating allowance for the 2019 Budget of $2.4b. It ended up $3.8b.
The 2019 Budget set an operating allowance for the 2020 Budget of $2.4b. It ended up $3b.
The 2020 Budget set an operating allowance for the 2021 Budget of $2.4b. It ended up $3.8b.
The pattern is consistent.
Budget packages end up being bigger than what is put in the forecasts. It is hard to make the numbers add up when in government.
The new normal does not look to be getting net debt down to 30 per cent of GDP as opposed to the old target of around 20 per cent. It looks north of 40 per cent and containment might be as good as it gets.
If that pattern continues, and in the absence of even stronger growth, net debt (excluding the Reserve Bank's FLP) will still be rising as a share of GDP over the next four years.
Net core Crown debt is also a less useful indicator than what it used to be with Crown Entity borrowings rising from $7b in 2019 to a projected $21b in 2025.
The 10-year projections included in the Fiscal Strategy Report has net debt falling to 27.8 per cent of GDP by 2035.
Cameron Bagrie.
That is based on incredibly tight spending assumptions. They include a capital allowance (think infrastructure) of $4b per year and an operating allowance of $2b.
The latter is miserly relative to recent spending trends and the allowance for the upcoming three Budgets.
The capital allowance is around 20 per cent less in inflation-adjusted terms than what was spent between 2010 and 2018.
The likes of Three Waters Reform will not be cheap, nor the cost of transitioning the economy to a low carbon future.
If you put a $3b operating allowance and $5b capital allowance into Treasury's Fiscal Strategy Model — which are tight assumptions relative to recent history, net government debt is 41 per cent of GDP in 2035, not sub 30 per cent.
Managing the fiscal cost of an ageing population makes it difficult to get debt down over the coming years.
New Zealand Superannuation is currently around half of all welfare benefit spending. By 2035 it will be 62 per cent of welfare benefit spending. Getting debt lower is a commendable aspiration in this environment.
Ideally, fiscal buffers would be strengthened by lower debt over time giving more capacity to absorb another potential shock.
The new normal does not look to be getting net debt down to 30 per cent of GDP as opposed to the old target of around 20 per cent. It looks north of 40 per cent and containment might be as good as it gets.
That sort of level is not an issue. And we should be focused on using the borrowing wisely and ensuring (and measuring) payback as opposed to arbitrary levels anyway.
• Cameron Bagrie is an independent economist and managing director of Bagrie Economics.
