Editorial: Control debt to keep money flowing in

When an international credit rating agency analyst speaks, a country listens. The more indebted it is, the harder the country listens. New Zealand's financial decision makers would have been listening very hard to a Standard & Poor's sovereign rating analyst, Kyran Curry, this week.

He welcomed the Prime Minister's New Year aim of lower annual increases in public spending and a return to a Budget surplus in three or four years. But he doubted John Key would find the savings he needs from "fat" in the public service, and doubted there was much to gain from asset sales.

"Generally, we look at the Government in New Zealand as being relatively small and compared to its peers it's quite efficient," he told the Herald. Furthermore, the country was "relatively light" in government trading entities and there was not a great deal left to sell.

He seemed more concerned with private sector debt and said it was business and household borrowing that was driving Standard & Poor's negative outlook on the nation's credit rating.

That is a marked change in the priorities of rating agencies which used to concentrate on government debt almost to the exclusion of private borrowing. The change can be attributed to the global financial crisis, which proved how quickly private debt can turn into a public liability when banks lend badly.

Measures to lift household savings and divert resources from consumption to production will have to be a feature of this year's Budget but the property crash and the slow recovery of consumer confidence have probably arrested the growth of private borrowing for a good while. In the circumstances, the Government must be surprised to find the Standard & Poor's analyst so relaxed about the public sector's rising debt.

The recent report of the Savings Working Group believed there were still efficiencies to be found in the sector and Finance Minister Bill English was complaining only last week of the amount of time and resources wasted on the writing of inconclusive reports.

National is said to have reduced the size of the public service by 5 per cent since coming to power in 2008 but that is a drop in the ocean beside the expansion under the previous Government which, as National never ceases to remind it, contributed to a 50 per cent rise in state spending during its years in office.

Mr Key's opening statement to Parliament last week promised a much more searching drive for efficiency in the sector than the "back office" savings the Government has been making. He suggested the pressure now will go on managers in ministries such as health to meet set performance goals in more efficient ways.

That is easy to say, harder to do. "Back office" savings are politically painless, frontline services are more visible and create a clientele that can generate a great deal of anguish when a service is withdrawn or even reduced. Every social programme is worthy in isolation, it is only the Government that has to evaluate it against every other.

New Zealand's foreign debt level is comparable to that of Europe's fearful "PIGS", Portugal, Ireland, Greece and Spain. Unlike them we have an independent currency that could fall if creditors lose confidence. A drastic fall would wreak its own pain on the country, raising consumer prices and reducing real wages.

Measures to control the growth of national debt are needed if creditors' confidence is to be maintained. Those measures may be less painful than a currency collapse but they must move investment in the same direction, from consumption to production. Everything on the consumption side of the ledger will need to be squeezed for a while yet, including the public service.