Budget 2006: Debt level to be kept at around 20pc of GDP

The Budget contains a subtle but significant shift in the Government's long-term fiscal strategy, from steadily reducing its debt to keeping it broadly where it is - relative to the size of the economy.

"For the first time a Government is reporting that it is satisfied that a prudent level of debt is now in sight. We are now shifting the emphasis to maintaining [gross] debt at around 20 per cent of GDP and continuing to strengthen our financial position through the contributions to the New Zealand Superannuation Fund, rather than continuing to reduce gross debt," it says.

And in the cause of boosting spending on roading "it is prepared if necessary to see gross debt rise slightly above its long-term objective of 20 per cent over the short term".

The Crown's gross debt has declined from over 60 per cent of GDP in the early 1990s to 23 per cent of GDP now. The steepest fall occurred under the previous Government but Finance Minister Michael Cullen has continued the debt reduction while also introducing the Cullen fund to build up assets to partially finance future superannuation payments, due to balloon when the babyboomer generation moves into retirement.

Gross debt is still forecast to decline, but more gradually, reaching 20 per cent of GDP by 2010 and the long-term objective has been amended to be to keep it broadly stable around 20 per cent of GDP over the next 10 years.

When the Government's financial assets - mainly marketable securities and the student loans - are offset against the gross debt, the net debt level is 5.8 per cent of GDP. This is expected to rise slightly before stabilising at around 7.2 per cent of GDP, Dr Cullen said.

And when the $10 billion in the Superannuation Fund is included, the Crown's financial assets exceed its liabilities.

The average among developed countries is a net debt of 45 per cent of GDP.

Dr Cullen said this put New Zealand in a stronger position than almost any other developed country to deal with the fiscal implications of an ageing population.

"This will increasingly become a competitive advantage for us as other countries face increasingly difficult fiscal trade-offs which will be less challenging for us."