Government to return to standard debt and surplus targets in Budget 2022

Finance Minister Grant Robertson says he will announce a new debt target. Photo / Mark Mitchell.

The Government looks set to put in place a more rigid debt target for the first time in two years, as the economy slowly returns to post-pandemic "normal".

Finance Minister Grant Robertson said the Government is "committed to setting new fiscal targets", which includes a debt target, at Budget 2022.

Under the Public Finance Act, a Government is legally required to publish a fiscal strategy, outlining its approach to managing key fiscal objectives, which include the level of debt, the level of surplus, the level of expenses, the burden of taxes and net worth.

Usually, this involves setting a debt target as a percentage of GDP, telling voters and markets the Government will reduce debt levels to a certain percentage of GDP by a certain date. However, a target does not necessarily have to include a specific number.

The Public Finance Act requires debt levels to be reduced to "prudent" levels and to stay there.

A Government can wriggle out of a strict debt and surplus target if it needs to during a crisis. The Government is allowed to let debt rise in the short term, with a goal to reduce levels back to normal in the long term. National made use of this during the financial crisis a decade ago and Labour has used it since the 2020 Budget, the first since the pandemic took hold.

The current debt strategy is to allow "the level of net core Crown debt to rise in the short term to fight Covid-19, cushion its impact and position New Zealand for recovery".

The long-term strategy is to "reduce [debt] as conditions permit" in the second half of the decade.

In December last year, Robertson announced the change in the Government's Budget Policy Statement, saying there was an "expectation" the "global economic outlook and conditions will stabilise".

Robertson told the Herald he was " committed to setting new fiscal targets at Budget 2022".

Robertson would not say what those targets would be.

"In deciding the form of the targets for debt, OBEGAL [operating balance before gains and losses] and the other fiscal indicators, it is important to balance flexibility with credibility and allow for the right balance of prudent debt and investment levels to ensure the long-term sustainability of the economy," said Robertson.

National's finance spokeswoman Nicola Willis said debt targets had moved around a lot during the past five years because of external shocks.

"It's clear we could only borrow as much as we did during Covid because the last National government got the books into fantastic shape," Willis said.

National went to the 2017 election promising to reduce net core Crown debt to 10-15 per cent of GDP by 2025, Labour promised to reduce it to 20 per cent of GDP by 2021/22.

"What I would say is important is we would like to see the Government committing to reducing net core Crown debt over time, and more importantly what we will be looking for in the Budget is a recommitment to fiscal discipline," Willis said.

"We don't think it's a time to abandon the shackles."

Willis would not give a National alternative debt target, saying there were many forecasts to go before the election.

The Greens' finance spokeswoman Chlöe Swarbrick said the Greens did "not support the setting of an arbitrary debt target, because it's exactly that: arbitrary".

"We've seen the consequences of such targets before. The National Government's point target for debt and deadline on getting back into surplus led to deferring critical investment in infrastructure, and social and environmental wellbeing in the 2010s," Swarbrick said.

"Were this Government to make a similar mistake, it once again decides, arbitrarily, not to meet our communities' collective needs within the boundaries of our living planet."

Labour and National went to the last election with promises to eventually reduce debt levels, but an optimistic economic outlook has meant those promises are now out of date and easily within reach of the current Government.

At the election, National pledged to cut debt to 35 per cent of GDP by 2034 - a target that was adjusted upwards after the party's first fiscal error was discovered.

Labour pledged to get net debt to 48 per cent of GDP or just over 45 per cent if the Government's Covid fund was not spent.

Much stronger than expected economic and fiscal results in the intervening two years have meant that on the latest forecasts, Treasury expects net core Crown debt to peak at 40 per cent in 2023, falling to 30 per cent by 2026, and down to 20 per cent by 2035.