Inside Money: Land of the never-never - IMF finds NZ in a good fiscal space

New Zealand is the third-luckiest country in the world, as measured by its ability to take on more public debt, according to a new International Monetary Fund (IMF) paper. Photo: Doug Sherring.

New Zealand is the third-luckiest country in the world, as measured by its ability to take on more public debt, according to a new International Monetary Fund (IMF) paper.

The IMF report, titled 'When should public debt be reduced?', found NZ had ample fiscal headroom and could more than double its current debt load before maxing out its credit.

Based on Moody's figures, the IMF study shows only South Korea and Norway could take on more public debt (by 241.1 per cent and 246 per cent respectively) before butting up against fiscal limits.

However, the authors - Jonathan Ostry, Atish Ghosh, and Raphael Espinoza - are not advocating spending sprees for the governments lucky enough to enjoy such vast "fiscal space".

Instead, the study attempts to debunk post-GFC political arguments that centre only on the pace at which public debt should be reduced.

"Those who believe that debt is bad for growth favour a rapid reduction in indebtedness, whereas those who stress Keynesian demand management considerations argue for a measured pace of consolidation, perhaps with a ramping up of public investment while interest rates remain at historic lows," the report says.

"Somewhat lost in this debate is the possibility of simply living with (relatively) high debt, and allowing debt ratios to decline organically through output growth."

In fact, for those countries in the debt sweet spot - labelled the "green zone" - not fretting about debt reduction appears to be the most sensible course of action (or inaction), according to the IMF report.

The study comes up three "insights" for world fiscal experts to consider:
• Inherited public debt represents a dead weight burden on the economy, reducing both its investment potential and its growth prospects;
• When fiscal space is ample-which can never be established through some mechanical procedure-there is a case for simply living with the debt, paying it down only "opportunistically" when non-distortionary sources of revenue are available and letting the debt ratio decline through growth; and,
• Debt should be used to smooth the taxes necessary to finance lumpy government expenditures.
The report does not take account of private debt but, as a green zone resident, I'm not going to worry about that today.