We are not talking about trivial amounts of money here. Right now, 1 per cent of GDP is about $2.6 billion.
Say you wanted to keep net debt at 20 per cent of GDP. That is, after all, an extremely low level by international standards.
And let’s assume nominal GDP grows by 4.5 per cent a year, which is what it has averaged over the past 12 years. Nominal GDP growth is the combined effect of real growth and inflation and is a rough proxy for growth in the tax base.
In that case, as a matter of arithmetic, a Government would be able to run a (cash) deficit of 0.9 per cent of GDP and still keep the debt ratio at 20 per cent.
Instead, the Government’s fiscal priority is to reduce net debt by between 1 and 2 per cent of GDP a year over the next eight years. That will drive the target for the operating balance and limit the scope for capital expenditure.
Now, 0.9 per cent doesn’t sound like much. But it is about what the Government spends on defence, or twice the annual cost of the accommodation supplement. That calibrates the scale of the opportunity cost here.
Or, its a massive housebuilding program, paid parental leave, ending child poverty, and stacking money away in the Cullen Fund to ease against the inevitable retirement of the Boomers (and its all of those things because its 0.9% extra GDP every year). And National is sacrificing this in pursuit of a debt target which is entirely arbitrary and self-imposed. Its austerity for the sake of austerity! But when we have enormous social and physical deficits from National’s past cost-cutting excesses, it is entirely the wrong policy response.
This is why we as a country can’t have nice things: because one of our major parties is committed to a government which simply can not afford them. But its entirely a matter of choice. If we want a government which actually can provide the services we expect, we can vote for one in September.
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The Civilian has thought a good headline that’s appropriate for the theme of this post. For the first year on record, New Zealand weather more miserable than New Zealand humans.
I think about Gnashional pollies, that they should take turns at being Prime Minister.
All of them hunger after promotion, let them all have a go, Brownlee next. It won’t make any difference. to how well the country is run, down. And let them try out as Finance Minister, each one following a different economist. The poor will still go on being miserable, and the rich also but in comfort, so BAU.
Actually sounds pretty prudent to me. Would Cullen have disagreed?
Yes. Labour paying debt down is good. National doing it bad. I thought you lot were blaming National for causing a massive increase in Government debt. Now you’re blaming them for plans to cut it.
With the EQC at near nil, a govt with major future spending headroom isn’t dumb.
It’s not Clark-scale spending this budget, but its up there.
It may be prudent to reduce debt, however if we reduce debt at such a rate savings come at the expense of neglecting essential investment, thus resulting in increasing future costs, then it’s far from prudent.
It’s a balancing act. But with the social deficit sitting so high (homelessness, child poverty, etc) one has to question whether or not National has got the balance right?
Question away, but doing it under the headline of “This is why we can’t have nice things” is immature and fails to inspire confidence
It wasn’t my heading and it may not be fitting, but don’t let it distract you from answering the question.
Funny how no one mentions the third way of having low debt and more to spend annually. Tax more fully and fairly and by that I don’t mean the ordinary average 90% of people living and working here.
On shoring our tax base would be a good start and getting proper tax out of everyone from Google to the Wellington lines company. Taxing offshore owners of non productive onshore assets (housing) , taxing substantial asset piles onshore – nothing that hasn’t been mentioned before and it is do-able. Lifting the top tax rate starting at $150k.
And getting down some of the expenses that channel straight into private pockets- build more housing and decrease the $1b of housing supplement. At two houses for $1m that’s 2000 pretty expensive houses.
Except what is being discussed is net debt to GDP. Increasing tax rates generally reduce GDP growth
Government revenue, expenditure, debt and GDP are all interrelated.
A larger tax take provides Government with more funding to pay down debt while also enabling more Government spending which can then stimulate, grow and improve the economy.
Nett debt ? This seems a strange measure and of course, the government has large funds which have substantial credits .
ACC, $35 bill
Cullen Fund, $30 bill
EQC ( mostly gone but still at $1.9 bill) , but still $2.7 bill outstanding claims liability (plus $0.5 bill reinsurance outstanding)
All those funds are ring fenced and not available for general government spending. The Cullen fund can be drawn down in future years but thats seen as offsetting the Super payments.
The Gross Debt is what interest is paid on. We are not like Norway which can and does draw on its ‘Oil Fund’ year by year- was rare until recently with drop in oil price