As debt-servicing costs head to $2500 per Kiwi, a top Treasury official suggests spending less, taxing more and selling assets
Struan Little (left) seated next to Finance Minister Nicola Willis and former Treasury Secretary Caralee McLiesh. Photo / Mark Mitchell
New Zealand has “one of the largest structural deficits among advanced economies”, Treasury has warned, with its chief strategist Struan Little, a long-time Treasury staffer, saying this Government and future ones may need to make some very difficult choices.
Little made the warning in a speech that singled out spiralling debt servicing costs and delivered a stark warning that unlike other wealthy countries, New Zealand had little to fall back on in the event of a debt shock.
“Debt servicing is now the fourth-largest line item on the Government’s books. As the Minister of Finance noted in last year’s Budget speech, the interest bill has gone from $3.6 billion in 2014 to $8.9 billion in 2024, which is more than annual expenses for Police, Corrections, the Ministry of Justice, Customs and the Defence Force combined,” he said, noting that on a per capita basis, debt-servicing costs will be $2500 per New Zealander by the end of the decade.
He warned against commentary suggesting the debt picture was not a serious concern, which often cites the fact that New Zealand has far less debt than European economies and the United States.
“Yes, the US and UK have higher debt: GDP ratios but that is no comfort to New Zealand because they are far bigger economies with heavily traded currencies.
“Smaller developed nations like Finland and Ireland seem more comparable but are in the Eurozone so have the support of their neighbours. Many of the countries to which we often compare ourselves have some form of monetary, fiscal or trade support so are not like us at all,” he said.
In what could be read as a stark message not to all political parties, Little said governments will need to think not just about getting spending under control, but raising more revenue through taxes and selling some assets in order to sustain the public finances.
Spending cuts, tax rises and asset sales are among the most politically challenging policy decisions for any government.
Little addressed these challenges in a speech to the ANZ-Kanga News Debt Capital Markets Summit today, which focused on debt.
“Fixing these intertwined fiscal and economic challenges will require successive governments using the levers available to them,” Little said.
“Controlling expenditure will remain critical. But revenue options need to be considered too,” he said.
While New Zealand’s current tax system - which had a “broad base” but a “low-rate” - was “world-class in many ways”, Little said “our fiscal and economic challenges mean we cannot afford not to look at tax as part of the long-term solution“.
“Just because there are no easy short-term options is not a reason not to consider tax reform, particularly in how savings and investment are taxed.
“The current system creates economic costs and limits options to raise revenue efficiently,” he said.
Little also said the Government needs to “achieve better management of the Crown’s balance sheet with improved performances of both assets and liabilities”.
He said he used the word “asset” with “trepidation” because “there’s a tendency for debate to quickly narrow to asset sales”.
“But small gains achieved by better managing the Crown’s $598 billion of assets, or its $409 billion of liabilities offer huge potential fiscal benefits,” he said.
Treasury publishes a stocktake of its assets, which include not just companies like the Government’s share of the gentailer power companies or Air New Zealand, but the land and buildings it owns too.
The current Government has suggested a keenness for “asset recycling” which would involve selling some assets that are not used, or not used well, by the Government in order to invest in assets which could be used better.
This is seen as preferable to borrowing money to acquire more assets before seeing whether the current lot are performing well.
There were some positive notes to the speech. Little said the economic recovery was taking hold and the economy was likely to grow this year, even with the Iran conflict raging.
Another theme of the speech was making New Zealand’s debt more manageable by making New Zealanders more productive, thus bending the economic curve up, while the debt curve bent down.
“It is Treasury’s view that it is the responsibility of future governments to retain these as priorities,” he said.
Noting that the Government had run a “structural deficit” for a number of years, Little said this the current Government was “taking steps” to get on top of the challenge, “using re-prioritisation as a way to fund new initiatives to keep spending within forecast operating allowances”.
“Despite this, nominal debt is still rising, although as a proportion of GDP, it is forecast to fall towards the end of the forecast period,” he said.
Little said fiscal consolidation “needs to continue to be a priority in the next term of Parliament to ensure that the forecast decline in debt is realised”.
The speech warned that New Zealand had borrowed heavily for the Global Financial Crisis, the Canterbury Earthquakes and the Covid-19 pandemic, but had not reduced debt levels adequately between crises.