The increase in New Zealand’s net debt to GDP ratio over the next four years is not the bogeyman some are making it out to be, nor will the Government necessarily have to increase taxes to pay off what they are borrowing.
That’s according to one of New Zealand’s leading and respected economists, Tony Alexander, who last week discussed a range of topics relating to the current and post-COVID-19 economic landscape as part of TMNZ’s first virtual roadshow for the year.
The net debt to GDP ratio increase
The Budget shows New Zealand’s net debt to GDP ratio is forecast rise to 30.2 percent this year and peak at 53.6 percent in 2023.
This is up from 19 percent last year.
Unsurprisingly, this has led to concern in some quarters.
However, Alexander (pictured left) says it’s important to remember there is no permanent increase in the size of the Government’s spending as a proportion of the New Zealand economy.
“Some people may be looking at this as the Government spending a lot more. Yes, in the short term they are, but in about five years’ time the ratio of the Government’s spending to the size of our economy will pretty much be back to where it was [during the] last fiscal year.
“That gives me assurance that Grant Robertson does want to continue along the lines of finance ministers in New Zealand since the early 1990s of trying his best as possible to get good control over the quantity, and hopefully quality, of Government spending going forward.”
Alexander says that credit rating agency Standard & Poor’s believes New Zealand’s economic outlook is better than The Treasury is forecasting.
They are showing no signs of issuing a potential downgrade in the wake of the Budget, he says.
A peak net debt to GDP ratio of 53.6 percent is still lower than where other economies are at currently. Some are sitting as high as 110 percent.
“Even after all this, we’re still going to be in a very good position,” says Alexander.
Tax hikes not the only way to pay down debt
In terms of how the Government will go about reducing its level of debt, there is talk they may have to introduce new or increase existing taxes.
That’s because its tax revenue is forecast to drop.
The Treasury expects tax revenues to fall from $86.5 billion for the year to June 2019 to $80.1 billion dollars for the year to June 2021. Over the period to June 2024, it expects tax revenue to be more than $15 billion lower net of the effect of the reduced GDP over the period.
However, Alexander believes it is possible for the Government to reduce its debt without tinkering with the tax system.
He bases this claim on past experiences.
For instance, Alexander cites successive National- and Labour-led administrations managing to decrease New Zealand’s net debt to GDP ratio from 55 percent in 1992 to just six percent in 2008 through controlled, responsible spending.
“New Zealand has an established record of good fiscal control under both Labour and National governments,” he says.
“My expectation is we will see the net debt to GDP ratio in New Zealand decreasing over an extended period, that it’ll be a gradual process and it will be able to be achieved with spending restraint, rather than whacking GST up to 20 percent or introducing a new 46 percent top marginal tax rate or that sort of thing.”
Increasing taxes in the future would also be counter-intuitive to the Government’s goal of trying to get people to spend money now, when confidence is low.
“If they did [raise tax], we would spend less in anticipation of higher taxes down the track.”
Hear more from Tony Alexander
The affable Alexander spoke at length about several different topics during his informative, wide-ranging session with TMNZ.
- His thoughts on the Government’s Budget and The Treasury’s economic forecast.
- How the New Zealand dollar will fare in the next 12 to 18 months.
- Why the party is over for tourism and what the collapse of that industry might mean for regional New Zealand.
- When he feels banks will resume lending again.
- Why quantitative easing does not cause hyperinflation, but may push up asset market prices.
- The chances of the Reserve Bank of New Zealand resorting to a negative official cash rate.
- The outlook for the property market.
Trust us, this is one hour worth your time.
You can watch Alexander’s full webcast here.
Next virtual roadshow – register now
Richard Owen from IRD will be joining us as part of our next TMNZ virtual roadshow on Wednesday 17 June.
Owen is the small and medium enterprises customer segment lead at the department. He will cover tax policy on COVID-19 and the impact for IRD, tax agents and taxpayers.
If you have questions about the remission of UOMI, the carrying back of tax losses or the Small Business Cashflow Loan Scheme, then you won’t want to miss this.
You can register here. Get in quick because spaces are going fast.