Market Update: Best of Inside Economics: How much government debt is too much? – Full Analysis

Q: Hi Liam.

In a recent NZ Herald article from a left-leaning columnist, the following data was tabled:

As of 2024, New Zealand’s government debt-to-GDP ratio is approximately 47.2%.

This ratio is lower than that of several countries.

Notable examples include Japan, approximately 242%​, Singapore, around 158%​, Italy, approximately 113%​, United States, around 113%​, France, approximately 97%, Canada, around 95%, United Kingdom, approximately 92%.

This raises two questions for me:

1. It seems that many successful economies use a FAR higher debt ratio than ours, yet both Nicola Willis and the Opposition maintain we need to keep ours down in case of a major disaster (don’t ALL countries have major disasters?).

Surely it implies that those countries are investing in the very growth we so desperately seek?

2. If governments can borrow more cheaply than others, how does it make sense to use Public Private Partnerships?

With thanks and kind regards,

Allan M

A: Thanks Allan. Those numbers are from a recent Herald op-ed column by Dennis Wesselbaum – an associate professor at the University of Otago Department of Economics.

I don’t think he’d necessarily describe himself as left-leaning; he was pretty outspoken in taking the previous Labour Government to task for its post-Covid spending.

But it is fair to say that in this column, he is pushing back against the use of “fiscal austerity” to balance the Government’s books, especially at a time when the economy is already under pressure.

He argues that the Government should focus on boosting productivity and economic growth. That means investing in the economy, which means borrowing more (or repaying debt more slowly).

That’s a more Keynesian approach than we’re hearing from commentators on the right, who argue that New Zealand’s debt position is so serious that big Budget cuts are required.

Wesselbaum argues that “the idea that New Zealand’s debt-to-GDP ratio requires immediate and drastic austerity-like measures is not supported by the evidence”.

I won’t get too deep into that Budget debate now, having just written about it in my Sunday column: Are Kiwis about to be hit by an austerity Budget?

In that column, I tiptoe through the arguments for and against austerity and conclude that there are good points on both sides and I wouldn’t want to be the Finance Minister right now.

The debate about how hard the Government should be cutting the Budget – if at all – is likely to snowball as we head into the big day on May 22.

But let’s look at the points you raise about national debt.

New Zealand does have a relatively low level of government debt to GDP compared to other developed nations, many of which could be described as more economically successful.

It is important to acknowledge that New Zealand has a broader problem with private debt that makes it harder to run a very large Crown debt.

According to Reserve Bank and Treasury figures, in the year to May 31, 2024, New Zealand hit a total of $827 billion in debt.

That includes all private and public debt and it is about 200% of GDP.

About $316b of that is mortgage debt, which we mostly owe to Australian banks.

The interest we pay on that drains out of the country in bank profits and helps keep our current account in deficit.

International credit rating agencies technically focus on Crown debt when they decide on a nation’s lending risk.

But they also assess our ability to keep paying the debt.

So issues like our level of private debt and the size of our current account deficit are relevant and curb the ability of our Government to borrow as much as it might otherwise.

One reason that some countries, like Japan, can get away with such high levels of Crown debt is that they own a lot of it internally.

In other words, the Japanese citizens have very high levels of savings, which offset the debt, and much of those savings is actually held in Japanese government bonds.

Trust in Government

Your second question also raises a valid point. Technically, the Government can raise debt more cheaply than private companies. If we partner with private companies to build infrastructure, they’ll also need to pay a profit.

That means New Zealanders will eventually end up paying more for the access, either through taxes or user-pays charges.

I think the argument for Public Private Partnerships (PPPs) really hangs on the lack of trust in the Government’s ability to deliver big infrastructure projects efficiently.

If the Government spent all the money it borrowed well, on projects that boost New Zealand’s economic performance, then it would make sense for it to keep doing that.

New Zealand would be more productive, the economy would be more dynamic and tax revenue would rise, making it easier for the Government to repay debt.

But advocates for lower government spending just don’t believe the state has a good track record of delivering on big projects. They argue that involving private companies brings more discipline and financial incentive to deliver projects on time.

Ultimately, there is a political divide around government debt levels that doesn’t look likely to be solved anytime soon.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.

He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.