Grant Robertson Announces New Fiscal Rules Allowing Infrastructure Borrowing


The finance minister this morning announced new rules allowing the government to borrow – and says he hopes to make ‘a real dent’ in a $100billion infrastructure deficit

Grant Robertson announced a 2% cap on surpluses to reassure banks and financial markets as it creates leeway to borrow for some important infrastructure spending. He calls it “the new normal”.

At a breakfast at Rabobank in Wellington this morning, he announced the range of zero to two per cent of GDP for surpluses, to ensure that new daily spending does not add to the debt incurred for spending in capital. This is intended to bring the operating balance before gains and losses (OBEGAL) back to surplus and then maintain small surpluses on average over time.

The Treasury has recommended that the government keep this average surplus within the two percentage point range over a 10-year period.
period, subject to economic and tax conditions. This allows for trade-offs that offer the flexibility needed to deal with cyclical fluctuations and shocks, while not being broad enough to provide a lack of clarity on government intentions.

In other words, governments should save – or run budget surpluses – during upturns in economic cycles, to allow them to run deficits during downturns. “This approach is largely driven by the idea that governments should aim for surpluses to offset expected future shocks, in which case deficits would be expected,” advises the Treasury. “If there was a significant economic shock, we would expect OBEGAL’s average position to fall outside this range over a 10-year period.

“There are always opportunities for forecast adjustments and forecast errors – both in terms of positive and negative surprises – but we consider aiming for a small operating surplus to be a good starting point.”

At the same time, Robertson is changing the way the government measures its debt, which he told business leaders would bring New Zealand closer to other countries. He sees the debt ceiling and the surplus ceiling as complementary, avoiding criticism of the previous government over the accumulation of large surpluses – money that could have been better left in the economy.

A new debt ceiling would ensure New Zealand maintains one of the lowest public debts in the world, he said, while leaving more room for investment in infrastructure.

“While this rule gives us a relatively low level of net debt, it will provide fiscal space to fund high-quality capital investments that improve productivity and welfare.”

The new measure looked at multi-year averages, allowing debt to peak in the event of a 100-year shock. “That would see the debt climb significantly higher than the cap.”

He said the Infrastructure Commission made it clear in a report yesterday that ‘New Zealand has a gaping infrastructure deficit’. He expressed hope that New Zealand could have “a mature conversation” on public debt, to pay for infrastructure.

A report by the Te Waihanga Infrastructure Commission showed that it would cost $31 billion a year, or about a tenth of New Zealand’s GDP, to close the infrastructure gap and build for the future. Repairing the Three Waters infrastructure alone is expected to cost $185 billion over the next 30 years – although the government has refused to commit to any new taxpayer investment there, relying on borrowings from the four large water companies owned by the council.

“All of us know what it looks and feels like in real life. It’s the hours of wasted productivity stuck in Auckland’s traffic. It’s the burst water pipes here in the capital. It’s the run-down hospitals in the provinces.”
– Grant Robertson, Minister of Finance

Robertson made it clear yesterday that New Zealand could not afford to extricate itself from this shortfall and needed to consider what could be done to make better use of the infrastructure already in place. He said he has no plans to change the debt trajectory over the next few years, but governments may need to borrow more over a longer period.

Today he said an estimate introduced in that report was that New Zealand was sitting on a $104 billion infrastructure deficit.

“All of us know what it looks and feels like in real life. It’s the hours of wasted productivity stuck in Auckland’s traffic. It’s the burst water pipes here in the capital. It’s the run-down hospitals in the provinces.

“For decades, as a country, we have failed to make the investments we need to boost productivity and improve well-being.

“New Zealand’s population grew from three million to four million in 30 years from 1973 to 2003. We then went from 4 million to 5 million in just half that time. But we didn’t build homes or public or public transport networks the services we needed to match that.

“I am not ready for our country to fall further behind when it comes to infrastructure. Our investments using the fiscal space created by this fiscal rule will need to be high quality, well thought out and have a clear and direct benefit to our productivity. and our well-being.”

Robertson said the interaction of the two budget rules – the debt ceiling and the surplus ceiling – meant the extra debt could not be used for day-to-day spending. This left the debt ceiling to guide capital investment.

Under the old measure, the Treasury recommended that the cap be 50% of GDP. Robertson said the new measure – a 30% debt cap – was effectively the same as the old one, but the numbers were counted in a way that was closer to other countries.

The International Monetary Fund projects that New Zealand’s net debt in 2021, at 15% of GDP, will rise to 21.3% in 2023, before slowly declining to 16.4% in 2027.

By this measure, New Zealand’s debt will be lower each year than that of major industrialized countries such as Australia, Canada, the United Kingdom and the United States.

“The government has been able to use our strong fiscal position to support New Zealanders through Covid with programs like the Wage Subsidy Scheme. As we move into a new normal after the peak of Covid, now is a good time to resume a set of budget rules to carefully manage costs while planning for the future,” he told his audience.

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