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The effects of high debt

The reason the historic trends scenario results in such a sharp increase in net debt is because spending - even excluding finance costs - is higher than tax revenue, resulting in permanent primary deficits and increased debt. The primary balance is the operating balance less net finance costs,[3] and isolates the underlying gap between policy-related spending and revenues from the effects of debt servicing (Figure 3.4). Increased debt results in increased financing costs, which feeds into ever-increasing operating deficits.

Figure 3.4 - Primary balance and operating balance
Figure 3.4 - Primary balance and operating balance.
Source: The Treasury
Figure 3.5 - The debt spiral
Figure 3.5 - The debt spiral.
Source: The Treasury

Using debt to finance increased government expenditure in this way means that future taxpayers will be paying for the government services enjoyed today. With net debt projected to increase so sharply, debt financing costs increase over time, using a larger and larger share of future government income. In 2050, debt servicing would be around $110 billion (13% of GDP) annually.

The fact that New Zealand typically has higher interest rates than many other developed economies means that our financing costs are higher for a given level of debt. Furthermore, because net debt continues to increase indefinitely in the historic trends scenario, financing costs also increase exponentially.

In addition to the increased financing costs, funding the deficits through increased debt means future generations are burdened by greater debt than we currently have; it will impair New Zealand's national debt position and our access to capital at a reasonable cost; and it leaves a smaller buffer against further economic and fiscal shocks – which are almost certain to occur over a 40-year period.


  • [3]This has been calculated as the difference between core Crown revenue (excluding core Crown investment income) and core Crown expenses (excluding core Crown finance costs).
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