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What if governments stabilise net debt?

Fiscal sustainability requires the maintenance of prudent and low average levels of debt over time, as has been the Treasury's advice to governments over recent decades. As demonstrated over the past decade, temporary fluctuations in the fiscal balance and debt can be an appropriate government response to economic cycles and other shocks. They avoid the government having to make sharp adjustments to spending and/or taxes in order to balance the budget in a single year. Allowing these fiscal stabilisers to operate is more feasible when debt is kept relatively low – at a level that facilitates temporary financing and temporary increases in debt.

Following the approach of the 2013 Statement, one way of assessing the size of long-term fiscal challenges is to compare the spending path of the Historical Spending Patterns scenario with a spending path that stabilises net debt. In this scenario, successive governments are assumed to operate fiscal policy so that net debt averages around 20 percent of GDP across the projection period.

Figure 6.1 projects primary expenses (e.g. expenses excluding debt financing costs) as a percentage of GDP. It provides an example of the size of the challenge governments could face in meeting spending pressures while maintaining prudent debt levels. In 2060, there would be a gap of just over six percent of GDP between the two spending paths. Were the figure to include debt financing costs this challenge would be even greater. Because NZS payments are determined by current legislation, the two spending paths contain the NZS projection from Table 6.1. This means net debt is assumed to be stabilised through changes in non-NZS operating expenses. These changes are assumed to occur gradually with net debt declining to around 15 percent of GDP in the early 2030s, before stabilising at around 22 percent of GDP by 2060.

Another way to compare the two scenarios is to consider the path of the primary balance (e.g. revenue less expenses, both excluding interest). The stable net debt scenario does not require the running of large, ongoing fiscal surpluses (see Figure 6.2). However, it does assume surpluses in the medium-term to be in a position to absorb and respond to fiscal pressures in the future.

Figure 6.2 – Stabilising net debt in the long-term: Primary balances-to-GDP
Figure 6.2 – Stabilising net debt in the long-term: Primary balances-to-GDP   .
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