I should really be doing something else, but I just read Brian Fallow’s column in today’s Herald outlining his views on why the government shouldn’t relax its own fiscal rules. Reasonable people can differ on that – and as per my post yesterday I’m certainly not arguing for the government to raise debt levels (per cent of GDP) from here. But what caught my eye was some IMF “analysis” Brian quoted.
He introduced his article noting that on IMF data (or any other measure you like) New Zealand’s net or gross government debt is quite low as a share of GDP. On my preferred measure, net debt is about 8 per cent of GDP. But he goes on
A third reason for being cautious about ramping up government debt is that not all of its obligations are on the balance sheet.
In particular, there is the future additional cost of superannuation and health spending as the population ages.
The IMF has had a stab at calculating the net present value (NPV) of those increased costs out to 2050. We can think of that as how big a pot of money we would need to have set aside, earning compound interest, if those liabilities were fully funded.
It reckons the NPV of the pension spending increase out to 2050 is 54 per cent of GDP. That is $150b in today’s dollars, only partially offset by $38b in the New Zealand Superannuation Fund. The NPV of the expectable health spending increase is even larger, at 66 per cent of GDP.
When those two factors are accounted for, New Zealand is no longer a fiscal outlier, but sits in the middle of the range for advanced economies, between Germany (with its challenging demographics) and Ireland (with its debt crisis legacy).
That sounded interesting, so I dug out the chart Brian appears to be referring to from the latest IMF Fiscal Monitor publication.
I don’t know quite how the IMF did their health and public pension numbers, or how comparable their estimates are across countries. But just take them as what they are (our pension numbers are high because, unlike many countries, we haven’t done anything to raise the NZS age). Allegedly, New Zealand is now in the upper half of the indebted advanced countries.
But this is a nonsense chart, adding apples and oranges. It might make some sense if every country had the same starting deficit/surplus, in which case future differences in discretionary spending associated with ageing might be the only difference in the projected future debt paths across countries.
In fact, some countries are in (cyclically-adjusted) surplus, and some are in (cyclically-adjusted) deficits. Israel, for example, is estimated to have structural deficits of 3.5 per cent of GDP, and the US is now estimated to have structural estimates of about 6 per cent of GDP. Israel is much further down that IMF chart than we are, but annual deficits of 3.5 per cent of GDP (before the effects of additional ageing) soon compound into very large numbers.
And New Zealand? Here are the IMF’s own estimates of the average cyclically-adjusted fiscal balance for 2018-2023 (their forecast period).
On the IMF’s own numbers we have the largest (structural) surpluses projected over the next few years of any advanced economy. Structural surpluses of 2 per cent per annum, in a country with high real interest rates, compounds to a very big (positive) NPV really quite quickly.
As it happens, Germany is also projected to be running quite large surpluses. No wonder markets aren’t remotely worried about fiscal/debt risks in either Germany or New Zealand. You simply can’t sensibly start with today’s debt, add one bit of additional future spending, and not take account of the baseline fiscal parameters that, in countries like New Zealand, mean we already have material fiscal surpluses (on the books, and in prospect). Fiscal people at the IMF sometimes liked to quip that IMF stood for “It’s mostly fiscal” (the problems, and macro solutions, that is). But they really should be producing better fiscal analysis than this (even if, perhaps, their main interest is big countries with both high debt and ongoing deficits).
None of which means I think NZS shouldn’t be changed. To my mind – as voter – failure to do so is both a fiscal and moral failure. But, despite those future pressures, by international standards our fiscal position remains very strong, and there is – objectively – plenty of time to adjust (even if I personally might prefer the adjustment had already begun years ago).