Not that long ago, New Zealand’s fiscal balances looked pretty good by advanced country standards. Sure, the fiscal pressures from longer life expectancies were beginning to build – as they were in most of the advanced world – but in absolute and relative terms New Zealand still looked in pretty good shape.
Just a few months before Covid, in October 2019, the IMF published its half-yearly Fiscal Monitor, with the helpful cross-country comparative tables (whatever the merits of New Zealand’s own approach to measuring and reporting fiscal balances it doesn’t facilitate international comparisons).
This was how we’d compared with the median advanced country that year and the previous few.
Notes for this and several later charts:
- “general government” (not central), the only meaningful basis for international comparisons
- “primary” = ex interest (so reflecting current spending choices not legacy debt)
- “cyclically-adjusted”, so looking through the state of the economic cycle. For Norway the data are not cyclically-adjusted (IMF only publishes cyclically-adjusted numbers for ex-oil Norway)
- “advanced countries” = IMF classification for sovereign states (so ex Hong Kong), with Poland and Hungary added.
So under both National and Labour-led governments we were mostly running structural primary surpluses, and surpluses a bit larger than the median advanced country. Since our starting level of net public debt was lower than that of the median OECD country, using cyclically-adjusted overall balances our relative position was a bit stronger still.
Covid, of course, intervened, and in 2020 and 2021 most countries (including New Zealand) had really big fiscal outlays associated with supporting the Covid disruption to economic activity.
So fast forward to 2023. The Covid spending itself was by then a thing of the past.
The IMF released another Fiscal Monitor set of forecasts/estimates in October 2023 just a few days before our election (I wrote about the numbers here at the time). I’ve averaged the numbers for 2023 and 2024, but choosing either year individually wouldn’t make much difference. We now had among the larger structural primary deficits of any advanced country (again, the picture was a little less bad using the cyclically-adjusted total balance).
So that, as estimated by the IMF (who use national numbers for each country but do their own cyclical adjustment), was pretty much the situation the incoming government inherited at the end of 2023. They knew that New Zealand was estimated to have among the largest primary structural deficits advanced world – a choice (and it was pure choice) made by the outgoing government.
So what stance was taken by the incoming government in its first Budget this time last year? This chart is from the Budget Economic and Fiscal Update. Treasury’s own estimate of the structural deficit was that policy choices would widen the structural deficit for 24/25 slightly relative to the estimate for 23/24.
That wasn’t particularly surprising. There were expenditure cuts (and a tax increase) but there were also a number of tax cuts (much as had been promised by National in the election campaign).
Treasury estimates of the adjustments required to get to structural and cyclically-adjusted balance estimates can change with incoming data, but this chart was from last December’s HYEFU
There was still no sign of any improvement in the structural position, based on decisions already made (ie last year’s actual Budget as distinct from lines on a graph about possible future Budgets).
Which brings us to the most recent IMF Fiscal Monitor released a few weeks ago. This is how our cyclically-adjusted primary deficit now compares (for NZ, the IMF uses HYEFU/BPS information – they don’t impose their own guesses about fiscal policy itself): largest structural primary deficit among the advanced countries (and a far cry from the modest structural primary surpluses New Zealand governments ran – chose to run – last decade)
and here is the chart for the structural overall balance (ie including finance costs)
Not quite as bad, but still 4th largest deficits among advanced countries.
As I’ve shown previously, the net debt position is not yet particularly bad. Government debt as a share of GDP is still below that of the median advanced country, but that gap has been closing rapidly.
And one could add to the mix the repeated extension – by both governments – of the horizon for getting back to operating balance (currently, on the standard OBEGAL definition, both National and Labour seem agreed that 2029 is fine, at least until some other shock or pressure comes along).
It isn’t as if the financial markets are going to compel adjustment. If the net debt rises materially further a credit rating downgrade can’t be ruled out, but on its own that wouldn’t matter very much. It is more a question of our own choices and our own sense of fiscal responsibility and accountability.
Of course, there will be plenty of people – perhaps currently mostly on the political left – inclined to the view that if anything our governments should take on more debt. I’d largely agree with them that a somewhat higher level of debt is not likely to either raise interest rates very much or dampen potential GDP growth very much. My aversion to higher public debt is more about the demonstrated weakness of the political process in too many countries – not so much in New Zealand for a couple of decades, but again apparently now. It is easy to promise nice-to-haves (and both main parties have been guilty of this in recent years) when you don’t have to go to the voters and ask them for higher taxes now to pay for the handouts. Much more honest that if you want to increase (structural) spending – new or more expensive programmes – to raise taxes to pay for it. Failing to do that risks taking our country the way of places like France, the UK or the US – even before the demographic pressures really up the ante.
What will we see in the Budget? We’ll see I guess, but the Minister of Finance has announced a cut in the operating allowance for 24/25. That is no doubt fine and good, but relative to the scale of the structural imbalances – see charts above – it is pretty small beer, enough only to improve our ranking in those IMF charts by one place. Perhaps the Treasury’s estimation of cyclically-adjustment will have changed – for better or for worse – but we seem a long way from where we should be. And having chosen not to adjust last year, and with the three-party coalition chasing re-election next year, this year’s Budget was perhaps the only real hope left this term for getting back on fiscal track. To be sure, economic activity at present appears pretty weak, but a well-signalled tougher fiscal adjustment would normally be expected to be met by a looser-than-otherwise monetary policy (rather than further weakening economic activity). That, it seems, is not to be.
(The Opposition, of course, seems to differ only on the mix, not the extent of the fiscal imbalance they created and bequeathed, or the speed – sluggish at very best – with which it should be dealt with.)
But no doubt we will all be looking forward to the “bold” steps to lift economic growth etc
croaking cassandra 
That’s a great article and, as always, well supported with real world data. As is often the case I need to turn to ‘the sum of all human knowledge’ – Chat GPT – to gain an understanding of the terms. Here’s some of the conversation:
Me: Hi Chat – I’m reading an article about “General government cyclically-adjusted primary surplus (% of potential GDP)” as measured by the IMF. What can you tell me about this approach?
What is the “Cyclically-Adjusted Primary Surplus” (CAPS)?
This measure is an attempt to strip out the effects of the economic cycle on a government’s budget balance, in order to better understand the underlying fiscal stance of a government.
Let’s break it down:
Why use CAPS?
Governments often want to know if they are being fiscally prudent or expansionary, independent of the economic cycle. For example:
CAPS helps policymakers, the IMF, and analysts answer:
Levels included in “General Government”:
Me: So, this is “Government revenues minus government expenditures” means revenues from taxes and council rates and all expenditures made by all branches of government and councils?
Yes, that’s right — when we’re talking about the general government balance (including the cyclically-adjusted primary surplus), the revenues and expenditures include.
Me: Is there not a significant difference in the way that a government ‘borrows’ money and the way that a council does?
Yes, absolutely — there is a significant difference between how a central government and a local council (like a city or regional council) borrow money, both in mechanics and in constraints.
Me: Given that why would the IMF think that it makes sense to combine them together as a single measurement?
The IMF combines central + local government into the “general government” sector because it wants to measure the total fiscal impact of government activity on the economy — regardless of who is doing the spending or taxing.
The IMF’s main goal is to assess fiscal policy’s impact on the economy — not the political or institutional structure.
So, from a macro view:
Similarly, taxes or rates collected at any level reduce private income.
A $1B road project by the NZTA (central) vs a $1B water project by Auckland Council → both add to aggregate demand.
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An MMT lens might look at the surplus between 2015 and 2019 on the government side of the ledger as a deficit on the private sector side of the ledger.
It would be interesting to look at a graph of private sector debt growth over that period. MMT would expect private sector debt growth to compensate for the withdrawal of money by the government.
However, the fact that councils are included clouds the picture a little for me.
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I guess the other thing that is missing is the assets acquired through the debt or deficit periods – is there a side of the ledger that is being ignored in this measurement?
For example – during a government deficit period is there investment and growth taking place in the government’s capacity and assets – public servants, school and hospital buildings, infrastructure, the institutions that facilitate the operation of the economy etc.?
During government surplus is there an under investment in capacity that shows up in the economy as a deficit – such as infrastructure and productivity?
There is a lot of economic discussion in NZ about the need for government surplus and a gradual reduction in the overall debt (bonds issued). It feels like a consensus if you read the NZ media and the political parties – (aside from the Greens) – but is it correct?
Does the economic evidence and historic data support the idea that government deficits are bad for the economy? Or that governments should not issue bonds beyond a certain level?
What evidence is there that these debt reduction economic policies will lead to good economic outcomes?
If by good economic outcomes we mean high employment across the board in all sectors and different parts of the country, profitable and engaged business of all shapes and sizes, improving quality of life and living standards – in terms of healthcare, housing, education and wages.
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As you’ll have seen from the post itself, I’m not arguing for consistent surpluses (even on an operating balance basis) but for (structural) balanced budgets. There can be a reasonable basis for debt to finance capex, but nZ public disciplines around capex evaluation and purchase/implementation are weak, so we need a cautious approach there too.
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Thanks for your reply. I appreciate your articles because of their depth and on topics that no one else looks at. They force me to research and learn things I don’t understand and to question my own economic bias.
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Interestingly Warren Mosler sees high levels of government debt as inflationary because bond yields are regular injections of new money into the economy – at least some of which will be spent. So, from that perspective large quantities of high yield government debt are not good for the economy.
The counter to this, from MMT, is to keep interests permanently low and use other instruments to control inflation – such as taxation and mandatory private sector savings.
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A little outside the discussion but I wanted to write a comment on it because it was something that had never occurred to me before.
Steve Keene made this observation about government spending that kind of turned a light bulb on for me. His modelling is focused on the real-world role of banks as money creators (not intermediaries) and the dynamic system that results in the economy.
He said something along the lines of:
For every private sector loan there is an immediate and direct obligation on the loan recipient to commit to repayments – they carry a liability with the deposit that the loan creates. What’s more – as bankers know repaying loan principle destroys money – removes it from circulation.
The government, however, does not have this obligation and there is no immediate obligation to repay anything. Especially for the private sector recipient of government spending – teachers and doctors are not required to repay their salaries – these are credits without direct repayment obligation.
The new money is created in exactly the same way but the recipient of new money from government spending does not carry a liability.
What’s more when the government (as a loan recipient from the private sector via bonds) repays those bonds – money is returned into circulation in the private sector side of the economy – the opposite effect of repaying a bank loan.
Which helps to further explain why a public sector deficit is a surplus on the private sector side of the ledger and it is this surplus that enables savings and economic growth to take place.
Such a fascinating area of economics and very poorly understood fully – myself included.
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