The New Zealand Treasury's latest forecasts and the Government's Budget Policy Statement (BPS) are disquieting. Public debt management looks lax and possibly illegal, government spending entrenches excess rather than tackles it, and productivity growth measures are welcome but piecemeal.

The BPS’s approach to managing public debt appears to fall short of legal requirements. The Public Finance Act sets the rules for how governments manage public money. One section requires each government to do two crucial things: determine what a "prudent" level of public debt should be and set out a clear timeline for achieving it.

Before Covid-19, the authorities considered a prudent level for net public debt to be between 15-25% of GDP (Gross Domestic Product – the total value of goods and services produced in New Zealand). However, the current forecasts show debt will remain at 45% of GDP by June 2029 – almost double what was previously considered safe. More concerning is that the government hasn't specified what it now considers a prudent debt level, nor has it provided a timeline for reaching it.

While the Public Finance Act does allow temporary departures from debt targets during exceptional circumstances like the pandemic, it requires the Minister of Finance to clearly state how long this departure will last. The current Budget Policy Statement does not do this.

Government spending also remains significantly higher than pre-pandemic levels. Before Covid-19, in June 2019, core Crown operating spending was 28% of GDP. Treasury forecasts show this will still be at 31.5% of GDP by June 2029 – a full decade after the pandemic. To put this in perspective, imagine if your family increased its spending during an emergency but hadn't planned to return to normal spending levels even years after the crisis passed.

The government's current strategy could be described as "hold and wait" – maintaining higher spending while hoping economic growth will eventually increase tax revenue enough to close the budget deficit. Yet Treasury has identified that the government is running a structural deficit of 2.7% of GDP.  By definition, that is not a deficit which disappears as economic activity recovers from a downturn. Correcting it requires cutting spending or raising revenue in some combination. Notably absent from the government's plan is selling government assets to help reduce debt – a strategy that has been used in the past to improve the country's financial position.

The third critical issue is productivity growth – how much value each worker can produce per hour. The government has proposed five main measures to boost productivity: improving school education, making it easier for foreign companies to invest in New Zealand, allowing more collaboration on gene technologies, increasing land supply for housing, and reducing red tape through a new Ministry for Regulation.

However, Treasury's forecasts suggest these measures won't significantly improve productivity by 2029. This is particularly concerning because productivity growth is vital for raising living incomes per capita and thereby living standards and tax revenues.

For young New Zealanders, these issues matter deeply. Higher government spending without corresponding productivity growth must mean higher taxes or reduced services in the future. The elevated debt levels could limit the country's ability to respond to future crises, whether they're natural disasters, economic downturns, or other challenges that require government intervention.  Public debt levels are much higher world-wide than pre-Covid. This makes the world a riskier place financially.

The situation calls for more decisive action. Much government spending is ill-justified and should be cut. There are far too many government agencies each fighting for their own silos. Debt could be reduced by selling assets governments do not need to own. More effort could be put into reducing red tape.

The Treasury's forecasts make it clear that more decisive action is needed given the current fiscal challenges. Without stronger action on spending, debt management, and productivity growth, New Zealand remains more vulnerable than it should be to the next adverse economic shocks. Given the state of the world, one could come at any time.

To read the full article on The Post website, click here.