Debt interest to hit $100 Billion

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New Zealand report

Government debt will climb to intolerable levels by the middle of the century on present policy settings and this is a problem that we cannot simply grow – or tax – our way out of, according to Treasury projections of the long-run fiscal outlook.

That leaves a focus on spending.

The projections have the Government’s net debt, which stands at around 16 per cent of gross domestic product, climbing to 223 per cent by the middle of the century, compared with just over 100 per cent in the previous projections made in 2006.

If that happened the interest bill would be more than $100 billion a year and would dwarf any other item of Government spending.

About half the deterioration since 2006 is the legacy of the financial crisis of the past two years – an end to fiscal surpluses and a shrunken tax base. The rest reflects higher costs of existing programmes and changes to Government policy

Treasury Secretary John Whitehead stressed that the projections are not forecasts of what will happen, but rather where policy, demographics and past trends in factors like productivity growth and migration would take us over the next 40 years if nothing changed.

The projections assume productivity (or per capita GDP) growth of 1.5 per cent a year, in line with the long-run historical trend, and a net migration gain of 10,000 a year. But even if productivity growth lifted to 2 per cent, the migration gain was 15,000 a year and the labour force rose significantly from its already internationally high level, the Government’s net debt would still reach an unsustainable 146 per cent of GDP by the middle of the century.

“Growth alone does not solve the fiscal problem,” Whitehead said. Higher productivity means higher wages, and New Zealand Superannuation is indexed to wage growth, too.

The impact on the fiscal position of another $1 of GDP from higher productivity would be to increase the tax take by 33c but, when that is offset by higher superannuation and public sector wage costs, the net gain to the Government is about 13c.

Higher taxes would reduce fiscal deficits but at the expense of weaker economic growth. READ MORE

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