Presentation to Wellington Macrogroup Seminar on Debt policy. 7 November 2025; there is a PowerPoint that goes with this presentation. Available on request.
This paper argues that we should focus fiscal policy on net worth more than we do. The current obsession with debt ignores the difference between borrowing for investment purposes and borrowing for consumption purposes.
Asymmetry is a crucial, but often ignored feature of credit transactions. You would normally be surprised if a shopkeeper said they would sell you 1kg of apples but not 2kg, even if you offered to pay a higher price. Yet such a response is routine if you ask for credit. As Minister of Finance Downie Stewart recalled, Keynes advised that New Zealand should borrow as much as it could to offset the Great Depression, but if Keynes were the lender he would probably not be prepared to advance New Zealand anymore. That asymmetry is at the heart of the political power of the finance sector over the real economy.
It is not an unreasonable stance. The cost to the lender of a failure to repay a loan can be substantial. Lenders go to considerable trouble to assess the likelihood of such a failure. While they do their own assessments, they are often advised by credit rating agencies (CRAs) who, helpfully for us, offer a window into lenders’ thinking.
A Debt Target Distorts Investment
As Pat Duignan has detailed, CRAs look at the whole economy in an informed, firm but understanding way. Sure, they may be ideologically to your right, but they are not stupid. While they look at a spectrum of indicators, they do not fix on anyone. More important, they have to convince themselves that the government has a credible commitment towards its debt obligations as well as an ability to service them including to manage its investments. In the end the lender gets its profit from lending (providing the debt is honoured), so they want to do deals.
That government commitment need not be as crude as adhering to a rigid a debt-to-GDP ratio target, although that is the way it is currently signalled. The trouble with the target is that it does not make rational economic sense insofar as it results in poor investment decisions.
It makes no sense that the main driver of any healthcare decision should be an arbitrary debt target. For example, the government is outsourcing public medical procedures to the private healthcare sector. That avoids the government having to borrow to invest in adequate public sector facilities – such as buildings and equipment. Rather than borrowing and investing itself, the government is getting the private sector to do the task and then paying it for the debt servicing. It is keeping its debt-to-GDP ratio down but still paying for the investment.
This is but one example of the absurdity of the debt-ratio target. Another is the tangle we are getting in over the need to invest in the water infrastructure. Very substantial public funding is required unless we privatise. However, the government has been trying to keep any resulting debt off the books. No doubt the CRAs will see through the muddle because any public funding will be ultimately underwritten by the government, even if it does not appear in the public accounts as a legal contingent liability.
Borrowing For Consumption
Nowadays, CRAs must be worrying because we are currently borrowing for consumption. We can trace this via the Crown’s net worth, the total assets of the Crown less its debt. It is far better indicator of the government’s financial position. (Of course the lender will remain concerned about other indicators such the net debt.)
The government’s net worth fell from $183.5b in June 2023 (45.7% of GDP) to $179.3b in 2025 (41.1%). The 2025 Budget Economic and Fiscal Forecast (BEFU) expects a further fall through to 2029 (as far out as the projection goes). Unfortunately, the projection is not inflation adjusted, but in constant price terms BEFU expects net worth to be about $12b lower than today (down to about 35% of GDP).
This means the government is consuming its capital, not adding to it. There are various ways of running down net worth including directly borrowing (or selling assets) to fund consumption or running down the stock of capital. (The latter is the reason why our water infrastructure is in a mess.) The government is not saving but over a six-year period it is consuming more than its revenue. It may be a legitimate decision for a retired person to do this but hardly appropriate for a government which expects to live forever.
The hard truth of our current fiscal stance is that additional borrowing is being used for consumption not investment. We overlook this when we focus on the level of debt rather than what we are doing with the borrowing.
Net Worth and the Golden Rule
How to make net worth more prominent? The government is not going to because doing so would draw attention to a serious defect in its stewardship, although it has talked of a net worth target. Those outside the government need to give more attention to net worth.
A step forward would be for the government to adopt the ‘Golden Rule’ of fiscal management which focuses on net worth. Put simply, over the economic cycle, the Government would borrow only to invest and not fund current spending. (The principle allows raiding a ‘rainy day account’ to prop up consumption in the short run after a shock but the fund needs to be topped up shortly after, ready for the next shock. It certainly does not envisage six and more years of raiding.)
This is the approach of a fiscal conservative. The adoption of a Golden Rule would increase the credibility of the government’s fiscal management. It would not disturb the CRAs and the lenders they represent. The concern of the debt-to-GDP ratio would continue but it would be seen as a constraint under which fiscal management operates, not the purpose of the management as too often it appears to today.