The government simply setting a debt target for its fiscal management makes no sense. Better to set a Crown Net Worth target which reflects the entirety of the Crown balance sheet.

The National Party promises to bring net core Crown debt down below 40 percent of annual GDP. Labour promises to reduce net debt to around 20 percent of annual GDP over time. They are using different measures of net debt; on a comparable basis the targets are much the same.* What they have in common is that they are both targeting ‘net debt’.

They would probably argue that they were required to make a debt target under the 1989 Public Finance Act, but the act could be changed if they saw the error of their ways. The spirit of the PFA – that the public should be told what the government’s fiscal plans are – should be maintained but the target of net debt does not make sense.

For instance, the debt ratio could be reduced by selling off Crown assets – privatisation. This is not arguing that the government should privatise its assets, anymore than it makes sense for you to sell off your house to eliminate your mortgage or, if you are renting, not to buy a house because that would raise your debt-to-income ratio. Indeed, it may make sense to borrow more, increasing debt rather than squeezing government consumption or raising taxes if you are nationalising an asset – such as Air New Zealand and Kiwirail as Michael Cullen did when he was Minister of Finance, initiating a new business – such as Kiwibank as Cullen did, or building more infrastructure – as Steven Joyce did with the broadband rollout.

Debt is not a meaningful fiscal target and, while we need to be conscious of its level because the lenders we borrow from monitor out debt position. But they also look at the rest of the government balance sheet. What really matters is that overall balance sheet which sets the debt in a context of what its assets and liabilities.

There is an even more insidious aspect to the focus on a debt target in that it fails to acknowledge when we are running up debt by borrowing for consumption rather than for adding to assets. In fact, New Zealand has been borrowing for consumption in every (fiscal) year since 2019/20. In that year there was a case for a temporary borrowing to cope with the shutdown which the Covid pandemic required. This borrowing for consumption is measured by OBEGAL, the Operating Balance Before Gains and Losses. Both parties promise to make return to an OBEGAL surplus – National in 2028/29 and Labour in 2029/30 – but one finds it very hard to justify the decade it is taking to return where the government is no longer borrowing for consumption. It took the Key-English Government, faced with the larger shocks of the Global Financial Crisis, and the Canterbury earthquakes, but three years to run a surplus. Had today’s government managed as well as the previous National Government it would already be in surplus, instead of promising another five years.

Not incidentally, the 2023 PREFU (Pre-election Economic and Fiscal Update) projected that the Crown accounts would have returned to surplus by the 2006/7 year. I am not saying that had Grant Robertson been Minister of Finance after 2023 the government would have attained that goal. The point here is that there is a tendency to make promises about the future trajectory of borrowing and debt but not to attain them.

The fact that the government has been borrowing for consumption does not discriminate between whether the consumption is public or private. The government borrows for private consumption when it gives tax cuts which it cannot ‘afford’. That is, in effect, what the Coalition Government did in 2023. It had promised income tax cuts – presumably it helped them to win office – but, despite heavy cutting in some areas partly offset by greater spending in others, it has prolonged the date for a return to an OBEGAL surplus.

Should we bother about borrowing for consumption? It partly matters what the consumption is. It is one thing to run up debt to obtain a qualification which lifts one’s future earnings, and another to gamble it away. The difference with government borrowing is that the debt has to be serviced and repaid by future generations, some of whom are not even born when it was the debt was incurred. In my view, it is appropriate to borrow on behalf of those generations only if they are left with assets they will value. That is a moral judgement. A totally selfish person may want the government to borrow on their behalf, leaving future generations to pay for the binge. (I accept that it may make sense to borrow for consumption as a short-term measure to deal with a great shock. The early repayment will largely be by those who benefited from the borrowing measure.)

I suppose my position is that I favour sustainability. Robert Muldoon said his aim was to leave the country as well off as when he took over. At the time the objective was decried as too modest. Today most would not judge Muldoon as successful in even that objective; neither have been many of his successors.

How are we to judge fiscal sustainability? The best measure we have is Net Crown Worth which offsets the debt by the assets. For the record, when the Coalition Government took over, NCW was around 45 percent of annual GDP; it is currently around 39 percent and is expected to be around 35 percent at the next (2029) election.** The current government is not even attaining Muldoon’s modest objective.

A particular advantage of NCW is that it is politically neutral. A privatisation would not change NCW, neither would a nationalisation. The efficiency case for each would be argued without the confusion of debt arguments. The measure also allows a government to borrow for investment in tangible assets which would be valued by future generations. That means that the debt-to-GDP ratio might rise, but it need not compromise fiscal sustainability because the assets backing them, and servicing them, would too.

Fiscal sustainability is only part of a wider sustainability which covers, among other things, national security the environment and good citizenship. However, none is really robust unless there is also fiscal sustainability.

* Treasury recommended, in 2022, that New Zealand should use a headline debt measure closer to the international norm. That measure would include a wide range of government assets (like the Super Fund and advances) and liabilities (including debt held by other Crown agencies like Kainga Ora). Treasury said it would give a headline net debt figure about 20 percentage points lower than the one being used today. Minister of Finance, Grant Robertson, adopted the Treasury recommendation. It is the measure used by the Labour Spokesperson on Finance, Barbara Edmond.

** Treasury projections do not incorporate future price rises of some assets, biasing the reported CNW downwards. As best as I can assess, this does not markedly change the story being told here. If CNW became more prominent in the government’s thinking, Treasury would put effort into projecting asset prices better.