There are plenty of egregious examples of public sector waste (think lavish welcomes and farewells for senior public servants) or lack of discipline combined with questionable – well, really poor – process (think this morning’s post about the sly but huge increase in approved Reserve Bank spending).
But my core interests are macro in nature. There have been a series of posts in the last couple of weeks about aspects of the inflation and monetary policy story in the last few years, including yesterday’s on the external economy backdrop which should, if anything, have made New Zealand better placed than some to have kept core inflation near target (and that without even mentioning our lack of exposure to last year’s extreme European gas price shock).
It occurred to me that it might also be interesting to look at how fiscal balances and public debt levels had changed across the group of advanced countries (with their own monetary policies) that I’ve been using for comparison in these posts. I was less interested in the specific pressures put on monetary policy, since I’ve already written a couple of pieces dealing with the spin the Governor is (yet again) engaging in, trying to downplay fiscal impulse measures (developed for monetary policy purposes) in favour of ones that seem to have no macroeconomic foundation at all. I’ve asked the Bank for all/any analysis research in support of what looks to be a highly questionable alternative view, but am not holding my breath (if there were anything much they’d either have referred to it in the MPS, or they might even have been keen to send it to me by return of email to allay my doubts). So my focus was on fiscal developments in their own right.
Sometimes when one heads off to OECD databases to download lots of cross-country comparative data I already more or less knows the story and just want the hard numbers to illustrate it. Other times I’m taken by surprise. This trawl was one of those surprising ones, and not in a good way at all.
But first the good news. This is my preferred (since all-encompassing) measure of net debt. The OECD doesn’t have data on quite all the countries (and Norway data isn’t up to date, but at last read was about -350 per cent of GDP). These are the OECD’s mid-year estimates for 2023
We have lower debt than the median country. Many people (including me, but certainly not everyone) count this as a pretty good thing. But a debt stock is an accumulation of choices by successive governments over a long time. And I was more interested in looking at how things had changed over the Covid period, so since 2019. After all, every government faced some big spending in 2020, and when economies were temporarily closed down tax takes fell too.
So here is how net general government financial liabilities is estimated to have changed from 2019 to 2023 for this same group of countries.
And this is where the surprises started.
The median country in this chart – Sweden – saw basically no change in net debt to GDP over this period. New Zealand, on the other hand had the third largest increase. Australia had a slightly larger increase, but interestingly that was concentrated in the actual Covid period: from 2021 to 2023 net debt in Australia is expected to have risen by 1.5 percentage points while in New Zealand is estimated to have risen by 7.5 percentage points. Of course, for highly-indebted countries the unexpected surge of inflation typically lowers net debt to GDP – helping the US notably among these countries – although in the UK’s case having a large proportion of inflation-indexed debt on issue prevented that happening (as it was designed to do).
The OECD forecasts include 2024 as well, so we can see how they think net public debts levels will have changed across these countries from 2021 (the end of the big Covid spends) to 2024, which they base more or less on policy as at the time the forecasts are done (so mid 2023). Here’s that chart
No comment needed really.
That’s debt, but what about flow measures? Deficits and the like.
Here, we can’t look at the operating balance measures we in New Zealand usually focus on. And all the measures are for “general government” (all layers) rather than just central government (although of course in New Zealand central government absolutely dominates the numbers). There are two sensible metrics to look at:
- the primary balance (ie excluding financing costs) as a per cent of GDP, and
- net lending (so saving minus investment) as a per cent of GDP
Both are available either cyclically-adjusted or plain, and the OECD also identify idiosyncratic one-offs to go beyond the cyclically-adjusted measures to something more like structural balances. Covid was a common shock, and there are very few identified one-offs for the years focused on here.
The primary balance is a deficit measure pure and simple. Excluding finance costs makes sense for these purposes not because they aren’t real costs, but because a country with higher inflation will tend over time to have higher interest rates and much of those higher nominal interest rates aren’t a real burden, but just maintain the real purchasing power of the debt. At present, 6 per cent inflation and 4 per cent bond rates gives you negative real financing costs, but still a significant line item of expenditure on interest. The other reason for excluding them is that a basic maxim in public finance is that if you are running a primary balance or material surplus, your debt won’t be escalating as a share of GDP (precise definition depends on the relationship between the interest rate and the GDP growth rate). Countries don’t need to run headline surpluses to see debt ratios stabilising or falling, but sustained primary deficits (especially in cyclically-adjusted terms) are typically a bit of concern – the sort of thing the IMF might focus on in struggling countries.
Anyway, here are the OECD’s primary balance estimates for 2023 (Norway, as so often at present, runs off the scale)
So that would be the third largest primary deficit this year or any of these advanced economies. Japan is….well….Japan when it comes to public debt and deficits. Poland is dealing with a big influx of Ukrainians and a huge increase in defence spending, and then there is New Zealand. By far the largest primary deficit of any of the countries we are more prone to comparing ourselves to (Anglos and other north Europeans), in an economy where this calendar year the output gap will be about zero (in other words the deficit isn’t exaggerated by a deeply below-capacity economy). I did check the cyclically-adjusted picture and it looks very much the same, altho the Czech Republic just sneaks past us.
And while the median country in this grouping has seen its primary balance deteriorate (into small deficit – see above) over the Covid period since 2019, New Zealand has had the third largest widening (again, cyclically-adjusted numbers are similar, although we are second worst on that measure)
Adjusting the New Zealand numbers for the OECD’s series of estimated one-offs (mostly around the earthquakes) produces this time series chart.
From which I take two points:
- We have never (outside Covid peak itself) run primary deficits anywhere near as large as those run last year and (estimated) this year.
- In almost every year in the history of the chart we have a stronger (cyclically adjusted) primary balance than the median advanced country in this grouping. Not only were our primary deficits materially larger in 2020 and 2021 (the Covid outlays years), they are still materially larger now.
The other set of measures is for net lending. I haven’t used these data often here, but they are totally standard framework for analysing macro (im)balances (the Reserve Bank even had a nice chart of these sectoral balances, for firms, households, and general government in the latest MPS. It is a measure of savings less investment, saving (in the public sector context) typically arising with operating surpluses. It is set within a national accounts framework, unlike the primary balance (which is more of a pure fiscal thing, since OECD primary balances typically include capital spending).
Here are the OECD’s numbers for 2023
We are fifth from right here, with a rather large gap between government saving and the government deficit, but even that position flatters us because the saving numbers take finance costs into account, and (as discussed above) in the presence of high inflation the numbers for highly-indebted countries (think US and UK) show as worse than they really are. Simply paying out interest equal to the inflation rate is not a real burden (or hence real dis-saving), they just maintain the real purchasing power of the bondholders without worsening the real position of the government. (If you want to know more about this issue in a New Zealand context Google work Grant Scobie did at The Treasury.) Since economies are getting back towards balance this year, the cyclically-adjusted picture isn’t much different for New Zealand.
And here is the change since just prior to Covid
Third from the right when even the median country’s position has deteriorated – and remember almost all of these countries have been grappling with high inflation – is probably not the ideal place for New Zealand to be.
I could, but won’t, show you the time series chart for this measure cyclically-adjusted and with adjustment for earthquake one-offs. I won’t because the picture is so similar to the time series comparative chart for the cyclically-adjusted primary balance. We used to be better than the median, our government sector used to be net lender most years, while now we are a net borrower and quite a bit more so than the median of these advanced countries.
As I suggested towards the start of this post, I was genuinely surprised by these numbers for the last few years. I knew, of course, that New Zealand’s position had deteriorated, and have banged on here about the lack of any robust economic case for running operating deficits last year and this while the economy was overheated or (this year) getting back to balance, and the Reserve Bank was belatedly grappling with the inflation challenge. But if you’d asked me, I guess I’d have assumed that other countries had probably had similar deteriorations. Mostly, they haven’t.
None of this – except the initial debt charts – are materially influenced by the costs of Covid – lockdown support etc- themselves. Those costs were borne, and often were very heavy, in 2020 and 2021, while my charts have focused on the changes in balances from 2019 (pre Covid) to 2023 (post big Covid expenditures and with fully employed economies). They are pure political choices.
I can see an arguable case for a country that had rapid productivity growth and rapid population growth to be a net borrower (investment in anticipation of future income gains). But other than the central European countries, rapid productivity growth has been scarce among advanced countries, and although our population growth rate is now rapid again, so are those of Australia and Canada, neither of which is running anything like our net lending deficit.
And in a fully employed economy (as ours is this year) there is just no good case at all for running any sort of operating deficit (the New Zealand specific measure), let alone a material primary deficit.
In flow terms, our public finances now – fully employed economy, and terms of trade which have still been high by historical standards – just aren’t what they once were (under governments of either stripe) until quite recently. And the numbers are still flattered by that boost an unexpected surge of inflation gives to the public accounts – but which you never hear either government or Opposition parties engage with – in that public sector wages (with a considerable element of central control) tend to be slow to adjust. The government recently more or less forced secondary teachers to accept a material real wage cut. They are trying to do the same now with senior doctors. And it is probably the case, in a bigger way, for any moderately well paid public servant who hasn’t changed jobs in the last three years. None of those cuts is likely to prove sustainable (when private sector real wages are flat or rising) longer term if we care at all about the capability and quality of the services we expect governments to provide. Pressures like that really should, but won’t (given the way these things are done), be reflected in next month’s PREFU as part of the big fiscal challenge facing whoever takes office after the election.
There are lots of numbers and concepts in this post. Apologies for that but it is largely unavoidable in trying to do meaningful cross-country comparison. The bottom-line, through all the charts and numbers, is that first sentence of the previous paragraph.
