Grant Robertson: shift from net debt 20% target to 15-25% range

One of the biggest talking points coming out of Minister of Finance Grant Robertson’s pre-budget speech to Craigs Investors Conference yesterday was a shift from a net debt target of 20%, to a much more flexible range of 15-25% dependent on economic conditions.

The 20% target was a feature of the Labour-Green fiscal responsibility agreement prior to the 2017 election.

Robertson 24 March 2017: Labour and Greens commit to rules for responsible financial management

The Labour Party and the Green Party have agreed to Budget Responsibility Rules, which will provide the foundation for sound fiscal management after the election.

“New Zealanders rightly demand of their government that they carefully and effectively manage public finances. We understand that and are committed to delivering this,” says Labour Finance Spokesperson Grant Robertson.

“These rules demonstrate how Labour and the Greens in Government will manage the economy prudently, effectively and sustainably.”

Under the Budget Responsibility Rules the Government will:
• Deliver a sustainable operating surplus across an economic cycle
• Reduce the level of Net Core Crown Debt to 20 per cent of GDP within five years of taking office
• Prioritise investments to address the long-term financial and sustainability challenges facing New Zealand
• Maintain its expenditure to within the recent historical range of spending to GDP ratio
• Ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

The Government will establish an independent body to make sure the rules are being adhered to.

Since the Labour-Green-NZ First Government took over in late 2017 the target (and fiscal prudence) has been strongly criticised by people on the left who have been demanding much more spending for ‘urgent needs’.

Relevant section of yesterdays speech under Budget 2019 Economic Priorities – Fiscal sustainability:

We are reducing the level of net core Crown debt to 20 percent of GDP within five years of taking office. New Zealand has low levels of Government debt by international standards, but we remain vulnerable to shocks that are beyond our control, such as earthquakes and other natural disasters. We have made our commitment to keeping debt under control to ensure that future generations of New Zealanders are in a position to be able to respond effectively to any such shock.

This Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand. This is apparent in the intergenerational wellbeing priorities we have identified in this year’s budget and restarting contributions to the NZ superfund and our focus on issues such as climate change.

We will maintain Government expenditure within the recent historical range of spending to GDP, which has averaged around 30 percent over the past 20 years. We are also focussed on the quality of spending, with Ministers running prioritisation exercises across their portfolios to identify spending that doesn’t fit with the Coalition Government’s priorities.

I am pleased to announce today that on the 30th of May the Budget will show that we are meeting these rules again, as we did in last year’s budget.

I know there has been some criticism of this approach – particularly around the debt target. For me it is a question of balance. We have made, and will continue to make, significant investments in our future, but we also know that the volatility of the world, be it economically or through natural disasters, biosecurity incursions or unexpected events, is never far away.

The Public Finance Act obliges Governments to outline their long-term fiscal strategies at Budget time. One of the key elements of this is the Government’s approach to debt.

People in this room will all have different views on what it could or should be. That in part depends on the levels of investment you believe the Government should be making and in what areas.

We also have to take into account capacity constraints at any point in time – like in our construction sector. With this in mind, I am comfortable with the 20% point that we have been targeting. But circumstances can obviously change.

Beyond the Budget Responsibility Rules, our fiscal intentions in this budget will signal a shift to a net debt percentage range, rather than a single figure. At this point we are looking at a range of 15-25% of GDP, based on advice from the Treasury. This range is consistent with the Public Finance Act’s requirement for fiscal prudence, but takes into account the need for the Government to be flexible so that it can respond to economic conditions.

Essentially, our current 20% target falls in the middle of the new range that will exist from 2021/22 onwards.

A range gives governments more capacity to take well-considered actions appropriate to the nation’s circumstances – circumstances that change over time. It establishes boundaries within which debt is kept to sensible and sustainable levels and where fiscal choices are driven by impact and value.

For example, a government may choose to move higher up the debt range to combat the impact of an economic recession, or where there are high value investments that will drive future economic dividends. At other times it may be prudent to reduce debt levels to the lower end of the range to provide headroom for future policy responses.

Reaction to 20% trade tariff suggestion

While White House press secretary Sean Spicer has retreated from his initial suggestions that a 20% trade tariff could be considered on imports from Mexico as a way of paying for a wall between the US and Mexico, the idea has prompted consternation and condemnation in the US and around the world, including in New Zealand.

RNZ: US tariffs on Mexico could hurt Fisher & Paykel

Punitive tariffs by the United States on Mexico could rebound on a major New Zealand company, according to its managers in Auckland.

US President Donald Trump has talked of imposing a 20 percent tariff on Mexican exports to the US as a way of making Mexico pay for a wall being planned for the US-Mexican border.

Since that tariff idea was first unveiled, the White House has back-pedalled slightly, saying it is an option, not a proposal.

But the mere possibility of a tariff has hit the New Zealand firm Fisher & Paykel Healthcare, which manufactures goods for the American market in the Mexican town of Tijuana.

News of a possible tariff caused its shares to fall 3.06 percent yesterday.

Loose talk from White House press secretaries can have quick and widespread effects.

And it has prompted strong criticism in the US. Politico: Major newspaper editorial boards blast Trump’s border ‘war’

The plan amounts to a “tariff tantrum,” The New York Times wrote in its editorial, while The Wall Street Journal labeled the week-old administration’s efforts at international negotiations “amateur hour.” Trump’s rhetoric, wrote The Washington Post, is “a stick of dynamite” inserted into mutually beneficial relationship that politicians from both countries have worked years to build.

Despite Trump claiming in a media conference a short time ago (with Theresa May) that he thinks he has a good relationship with the Mexican president:

Trump’s already strained relationship with Mexico descended to a new low on Thursday, with Mexican President Enrique Peña Nieto canceling a planned visit to Washington next week (Trump claimed that the decision to cancel the trip was mutual).

The president has promised from the very beginning of his campaign that the border wall would be paid for not by U.S. taxpayers but by the Mexican government. Peña Nieto has been unflinching in his response, insisting at every turn that under no circumstances will Mexico pay for the wall.

As a means of extracting payment, White House press secretary Sean Spicer suggested Thursday that the U.S. might levy a 20 percent tax on all Mexican imports, though he later pulled back that assertion.

Such a move would require the U.S. to back out of the North American Free Trade Agreement, a trade deal that Trump railed against on the campaign trail and has pledged either to renegotiate or to leave entirely. Extricating the U.S. from NAFTA could have severe economic consequences, threatening continent-wide supply chains fostered by North American free trade over the past 23 years and with them, the millions of American jobs that depend on exporting goods to Canada and Mexico.

Imposing such an import on Mexican goods, the Times noted, could create a shortage of fresh fruits and vegetables in American grocery stores and drive up the price of many other consumer goods made in Mexico. Ultimately, the Times’ editorial board wrote, “a tax on Mexican imports would be paid by American consumers and businesses that buy those goods. Americans would pay for the wall, not Mexicans.”

The Post agreed, writing that while a tariff could extract some money from Mexico, “it also would likely act as a tax on American consumers of Mexican goods. American consumers, that is, would pay for the wall by paying higher prices for Mexican-grown tomatoes, Mexican-sewn clothing and Mexican-built cars.”

The Wall Street Journal:

“Mr. Trump said as a candidate that he’d treat America’s friends better than Mr. Obama did, but his first move has been to treat Mexico like Mr. Obama treated Israel. On present course he may get comparable results, or worse.”

It looks like Trump and his administration are rushing things far too much, and thinking through the possible ramifications of what they say publicly far too little.