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Controlling debt - fact sheet

28 May 2009

Controlling debt - fact sheet

  • Treasury estimates showed that without policy changes, gross government debt would rise alarmingly, reaching 48 per cent of GDP by 2013 and 70 per cent of GDP – or about $227 billion – by 2023.
  • That level of debt equates to just over $45,000 for every New Zealander. Put another way, it would represent $180,000 of government debt for every family of four – equivalent to a second mortgage on their home.
  • Paying interest on that debt would have cost the Government $13.7 billion a year - more than is currently spent on the public health system.
  • Debt last peaked at more than 70 per cent of GDP in the 1980s and it took almost 20 years of tough decisions to bring it back to prudent levels.
  • Budget 2009 takes a number of actions to control debt:
  • Slowing the pace of annual operating allowance increases to $1.45 billion in 2009/10 and $1.1 billion in 2010/11. For following budgets, the allowance will grow at 2 per cent a year.
  • Deferring personal income tax cuts scheduled for 2010 and 2011.
  • Suspending automatic contributions to the NZ Superannuation Fund.
  • These actions mean gross debt is forecast to reach a maximum of 43 per cent of GDP in 2016/17 and to reduce to about 37 per cent in 2022/23.
  • The chart below shows what would happen if these decisions had not been made. Gross debt would reach 70 per cent of GDP in 2023 and continue to grow if the tax and spending policies from the 2008 Pre-Election Update were maintained alongside current economic forecasts.
  • In Budget 2009, the Government states its long-term debt objective in “net debt” rather than “gross debt” terms. This is set out in the Fiscal Strategy Report. Gross debt will continue to be shown.
  • The Government believes a net debt indicator is more accurate and transparent.
  • This is because it takes a wider view of the Crown balance sheet, including the level of financial assets as well as gross debt.
  • A net debt indicator is more commonly used internationally.
  • Moving to a net debt indicator also properly takes account of Debt Management Office assets and Reserve Bank settlement cash in the debt measure. This makes sense as they appear on both sides of the crown balance sheet.
  • The definition of net debt being adopted differs from that used previously. It excludes advances (for example, student loans) that could count as “financial assets”. Advances are made for public policy reasons rather than being associated with government financing.
  • This definition of net debt takes into account only core Crown debt and financial assets (the financial assets of the New Zealand Superannuation Fund are excluded). Gross debt, excluding settlement cash and Reserve Bank bills, is currently around 25 per cent of GDP.
  • The previous net debt indicator is around 2.5 per cent of GDP and the new net debt indicator is around 9 per cent of GDP. Over time, the difference between gross debt and the new net debt indicator narrows because debt is rising faster than financial assets.
  • See the full release with graphs here.

    ENDS

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