Government can’t keep borrowing to prop up New Zealand households – Bryce Wilkinson
Almost 180,000 more New Zealand citizens have left the country than have returned in the past four years. Most have gone to Australia.
Higher incomes in Australia are likely a factor. Australians earn about 30% more per person than New Zealanders. That gap is worth roughly $20,000 a year for every New Zealander, or about $105 billion in total.
Many New Zealanders will not be aware of the extent of the shortfall because heavy government borrowing has been bolstering household incomes unsustainably.
The New Zealand Initiative’s report released this week, NZ Unbound: Freeing up growth and fixing the books, investigates what might be done about the twin problems of low incomes relative to the cost of living and high public debt from deficit spending.
The income gap does not come from a lack of effort. New Zealand has as large a share of its working-age people in jobs as Australia does.
The gap lies in what each hour of work produces. This depends on equipment and workers’ skills, and how well they combine.
The productivity gap for output per hour worked is larger than the per-person income gap because, as measured, New Zealanders work longer hours than Australians.
That productivity gap has widened as well. Between 1995 and 2025, output per hour grew 64% in Australia’s market sector against 49% in the comparable part of our economy.
The public debt and deficit spending problem arose between 2018 and 2024, when current spending by the core Government increased from 27.3% to 33.0% of GDP. GDP is the value of everything the country produces in a year, so an increase of 5.7% of GDP in government deficit is extraordinary. Tax revenue rose by only 1.5% of GDP.
The spending binge from 2018 to 2024 converted operating surpluses into large, enduring deficits after Covid-19 struck, financed by a large increase in borrowing. For the fiscal years 2020 to 2027, the turnaround for borrowing is $111b, or $55,000 per household.
Greater capital spending than forecast in Budget 2018 required yet more borrowing.
Treasury forecasts net core Crown debt in June 2027 to be 43.7% of GDP, up from 18.6% in June 2019. The dollar increase is $152b.
Interest payments now take much more of each tax dollar; two credit rating agencies, Moody’s and Fitch, now have New Zealand on negative outlook.
There are no grounds for confidence that this money is being spent well.
The former Controller and Auditor-General found it “hard if not impossible” to see the combined effect of some $180b in spending. Parliament was not even getting the information it would need to be able to properly identify value for money.
This situation is irresponsible. A fiscal council reporting directly to Parliament on action-oriented options for addressing such problems would help. Transparency and accountability for the results of the spending are fundamental to good governance.
Government regulation has long had even less value-for-money scrutiny than government spending. Excessive red tape has been causing unconscionable delays and stifling domestic investment.
The cost includes necessary investments that never happened. Inadequate infrastructure and unaffordable housing are two visible examples.
Productivity growth is critical for per capita income growth. In the private economy, competition forces wage rates to track labour productivity.
Achieving higher productivity requires a greater willingness to accept change and to welcome greater investment per worker, even if the source is overseas capital. A worker with a digger can dig a trench faster than someone with a shovel.
There is much that Governments can do to encourage investors and innovators to invest in New Zealand.
There is no silver bullet for government action, but lower top tax rates, less red tape, fewer undue barriers to competition and controlling government spending are all needed.
Greater respect for property rights would help too. Investor confidence in a country is easily lost and hard to reverse. The wilful ban on offshore oil and gas exploration invites every investor to wonder what might be banned next.
An early return to more prudent debt levels looks unlikely. Treasury’s debt projections to 2065 show an unsustainable path for public debt due to the ageing population.
Those who emigrate escape this debt burden (although they may pick up someone else’s).
It is good that New Zealand citizens can and do get work experience overseas. But it is not good if a major driver of emigration is inadequate income in New Zealand. When that problem is made worse by poor-quality government spending and regulation, it is an avoidable tragedy.
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