Amongst the Budget Responsibility Rules which the government agreed after the 2017 election, the government is required to reduce the level of net core Crown debt to 20% of GDP within five years of taking office (fiscal year ended June 2022).  In a recent speech by Finance Minister Grant Robertson, the government acknowledged adherence to this target.  However, beyond the expiry of the Budget Responsibility Rules, rather than target a specific debt-to-GDP ratio the government is considering introducing a target range for debt to be 15-25% GDP.

We thought it would be interesting to see how this range compares internationally and some of the key considerations when thinking about the appropriate level of government debt.

What is Debt-to-GDP?

Debt-to-GDP is a ratio of a country’s public debt to its gross domestic product (GDP).  GDP is the total value of all the finished goods and services produced by a country annually.  Hence the ratio compares what a country owes to what it produces in an attempt to quantify the ability of the country to repay its debt.

There is no consensus as to what the appropriate ratio is.  Generally speaking, a higher ratio is worse as it implies a greater proportion of debt relative to a country’s output, but there are a lot of other considerations to take into account – not least of all the sustainability of the debt levels which requires consideration towards the outlook for GDP growth and government spending needs.

How does NZ compare globally?

Under the NZ Treasury’s Budget Responsibility definitions, as at June 2018 net core Crown debt was $57.5bn or 20% of GDP.  The recent Wellbeing Budget forecasts this to increase towards 21% for the next two years before reducing to 17% by the end of the budget’s forecast period in June 2023.