Political & Economic week ahead: A new way to look at government debt

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There should be more discussion this week on Finance Minister Bill English’s announcement of plans to take a different approach to measuring New Zealand’s fiscal position. 

This would address one long standing economic and political problem: the way in which the fiscal balance can be highly volatile in a small economy like New Zealand's.

There are hints, too, of a different way of looking at government debt, as well as the operating balance.

New Zealand already takes a more conservative approach than many countries in both these areas. The finance minister specifically mentioned in his speech to the Trans Tasman Business Circle in Wellington that most other countries would include assets in the New Zealand Superannuation Fund when considering the country's net government debt. 

At present, New Zealand's net government debt is 25.2% of GDP – down from a recent peak of 25.6% of GDP, well below most countries and also well below the Treasury's forecast, in 2009 of 34% of GDP by now. 

But if the NZ Superannuation Fund's assets were included in the net debt figure – that is, assets versus liabilities – it would be only about 8% of GDP.

Not mentioned by the finance minister is New Zealand's conservative approach to measuring the operating balance: many other countries use the "primary balance" which ignores spending on debt servicing. 

New Zealand includes debt servicing – currently about $3.6 billion – in its operating balance, and also uses a measure called 'Obegal', or operating balance excluding gains and losses, which strips out the more dramatic spikes and troughs in earnings from assets such as the Accident Compensation Corporation and the NZ Superannuation Fund. 

It is not clear where the government is heading on this but Mr English says any change will try to smooth out the volatility in the operating balance. 

One measure – which was, notably given much more prominence than usual in the financial statements released last week – is the 'cyclically adjusted balance' or CAB. This strips out any volatility caused by the current economic cycle and would, for example, have made those dramatic surpluses of a decade ago look like the short term, partly inflation-driven, phenomena they were. 

Intriguingly, if the government had used the CAB method last week, the books would still be in deficit.

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