By Michael Reddell

The IMF’s twice-yearly World Economic Outlook and Fiscal Monitor publications have come out in the last couple of days.

If there is gloom in the GDP numbers (eg this chart for the advanced countries, and we don’t score a lot better on the comparable one for the 2019 to 2025 period which encompasses the whole Covid and inflation/disinflation period), much about that is outside the direct or near-term control of any particular government.

My focus was on the fiscal numbers. We already know, from the published Treasury forecasts, that New Zealand’s fiscal position doesn’t look good. Last year’s Budget slightly widened an already uncomfortably large (estimated) structural fiscal deficit.

But the great thing about the IMF publications is that they enable meaningful cross-country comparison, something that is quite impossible just with what Treasury produces for New Zealand. (If The Treasury was seriously committed to improving debate and analysis on fiscal issues in New Zealand they would start routinely producing estimates for New Zealand in an IMF format, alongside their own preferred New Zealand format.)

I put this chart on Twitter this morning, and it appears to have caught some attention. You can see why that might be.

(For the selection of countries I’ve used those of the IMF advanced country grouping for which there are numbers – that excludes, notably, Taiwan and Singapore – omitting Norway (where the IMF reports only ex-oil numbers, which aren’t reflective of the overall state of Norwegian public finances) and adding Poland and Hungary. Poland, in particular, is now about as well off – in real GDP per capita terms – as New Zealand.)

I regard this as the best core measure of flow fiscal imbalances.

In interpreting the chart, however, there are a few points worth making.

First, it is a measure of “general government” not just central government. That is the only sensible basis for international cross-country comparisons. In New Zealand, local government is small relative to central government so the numbers are dominated by central government choices.

Second, the IMF states that they do their New Zealand fiscal projections based on the December 2024 HYEFU and the 2025 Budget Policy Statement. They have an independent set of macroeconomic projections and then recast the New Zealand fiscals into their internationally comparable format. They are not taking an independent view on what the government will or won’t do with fiscal policy in next month’s Budget (and are also not taking account of recent defence spending commitments).

Third, this is a measure of the primary deficit (ie excluding net interest) not the overall balance. Some countries have a large stock of outstanding public debt which they are stuck paying interest on (the US is a good example). That interest is, of course, part of the overall deficit, but it is a reflection of past choices. The primary balance is a reflection of current policy choices. As a general rule of thumb, if a country is running a primary surplus, pretty much however small, that country’s fiscals will eventually come out okay. If not, course corrections are necessary.

Fourth, the IMF numbers are presented on a calendar year basis but the New Zealand fiscal year ends on 30 June. The IMF appears to move New Zealand numbers six months forward (thus they show a significant primary deficit in 2019, which was probably capturing New Zealand outcomes for the year to June 2020. Thus the 2025 numbers shown in the chart above probably already capture what the Minister of Finance has told us she is going to do, in aggregate, in next month’s Budget.

Fifth, the series is cyclically-adjusted. Booms and busts – economies running temporarily above or below capacity – do not, at least in principle, affect this particular series. The IMF estimates (like the Reserve Bank) that New Zealand has a negative output gap in 2025 (while, say, the United States in these projections has a positive one).

Sixth, it is not a measure of the operating balance (the focus of New Zealand domestic analysis and commentary) but of the overall (primary) fiscal balance. Most countries don’t use an operating balance measure, so it can’t readily be used for international comparisons. Total balances (operating and capital spending) can make more sense for fiscal analysis as the line between operating and capital expenditure is pretty blurry for government. In a private business, capex is intended to generate (net) revenue, but that isn’t often the case with government capital expenditure – even if, which can’t be assumed, that capex passes some overall cost-benefit test.

Taking all that into account – which clearly wasn’t going to fit in my original tweet – what should we make of the chart, which shows New Zealand estimated to have the highest cyclically-adjusted primary deficit of any advanced economy this year?

First, it didn’t used to be so. The IMF table I drew from only goes back to 2016 but the comparison over time looks like this

We used to be better than the average advanced economy. Once upon a time, not so long ago. But not now. We also had the large primary deficit of this group of countries in 2023 and 2024 and were second largest in 2022. (In fact, when I looked at the IMF’s table of this series for “emerging market and middle income countries” still the only countries with a larger primary deficit than New Zealand for 2025 are China and Romania. Ukraine probably is too – the estimates aren’t there for 2025 – but then being invaded by your neighbour probably counts as a decent excuse.)

There can be a case for cyclically-adjusted (or structural) primary deficits, even large ones. Wars, for example, are often financed by a mix of debt and taxes. Pandemics can be another example – big disruptions to output and activity almost from out of the blue – and so no one really quibbles much over primary deficits in (calendar) 2020 and 2021.

But we don’t face a war or a pandemic. Our politicians – first Labour and now the National-led coalition – have simply chosen to run large primary deficits. Structural deficits – primary or otherwise – don’t arise from nowhere, and they certainly aren’t fixed by sitting by and hoping for something to turn up (they also aren’t fixed by – as in last year’s Budget – cutting spending and adding a new tax and using the proceeds to cut other taxes, leaving structural deficit measures little changed (slightly wider on The Treasury’s estimate)).

In case you are wondering about the overall structural balance picture, here is that chart

We don’t have the largest overall structural deficit among advanced countries, but there aren’t many worse than us.

And we are heading in the wrong direction.

Much of the commentary on New Zealand emphasises that our net general government debt is still relatively low as a share of GDP. But that picture is changing quite fast.

The US (98 per cent) and UK (95 per cent) used to be – and in my memory – relatively low debt countries too.

These New Zealand structural fiscal deficits aren’t some consequence of Covid but a series of choices to act, and not to act, by both governments in succession. It is on the current government’s stated intentions for the second of its three Budgets that we are estimated to have the largest cyclically-adjusted primary deficit among advanced countries.

It is a far cry from the laudable record of fiscal management – again under governments of both main parties – that we enjoyed not so long ago at all. At least back then when we had feeble productivity growth and weren’t closing the gaps on the rest of the advanced world we had an enviable record of fiscal stewardship. These days, productivity and real GDP per capita growth is lousy, and we are running big deficits and rapidly increasing debt.

It is a choice, but it is a bad one.

And since we know The Treasury estimates that we have a fairly large structural operating deficit, that judgement (“a bad one”) holds true even if, as perhaps they would claim, the level of general government capital expenditure was all passing robust cost-benefit tests on credible discount rates.

Originally published on Croaking Cassandra.