In today’s post I am going to look at the New Zealand government’s budget balance and debt over the period from 2003 to 2012. In particular, I am going to focus on changes in government debt in response to the global downturn of 2008/09 and some of the reasons for the country’s negative budget balance. In the last part of today’s post I will comment on the claim that the government did nothing in response to the recession.
Tax revenues and expenses, as well as central government debt for the period from 2003 to 2012 are graphed in figure 1. This is complemented with an overview on subsidies and other transfers (welfare payments) both in absolute terms as well as a share of government expenses in figure 2. Nominal data series are deflated to constant 2010 levels with the use of the CPI to account for inflation.
New Zealand’s tax revenues and expenses were roughly balanced until 2008. Government expenses started at around 30.4 percent of GDP in 2003 and increased slowly to 32.9 percent of GDP in 2008. Likewise tax revenues increased slowly from 29.2 percent of GDP (2003) to 31.8 percent in 2008. The highest tax revenue was recorded in 2006 (32 percent). Over the same period government debt decreased by almost 11.8 percentage points to 36.4 percent of GDP in 2008. After 2008, however, the government’s tax revenues and expenses diverged significantly. While taxes fell to levels below 30 percent, government expenses increased by almost 13 percentage points within only one year. After stagnating in 2009/10, expenses increased further by 6.5 percentage points to an all-time high of 52.8 percent of GDP in 2012. This trend caused government debt to rise from 36.4 percent (2008) to 67.9 percent of GDP by 2012. This corresponds to an 86.5 percent increase in debt in only 4 years. In 2012, government expenses came down to 45.6 percent of GDP but are still considerably higher than in the early 2000s before the global financial crisis.
Figure 2 looks at the New Zealand government’s expenses more closely. In general, government expenses include (1) compensation of employees, (2) goods and services expenses, (3) interest payments, (4) subsidies and other transfers, as well as (5) other expenses. It can be shown that the spike in government expenses of 2008/09 was mainly caused by the fourth category. Thereby subsidies and other transfers are defined as “all unrequited, nonrepayable transfers on current account to private and public enterprises; grants to foreign governments, international organizations, and other government units; and social security, social assistance benefits, and employer social benefits in cash and in kind” (World Bank, 2016b). However, the lion share in this category are welfare payments made by the New Zealand government.
While subsidies and other transfers remained relatively constant at a level of slightly above $20 billion from 2003 to 2008, they increased by more than $32 billion from 2008 to 2009. This is a 143 percent increase in government subsidies and transfers within only one year. It was mainly driven by increased government spending on family assistance to low income households. The lowest income decile in the population saw its transfers rise by more than 6 percent of disposable income while the second decile saw an increase of almost 10 percent from 2006/07 to 2009/10. Overall, 9 out of ten deciles benefited from an increase in transfers during this period. This includes Working For Families, NZS and Veterans pension, Income replacement and Housing Supplement (Ball & Ryan, 2013).
The second spike of 2010/11 was driven by the fifth category due to the two Canterbury earthquakes. The New Zealand government provided short-term income support, financed public infrastructure reconstruction and repairs and was liable for Earthquake Commission payments to households (Treasury, 2011). Earthquake Expenses were expected to accrue to a sum equivalent to 10 percent of GDP and the net cost to the Crown were estimated to be $13.5 billion in 2011 (Doherty, 2011).
Putting expenditures and tax revenues together, one can calculate the budget deficit of New Zealand for the period, as shown in figure 3, by subtracting government expenses from tax revenues. It should be noted though, that this is a simplified calculation of the budget deficit and differs from the cash surplus/deficit quoted in the World Bank database, which includes other revenue such as grants and deducts the net acquisition of nonfinancial assets in addition to expenses (World Bank, 2016a).
Figure 3 supports the findings from my analysis above, namely that New Zealand has been running large budget deficits since 2009 due to (1) the increase in welfare payments during the 2008/09 recession and (2) the costs related to the Canterbury earthquakes in 2010/11. Hence the claim that the government did nothing in response to the crisis does not hold if one looks at the numbers. The New Zealand government did respond with an almost 2.5 fold increase in welfare payments, especially to poorer households through family assistance. The government also had to bear higher costs in terms of unemployment benefits as the eligible population increased from 18,000 in June 2008 to 62,000 working age people in June 2010. It introduced a Youth Opportunities package including initiatives like the Job Ops or the Community Max programme as well as Youth Transition Services to tackle long-term unemployment through training and jobs funded or subsidized by the government (Ministry of Social Development, 2010).
I hope today’s post provided insights into how New Zealand reacted to the global recession of 2008/09 with the goal to shed light on the magnitude of the government’s spending increases and tax decreases over that period.
Thanks for reading!
Ball, C. & Ryan, M. (2013). New Zealand Households and the 2008/09 Recession (New Zealand Treasury Working Paper 13/05). Wellington: The Treasury. Retrieved from: http://www.treasury.govt.nz/publications/research-policy/wp/2013/13-05/twp13-05.pdf
Doherty, E. (2011). Economic effects of the Canterbury earthquakes (Research Paper December 2011). Wellington: Parliamentary Library. Retrieved from: http://www.parliament.nz/resource/en-nz/00PlibCIP051/ccd96733060e8e3a1769b3a4ef3017e3de45df83
Ministry of Social Development (2010). Ministry of Social Development Annual Report 2009/2010. Wellington: New Zealand Government. Retrieved from: https://www.msd.govt.nz/documents/about-msd-and-our-work/publications-resources/corporate/annual-report/annual-report-2009-2010.pdf
Treasury (2011). Economic and Fiscal Impacts of the Canterbury Earthquakes. Budget Economic and Fiscal Update 2011, 95-101. Retrieved from: http://www.treasury.govt.nz/budget/forecasts/befu2011/befu11-whole.pdf
World Bank (2016a). Cash surplus/deficit (% of GDP). Retrieved from: http://data.worldbank.org/indicator/GC.BAL.CASH.GD.ZS
World Bank (2016b). Subsidies and other transfers (% of expense). Retrieved from: http://data.worldbank.org/indicator/GC.XPN.TRFT.ZS
World Bank (2016c). World Development Indicators: New Zealand [Data file]. Retrieved from: http://data.worldbank.org/country/new-zealand