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15 Jun 2015

IMF Finds New Zealand in Good Shape

According to a new International Monetary Fund (IMF) paper, New Zealand is in pretty good shape. Measured third in the world in its ability to take on more public debt, New Zealand was found to have ample fiscal headroom and plenty of room to grow. In the report titled 'When should public debt be reduced?', the authors - Jonathan Ostry, Atish Ghosh, and Raphael Espinoza - said New Zealand could more than double its current debt load before maxing out its credit.

The IMF paper considers "optimal public debt and investment policy in the aftermath of the global financial crisis." High levels of public debt are an important legacy of the global financial crisis, with a reduction in public debt important with regards to risk management and economic growth. The report looked at economic health in terms of fiscal space, a concept defined as the difference between the debt limit and the actual debt-to-GDP ratio.

In an analysis of 30 countries, only two, Norway and South Korea, were found to have a higher level of fiscal space than New Zealand. Norway had a fiscal space of 246 percent, followed by South Korea with 242.1 percent, New Zealand with 228.1 percent, Hong Kong with 224.5 percent, Luxembourg with 222.9 percent, Australia with 214.5 percent, Taiwan Province of China with 209.5 percent, Switzerland with 202 percent, Denmark with 196.7 percent, and Singapore with 193 percent. Japan, Italy, Greece and Cyprus were all given a report card of 0 percent, with Portugal, Ireland and Spain also near the bottom of the table.

According to the report: "First, inherited public debt, though accumulated for good reasons, represents a deadweight burden on the economy, dimming both its investment and growth prospects... Second, if fiscal space remains ample, policies to deliberately pay down debt are normatively undesirable... Third, public debt should be issued to smooth the taxes necessary to finance lumpy expenditures."

"Those who believe that debt is bad for growth favour a rapid reduction in indebtedness, whereas those who stress Keynesian demand management considerations argue for a measured pace of consolidation, perhaps with a ramping up of public investment while interest rates remain at historic lows... Somewhat lost in this debate is the possibility of simply living with (relatively) high debt, and allowing debt ratios to decline organically through output growth." said the report.

When it comes to private debt, however, New Zealand is not in such good shape. In a report by the Swiss-based Bank for International Settlements (BIS) involving 26 countries, the debt-to-disposable income ratio of New Zealand households was measured 19th out of 26 nations, with the household debt-to-GDP ratio coming in at a slightly more respectable 18th. It's not all bad news though, with New Zealand one of a relatively small group of countries where the ratio of debt-to-income has fallen since the global financial crisis.