We will combine the fiscal rule on OBEGAL with a net debt ceiling
The fiscal rules in the past decade have helped maintain net debt at low levels. However, at times this has come at the cost of wellbeing-enhancing investments that could have addressed long-term challenges of climate transition and gaps in New Zealand's infrastructure. At the same time, core Crown finance costs as a share of GDP continue to remain low due to the sustained decline in long-term interest rates (Figure 11). As a result of these changes in economic fundamentals, the cost of debt in terms of foregone private consumption or spending on public services continues to be low.
Figure 11 - Debt and finance costs
Source: The Treasury
We are therefore moving away from setting a debt target as it discourages investment in long-term productive assets like infrastructure.
We will complement the OBEGAL rule with a ceiling on net debt. A net debt ceiling rule will allow room to invest to tackle long-term challenges and respond to shocks. We consider it appropriate to take on debt to finance capital investments that also create long-term assets - which future generations both pay for and benefit from.
The ceiling is not a target but the level below which the Government intends to keep debt over the long term. Our capital investment funding for Budget 2022 reflects the current macroeconomic environment of inflationary pressures and constraints on the market’s capacity and capability to deliver capital projects. We are therefore focusing our future capital investment on projects that are of the highest priority and value in improving the wellbeing of New Zealanders.