The Contribution
of Strong Balance
Sheets to New Zealand's
Economic Resilience
and Recovery from the
Pandemic
A speech delivered to the Citi Australia & New Zealand
Investment Conference 2021
On 14 October 2021
By Deputy Governor and General Manager of Financial
Stability Geoff Bascand
Introduction1
The ongoing global COVID-19 pandemic has been a unique shock for New Zealand and the world.
Lockdowns have sporadically shut down business activity, border closures have all but stopped
overseas migration, and supply chain disruptions are beginning to push up costs across
economies. Yet, it is also what has not happened that has been notable. Despite the level of
output in New Zealand falling by 10 percent in the second quarter of 2020, unemployment rose
only modestly and then fell much faster than expected over the second half of 2020 and the first
half of 2021. Against almost all expectations of a decline, house prices increased strongly; and
nonperforming loan ratios appear to be ignoring COVID altogether. This is in stark contrast to
previous experiences of severe economic downturns in New Zealand.
Fiscal and monetary support have played a major role in supporting the economy. The
Government provided extraordinary support through schemes such as the Small Business
Cashflow Scheme and the Wage Subsidy - enabling businesses to retain employees and filling
much of the hole in business and household earnings. Historically low borrowing rates facilitated
by monetary policy supported the cashflows of businesses and households and boosted asset
prices and investor confidence.
The inter-connected nature of these sectors and their balance sheets is very important. The strong
public sector balance sheet prior to the pandemic allowed a large fiscal response which in turn
supported the private sector. The sound private sector and financial sector balance sheets prior to
the recession remained robust, supporting the effective operation of the financial system, enabling
credit growth to respond swiftly and helping monetary policy to get to work and achieve its price
stability and employment objectives in the face of a downturn.
Today I argue that strong balance sheets for households, businesses, financial institutions and the
public sector going into the pandemic contributed towards maintaining a sound financial system
and yielding a faster economic recovery than following previous deep recessions.
Of course, we remain in a state of heightened uncertainty; COVID still poses risks to the economic
recovery and we assess that house prices are at unsustainable level. Because the various sectors
of the economy are closely connected, weaknesses in one sector's balance sheet could impact
other sectors. Macro prudential policy and broader financial stability policy settings are crucial to
containing the challenges facing the financial system going forward.
The role of financial stability in economic stabilisation
Maximum
Economic Financial system
sustainable
growth is is sound with
Monetary Financial
employment
resilient to ongoing
policy stability
and price
periods of provision of
stability over the
stress services to the
medium term
economy
Section 1: The role strong balance sheets play
in alleviating stress
Debate about how much debt households, firms, and governments should hold are timeless, but
economic history appears kinder to periods of lower debt.
Household debt has risen steadily as a share of household income, especially over the last forty
years. The household sector is a complex part of my story. Overall debt is high, but it is highly,
and increasingly, concentrated amongst recent borrowers, and debt servicing costs are currently
low. While debt has been rising, so too have house prices, leaving many households in a strong
net equity position. Nonetheless, household debt remains a key vulnerability as we look forward.
Figure 1: Household debt-to-income
600
Households with mortgage
500
All households
Median new first home buyer
400
300
200
100
0
1991 1995 1999 2003 2007 2011 2015 2019
Source: Stats NZ, RBNZ Household Assets and Liabilities Survey, LVR New commintments survey,
RBNZ estimates
For businesses, it is unclear whether there has been any long-term trend in debt levels (when
compared with current asset values or as a share of total finance) over the 20th and 21st centuries.
Corporate finance theory does not provide any concrete guide to the optimal level of debt. It
really is a choice that a firm makes as to how much debt it wants to hold. In practice, firms limit
their debt levels because of the risks of failure and the obligations posed by lenders, and we have
seen more prudent levels of business debt since the GFC.
For governments, the benefits of debt for financing long-term capital investments in infrastructure
and education (human capital investment) have to be weighed against the consequences of high
levels of debt for debt servicing costs and the ability to borrow when required for unforeseen
events such as earthquakes, pandemics or other fiscal policy needs.
Long-run declines in real interest rates have reduced the cost of debt servicing, and households
and governments around the world in particular have determined that they can therefore sustain
higher debt levels. But the ability to service debt in good times may mask the importance of
maintaining strong balance sheets for when times turn bad.
While theory doesn't give us clear answers, experience tells us that high debt levels constrain
options and limit economic recovery from recessions. Conversely, 'balance sheet strength' is the
ability of households, businesses and financial institutions to absorb shocks without becoming
distressed or significantly restricting their activities.
Economic shocks can transmit through balance sheets via a number of channels. There are four I
will outline today: defaults and insolvency risk, the interaction with the asset markets, deleveraging
behaviour of households and businesses, and the role of financial institutions in credit provisioning.
To help explain how these balance sheet channels interact with the economy and financial stability,
I will draw on previous experiences in New Zealand, focussing on four interconnected institutional
sectors2.
Institutional sectors
Asset prices and collateral value
Let me start with the role of asset values in the economy. An increase in asset prices generally
increases the collateral value that households and businesses borrow against, inducing demand in
the economy.3 Ceteris paribus, an easing of monetary policy would increase asset values, creating
a positive upswing and supporting economic growth through an 'accelerator effect'.
However, this accelerator effect can also amplify fluctuations in asset prices and contribute towards
unsustainable credit-asset price cycles.4 Recessions that are associated with a housing market
correction tend to have longer and larger recessions (figure 2), and take longer to return to
5
predownturn output. In an environment of declining asset prices, more indebted households and
businesses find themselves with a diminishing amount of collateral value to leverage ('collateral
squeeze') and may not be able to borrow for investment or consumption, dampening demand in
the economy. When these dynamics take hold, the accelerator effect can act to amplify the
6
downturn.
We saw an example of this play out locally during the Global Financial Crisis (GFC), when highly
leveraged investors faced reduced equity as house prices declined in 2008. In response, many sold
properties to shore up their financial position, which in turn caused property prices to decline
further. Similarly, when the October 1987 stock market crash revealed that equity prices were
significantly overvalued, the fall in listed stock prices saw the asset value of investment companies
and property developers decline significantly. As the value of their collateral declined, these
businesses deleveraged by selling their commercial property assets. This caused a further decline
in these companies' assets, inducing a downward cycle of price declines.7
Sudden and large declines in asset prices can also significantly reduce the buffers for households
and businesses to draw on should they experience income or revenue loss. For the most indebted,
this adds to financial stresses during an economic downturn. In the face of high debt servicing
costs and a loss of income, a decline in collateral values mean they have less scope to access the
liquidity they need to continue operations.
Figure 2: Duration and output losses of OECD recessions (1960-2007)
% of initial
Quarters
output
5 12
Average duration of the
recession (LHS)
10
4
Average cumulative output
loss (RHS)
8
3
6
2
4
1
2
0 0
Recessions without housing Recessions with housing bust
bust
Source: Claessens et al (2009)
Default and insolvency risk
This brings me to the next channel: default and insolvency risk. More indebted households and
businesses have smaller equity buffers to absorb temporary declines in income.8 On the back of
income losses and asset value declines, these buffers (and the ability to borrow to endure them)
can quickly erode for more indebted borrowers and ultimately lead to insolvency and debt
defaults. This leads to higher unemployment as businesses fail and losses for those who lent to
these borrowers.
This is more apparent in recessions that follow periods of high credit growth, reflecting the higher
levels of indebtedness of borrowers going into the downturn. The years leading up to the late
1980s were characterised by significant growth in business credit on the back of a strong global
economy and financial deregulation. When financial conditions deteriorated following the 'Black
Monday' stock market crash in 1987, many businesses that were heavily indebted collapsed. By
1989 the financial crisis spread to the rest of the economy and the share of non-performing bank
loans reached 11 percent of total bank lending (figure 3). With businesses facing financial stress and
insolvencies, unemployment rose to just over 11 percent by 1991.
Figure 3: Impaired or 90 days past due loans (as a share of total bank loans)
12
Impaired
10
90 days past due
8
6
4
2
0
1988 1992 1996 2000 2004 2008 2012 2016 2020
Source: RBNZ Bank Balance Sheet survey, private reporting.
The GFC followed a similar pattern. Business debt grew quickly during the 'boom' years of the
early 2000s and when conditions deteriorated pockets of vulnerability became apparent. The
commercial property and agricultural sector, which were more highly indebted, experienced larger
increases in business failures and loan defaults (figure 4). A similar experience can be found during
the downturn in dairy prices around 2015. Farms borrowed heavily on the back of previously
strong dairy prices. The high costs of servicing these debts left the sector more vulnerable to
income shocks, and when prices declined significantly in 2015 a number of farms became stressed.
Figure 4: Non-performing loan ratios by asset class
5
Housing
Consumer
4
Agriculture
Commercial property
3 Other business
2
1
0
2008 2010 2012 2014 2016 2018 2020
Source: RBNZ Bank Balance Sheet survey, private reporting.
Deleveraging
In the face of a downturn, elevated uncertainty and dampened demand can also see solvent
households and businesses actively reduce their debt levels as their tolerance for leverage
declines.9 This is a more binding constraint for more indebted businesses, which have been shown
to reduce their borrowings the most in response to a downturn.10 This in turn subdues business
investment, further depressing economic activity. The process of de-risking can continue for years
after a recession, hindering economic recoveries.
A similar process can also take hold for households, which tend to reduce consumption and
consumer debt during a downturn. This is partly related to the decline in collateral value and
household wealth. However, this phenomenon again appears to be more pronounced in
households that are more indebted going into a downturn.11
As I mentioned earlier, investment companies and property developers deleveraged in the late
1980's as their asset value fell and they became collateral constrained. However, on the back of the
general economic fallout, the broader business sector also limited their growth and steadily
reduced their debt levels. The consequence of this was a 27 percent fall in real business investment
from Q4 1990 through to Q2 1991. The years following also saw sluggish business spending, with
Investment not recovering in real terms until the second half of 1993. A more prolonged pattern
can be observed over the GFC period. Real business investment fell significantly in 2008, and did
not recover to its pre-GFC level until 2013 (figure 5).12
Figure 5: Real business investment per quarter (seasonally adjusted, 09/10 $bn)
12
10
8
6
4
2
0
1987 1991 1995 1999 2003 2007 2011 2015 2019
Source: Stats NZ, RBNZ estimates.
Note shaded areas represent recessions
Figure 6: Debt as a share of GDP
Business debt (non-agriculture)
50
Agriculture debt
40
30
20
10
0
1990 1994 1998 2002 2006 2010 2014 2018
Source: RBNZ Bank Balance Sheet survey, Stats NZ, private reporting.
Perhaps more stark during the GFC was the experience of household deleveraging. Unlike the 1991
recession, the housing market was at the forefront of the economic downturn during the GFC. As
house prices declined (in New Zealand, house prices fell by around 10 percent, but by much larger
amounts overseas), households reduced consumption, mortgage and consumer lending slowed
significantly, and activity in the residential construction sector fell by almost 30 percent over 2008
and 2009.
To be clear, deleveraging is not inherently bad. Highly leveraged businesses and households face
greater risks, particularly when a downturn occurs, and some may need to reduce their debt levels.
We have seen pockets of high indebtedness in households decline as loan-to-value (LVR)
restrictions were introduced, and the dairy sector has been reducing debt in recent years while
payouts have been reasonable (figure 6). However, when this deleveraging process occurs during
(rather than before) a recession, it amplifies the downturn and acts as a drag on economic
recovery.
The role of financial institutions
Strong balance sheets and sound buffers also matter for financial institutions. In the face of losses,
through either declining margins or loan defaults, banks can themselves become constrained by
their own capital position and funding needs. If banks are in a weakened position and need to
strengthen their balance sheet, this often comes at the cost of providing credit to creditworthy
households and businesses. Alongside an environment of business failures, collateral value
declines and deleveraging, this further supresses demand and amplifies an economic downturn.
Unfortunately, we have seen these consequences play out in New Zealand before. The turmoil of
the late 1980's saw the Bank of New Zealand, the largest bank at the time and responsible for
around a quarter of bank lending, almost fail and require a Government bailout.13 More broadly,
the banks also tightened lending to businesses during the recession, compounding the
deleveraging trend in the early 1990s. In the 2000s, the banking system became reliant on
shortterm overseas debt to fund its lending growth. When financial markets around the world seized-up
in the wake of the GFC, the cost of this funding increased dramatically and bank margins were
squeezed. This led to a rationing of credit and an increase in lending rates at a time when the
Reserve Bank's monetary policy actions were trying to stimulate the economy.
We can also draw on experiences for the insurance sector from the Christchurch earthquakes, the
most costly insurance events in New Zealand's history. While $37 billion of claims, from a total of
$39 billion, have been paid out, this was by no means a success story for the industry. About half
of general insurers did not have enough initial funds to cover the total costs of the claims, and
almost 20 percent of total costs had to be paid with funding acquired after the earthquakes took
place.14
One insurer, AMI, which represented a third of insurance policyholders in Christchurch, ultimately
required a Government capital injection.15 Had the Government not stepped in to provide capital
to AMI, it would have been unlikely that policyholders received their insurance claims in full.
Furthermore, any funds that AMI policyholders would have recovered would have likely faced
delays in being paid-out. This would have undoubtedly caused financial stress for households and
businesses directly affected, and could have had flow on effects to the wider Canterbury economy.
Section 2: 2020- 2021 - From pandemic recession to recovery
While we are still in a period of economic uncertainty and disruption to global trade, people and
investment flows, we have seen a shorter recession and a more robust economic recovery than
expected. A unique feature of the COVID recession has been the absence of the issues that have
tended to weigh on economic recoveries, with the business and financial sectors proving resilient,
aided significantly by the public sector absorbing their losses. Business failures and loan defaults
remain at very low levels, asset prices have not declined (if anything we have seen a positive
accelerator effect), business deleveraging appears to have been relatively short-lived, and the
financial system has been resilient enough to support borrowers.
Fiscal and monetary support have contributed materially to the better than expected economic
outcomes. However, this support has been in the context of borrowers having more capacity to
service their debts, and therefore greater buffers to absorb income shocks, and strong bank and
public sector balance sheets leading into the crisis (table 1). And while households are more
indebted than in previous years, the numbers of highly leveraged borrowers have been contained
through stronger lending requirements that have limited higher-risk loans, while debt servicing
costs are lower.
Fiscal support has helped protect household and business balance sheets, and consequently bank
balance sheets. At the same time, the better underlying health in those balance sheets and debt
servicing metrics has meant that the negative forces of deleveraging and collateral constraints
have not come into play in the same manner as in previous recessions. Moreover, rising asset
prices have boosted household balance sheets, providing positive support for consumption and
residential investment.
Table 1: Summary of aggregate statistics for the year prior to a recession
Household Mortgage Non agri Interest to Bank Tier 1 Govt net
debt to serviceability business EBIT† Capital debt to
GDP debt to GDP Ratio GDP††
1990 28.38% - 38.8% - 8.1% 47.5%
2006 88.3% 53.5% 43.7% 37.7% 8.16% 9.8%
2019 92.0% 45.0% 38.3% 19.7% 13.5% 19.0%
† This is estimated from Stats NZ's Annual Enterprise Survey.
Note: Excludes 'Financial and Insurance Services', 'Public Administration and Safety', and 'Education and Training, 'Health Care and
Social Assistance'. This is different to Stats NZ's 'All industries' category. Stats NZ classifications also includes non-market government
activity prior to 2013.
Agricultural business debt rose from 7.0% to 20.6% of GDP from 1990 to 2019
†† Data for 1990 uses the previous measures of core crown debt: Gross Sovereign Issued Debt less financial assets (excluding the New
Zealand Super Fund). Data for 2006 and 2019 use the updated measure of core crown debt: Represents Gross Sovereign Issued Debt
less core Crown financial assets (excluding the New Zealand Super Fund)
Government sector
A key place to start the discussion around this downturn is the government policy response. The
health responses necessary to contain the virus heavily restricted business activity in early 2020.
GDP fell 10 percent in the 2nd quarter of 2020. However, through the Wage Subsidy Scheme and
business loan schemes, widespread Government support effectively filled a large part of the hole
in business cash flows (figure 7). These programmes were comprehensive in their coverage even
by international standards, with the Wage Subsidy Scheme covering almost 70 percent of the
workforce in 2020. This compares to around 25 percent for Australia, and 30 percent for the UK.16
Alongside programmes such as the Small Business Cashflow Scheme, this provided many
businesses with additional liquidity through the initial economic impacts of COVID. By avoiding
widespread business failures, this also contained increases in unemployment and losses in
household incomes.
Figure 7: Quarterly non-financial business sector income
09/10$bn
40.0
Capital and other
Government subsidies
35.0
Operating surplus and mixed income (ex-subsidies)
30.0
Total
25.0
20.0
15.0
10.0
5.0
0.0
June-16 June-17 June-18 June-19 June-20
Source: Stats NZ, RBNZ estimates
Note: The separation of 'government subsidies' from 'operating surplus and mixed income' in
this chart is indicative only. It treats all government subsidies as having gone to nonfinancial
businesses, when some would have been received by other sectors (e.g. the financial sector).
This does not impact the total or the 'capital and other income' series.
Such large fiscal support was only possible with a strong fiscal position leading into the pandemic;
a fiscal position that had been built up over the decade leading up to 2020. By remaining prudent
when times have been good, we were able to borrow more as a country and use debt when we
needed it most. This has proved true more widely. The BIS has demonstrated that countries that
are more debt constrained provided less fiscal support during the pandemic.17 In contrast, on the
backdrop of the 1991 recession, the Government was facing a potential ratings downgrade after
years of large deficits prior to the recession (figure 8) . After the bailout of BNZ, there was little
fiscal headroom to provide additional support to the economy.18
Figure 8: Government debt as a share of GDP
60
Previous core debt measure
50
New core debt measure
40
30
20
10
0
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Source: The Treasury
Business sector
However, the economic fallout from the pandemic was mitigated by more than strong fiscal
support. Businesses were in a stronger position to weather economic shocks in 2019 than they
were in 1990 and 2006. Agriculture apart, business debt had remained stable relative to GDP since
2010 and interest servicing costs had generally declined for most sectors (figure 9). And while
pockets of high indebtedness within the dairy sector are still concerning, assisted by strong
commodity prices, many farms with large amounts of debt have been steadily been reducing their
borrowings.
Figure 9: Interest expense as a share of EBITDA (%), industry aggregates
120
All industries
Agriculture, Forestry and Fishing
100
Manufacturing
80
Construction
Wholesale Trade
60
Retail Trade and Accommodation
40
20
0
2002 2005 2008 2011 2014 2017 2020
Source: Stats NZ, RBNZ estimates.
Note: 'All Industries excludes 'Financial and Insurance Services', 'Public Administration and
Safety', and 'Education and Training, 'Health Care and Social Assistance'. This is different to
Stats NZ's 'All industries' category
Many businesses faced pressures, both during the strict lockdown in 2020 and in the following
months, yet there have not been nearly as many business failures in this recession as in past severe
downturns.19 Lower debt levels and stronger working capital enhanced by quick pay-out of fiscal
transfers, bank support (loan deferrals and restructurings), and cheaper debt servicing have all
played a part. Non-performing loan ratios are significantly below the GFC peak, including for
commercial property, the canary of the economy that tends to experience the largest losses in a
downturn (figure 10). With fewer businesses failing, the negative feedback effects of economic
downturns - rising unemployment leading to reduced spending and further business failures -
seem to have been largely stemmed.
Figure 10: Non-performing loans (% of total lending)
5.0
Peak from 2009 - 2012
Mar-18
Mar-19
4.0
Mar-20
Mar-21
3.0
2.0
1.0
0.0
Housing Consumer Agriculture Commercial Other business
property
Source: RBNZ Bank Balance Sheet survey, private reporting.
The process of debt consolidation also appears to be much shorter than following previous
recessions. Business credit has declined by about 1.3 percent in the year ending June 2021, a
reflection of the heightened uncertainty caused by COVID. However, business confidence has
recovered to pre-pandemic levels and investment intentions have bounced even more strongly
(figure 11). While investment as a share of GDP is still below its pre-COVID level, it is starting to
recover much faster when compared with the GFC and 1991 recessions.
Figure 11: Real business investment following a recession
Household sector
Housing and land assets are the largest component of household wealth, and mortgages are by
far the largest component of household financial liabilities; hence the Reserve Bank's focus on
housing in our assessment of risks to household balance sheets.
While household financial assets have grown significantly, with superannuation (Kiwisaver) and
equity investments growing rapidly, higher house and land prices have meant the household
balance sheet is no more diversified than it was in 2006.
Households came into the pandemic with debt levels similar to the levels in 2006, but well above
the levels of 1990. However, this debt proved less onerous. Declining long-term interest rates
have meant that household debt serviceability has largely remained in line with long-term
averages (figure 12). Moreover, LVR restrictions have curtailed the number of highly leveraged
households, and increasing house prices improved equity positions even further.
Household debt has become somewhat more concentrated, with larger mortgages amongst fewer
households. There has been an increasing share of high debt-to-income loans, which has
continued throughout the pandemic. This means that mortgagors are more sensitive to shocks to
their income or increases in mortgage rates than they have been in the past. Fortunately, fewer
business failures and wage subsidies keeping employees connected also meant most households
did not face a loss of income, and bank mortgage portfolios were not severely stressed.
Figure 12: Mortgage payments as a share of gross income20
50
New buyer
All mortgagors
40
30
20
10
0
2000 2003 2006 2009 2012 2015 2018 2021
Source: RBNZ Retail Interest Rate Survey, RBNZ Household Balance Sheet survey, Stats NZ Household Economic
Survey, RBNZ estimates
With few mortgagors facing stress thanks to relatively few business failures and low
unemployment, house prices, against all projections, increased sharply. This has meant that house
prices have had an overall positive impact through the accelerator effect: household consumption
has been strong on the back of high house prices and it is no exaggeration to say the residential
construction sector is booming. While this has meant the housing market has acted to support the
economic recovery, it has brought other problems of housing affordability and unsustainable
prices, a point I will touch on later.
Financial sector
Banks were also in a much stronger position going into the pandemic than in previous years.
Capital ratios had improved following tougher Basel requirements and rising investor expectations,
and dividend restrictions introduced in response to anticipated loan losses associated with the
pandemic strengthened these further. Prudential policies introduced since the GFC also meant that
banks were less reliant on short-term funding and had stronger liquidity positions (figure 13). Early
on in the pandemic, when markets began to seize up, banks had enough funding from longer and
more stable sources to sit out the volatility until conditions stabilised.
Figure 13: Share of offshore funding by maturity
60
Less than 90 days maturity
50
More than 90 days maturity
40
30
20
10
0
2000 2003 2006 2009 2012 2015 2018
Source: Stats NZ, RBNZ Liquidity survey
Our stress testing also showed that the banks could handle a relatively pessimistic, but plausible,
economic outcome. Bank capital ratios could withstand unemployment reaching 13 percent and
house price falls of about one third and be able to continue to provide lending to their customers.
While such an outcome did not materialise (fortunately), one finding is still relevant: banks were
able to weather the potential shock and support their customers through the downturn.
Following our review of bank capital requirements, completed in 2019, banks are on a path to a
higher, more robust capital position - which should enable them to withstand more severe stresses
(such as scenarios where the authorities cannot or will not provide substantial fiscal and monetary
support). One important part of the framework will be the counter-cyclical capital buffer -
essentially capital that is built up during the good times and can be released to provide more
capacity to support customers during a downturn.
Loan deferral schemes were made available to households through the depths of the recession
and then household credit surged, partly as a result of the strengthening housing market. While
business credit did decline through 2020 into early 2021, indicators suggest this was mostly due to
weak demand. Credit growth to the business sector has resumed, growing consistently since May
2021 as a result of business investment rising. A strong banking system has meant that our
financial system has been able to support the economic recovery, rather than become part of the
problem as we saw in 1991 and, to an extent in 2008.
While there are many things that we would like to forget about 2020, we should perhaps
remember what went well. The Government was able to provide support thanks to decades of
fiscal discipline. Businesses were generally in a stronger position prior to the pandemic than in in
the years preceding previous severe economic downturns, and we have seen relatively few failures.
Household incomes were protected as a result and we have largely avoided the potential severe
negative feedback effects on the economy. The financial system has been strong enough to take a
supporting role in the economy. In this context, monetary policy has been less hindered by
challenges around business and household balance sheets, or risks in the financial system.
Section 3: Current challenges moving forward
While the economy recovered strongly from the downturn in 2020, global uncertainty and the
local impacts of more recent health and economic restrictions remain impediments to growth
currently. Household and government balance sheets appear a little more vulnerable now than
they were at the outset of the pandemic and the uncertainty surrounding the outbreak of the
Delta variant continues to weigh on the growth outlook.
Government debt levels are expected to peak just below 50 percent of GDP in 2023, up from
around 20 percent prior to the pandemic. While still relatively modest compared with many
advanced economies, the importance of preserving fiscal space to accommodate unforeseen
events will confront policy makers in coming years, especially given the adverse long-term fiscal
trends, particularly from demographic ageing.21
The reasons for public debt expansion matter to its sustainability and potential constraint on future
borrowing. Debt that is associated with increased investment, boosting the economy's potential
growth, is worthwhile and presents few risks to investor confidence. However higher debt driven
by rising social expenditure transfers or discretionary policy choices exceeding revenue trends
could see less favourable investor perceptions, potentially adding a risk premium to New Zealand's
borrowing costs.
Significant policy decisions will confront fiscal decision-makers in the next 20 years to modify
expenditure, revenue and debt trends to ensure the government balance sheet does not become
a threat to economic resilience, rather than a support as it has during the pandemic.
The rise in house prices - to levels that are beyond what we believe are sustainable - has also
been coupled with some rising risks in the level and mix of household debt. While many
households are in a strong debt-to-assets position due to house price increases and LVR
restrictions, debt-to-income (DTI) ratios have continued to rise and new mortgagors are
increasingly exposed