Do these figures approximate the position of any of the countries which are listed in the tables to this chapter?
We recall the basic formula to answer this question:
b = (i - g) k
where (b) is the primary surplus, (i) is the nominal interest rate on the debt, (g) is the nominal growth rate of the economy and (k) is the size of debt : GNP ratio to stabilise (more complicated formulas can be derived to take account of other dynamic elements in the debt equation).
For the first country the formula writes as:
b = (10% - 7%) x 130% = (0.10 - 0.07) x 1.30 = 0.03 x 1.30 = 0.039 = 3.9%
Hence the primary surplus must be 3.9%
Total deficit is the sum of two components: primary balance and interest payments on the debt. For this country we have:
9% = b + (10% x 130%)
0.09 = b + (0.10 x 1.30)
0.09 = b + 0.13
b =0.09 - 0.13 = -0.04 = -4%
Hence the country has currently a primary surplus of 4%, which is higher than the target for sustaining the debt. This country is slightly reducing its debt : GNP ratio.
For the second country we have a target primary surplus b which is:
b = (7% - 6%) x 40% = (0.07 - 0.06) x 0.40 = 0.01 x 0.40 = 0.004 = 0.4%
A primary surplus of 0.4% is sufficient to stabilise the debt : GNP ratio at 40%.
Since total deficit is
1.7% = b + (7% x 40%)
current primary deficit is
b = 0.017 - (0.07 x 0.40) = 0.017 - 0.028 = -0.011 = -1.1%
hence current primary surplus is 1.1%. Since 1.1% is higher than the required 0.4%, this country is actually reducing Debt : GNP ratio.
The first country under examination recalls Italian figures while the second one recalls the fiscal situation of the United States.
Q5 New Zealand's Fiscal Responsibility Act 1994 requires the government to identify and publish its fiscal objectives. The New Zealand government has specified prudent levels of public debt to be below 30% of GDP in the short run and below 20% in the longer term.
Are these targets high or low by international standards?
Would you recommend other governments to follow New Zealand's example?
New Zealand targets are certainly low by international standards. For example we recall that EU target is 60%, while US ratio was 38% in 1996. Fiscal rectitude is one of the reasons of the economic success in New Zealand in the 1990s. New Zealand is now in the enviable position of having low debt : GDP ratio, low interest rates and high growth rates. It now has the possibility to run modest fiscal expansion policies when