The Debt Ceiling and its Discontents

Abstract

This article challenges the New Zealand Treasury’s 2022 recommendation of a 50% debt-to-GDP ceiling, arguing that the analysis undertaken does not justify the recommendation, and that it contains structural biases favouring fiscal restraint over productive
investment. We demonstrate that the Treasury’s conservative assumptions about the macroeconomic environment for debt consolidation, combined with excessive shock buffers, lack sufficient analytical justification. Replicating Treasury’s analysis with more
realistic assumptions yields substantially higher sustainable debt levels. We discuss the asymmetric treatment of fiscal risks, where
debt costs are precisely quantified while the benefits of public spending and risks of underinvestment are treated as secondary or
speculative. We argue for balanced fiscal frameworks that recognise both excessive debt and chronic underinvestment as threats to
sustainability.