Money · Credit · New Zealand · Part 17
When should New Zealand borrow instead of tax?
Borrowing does not remove the cost of government. It changes when the cost is paid, who carries it, and what future taxpayers receive in return.
Imagine New Zealand wants to build a hospital that will serve the country for fifty years.
There are several ways to pay.
Raise enough tax today to fund the entire construction cost.
Borrow the capital and repay it over time.
Use a mixture of current revenue and debt.
Or restructure other spending and use the savings.
None of those choices is free.
They distribute the cost differently across people and across time.
The real question is not “tax or debt?” It is “which generation should pay, for what, and why?”
Borrowing is deferred funding
A government bond gives the Crown money now in exchange for a legal obligation to repay principal and interest later.
If the asset itself produces enough revenue, that revenue may help service the debt.
If it does not, future taxes or other Crown revenue will ultimately carry the obligation.
So borrowing is not an alternative to funding.
It is a way of changing the timing of funding.
Borrowing does not avoid taxation. Unless the investment generates its own repayment stream, borrowing moves some of the tax burden into the future.
That can be fair
Suppose today's taxpayers paid the entire capital cost of a bridge that will still be serving New Zealanders in 2075.
Future users would receive the service without contributing to the initial capital cost.
Borrowing can spread the cost across more of the generations receiving the benefit.
Treasury's Investment Statement makes this point directly: debt can spread the cost of an asset across time and generations because the asset creates a flow of future benefits.
Treasury — Investment Statement 2025 ↗
This is the strongest case for borrowing:
a long-lived asset,
future beneficiaries,
credible public or economic value,
and a debt path the Crown can service.
Intergenerational fairness works both ways
Debt can improve intergenerational fairness.
It can also damage it.
Treasury's work on fiscal strategy notes that debt finance can maintain intergenerational neutrality where the generation repaying the cost is also the generation receiving the benefit.
But debt-financing permanent consumption is different because future taxpayers can inherit the liability without receiving a corresponding asset.
Treasury — How Fiscal Strategy Affects Living Standards ↗
That gives us a simple distinction.
Borrowing for a durable asset: future taxpayers may inherit both the debt and the asset.
Borrowing for recurring consumption: future taxpayers may inherit the debt after the original service has already been consumed.
Intergenerational fairness is not achieved by making future generations pay. It is achieved when the obligation they inherit is matched by something of value they also inherit.
When should current taxation do the work?
The strongest case for current taxation is recurring expenditure.
Public-sector salaries.
Routine maintenance.
Benefits and transfers.
Consumables.
Ordinary administration.
Recurring service delivery.
If government permanently spends more on recurring services than it raises in recurring revenue, borrowing only postpones the funding problem.
Interest then becomes another recurring expense.
That is why the Public Finance Act's responsible-fiscal-management framework places such importance on operating revenues and expenses being balanced on average over a reasonable period once prudent debt levels have been achieved.
Public Finance Act 1989 — section 26G ↗
There is no perfect bright line between operating and capital
We should still be careful.
Not everything labelled “capital” deserves debt.
A badly chosen capital project can leave a physical asset and still destroy value.
And some operating expenditure can create long-term benefits.
Education is the obvious example.
Training a nurse is not recorded as a bridge on the Crown balance sheet, but the capability can benefit New Zealand for decades.
So accounting classification is not enough.
The deeper test remains:
what future benefit is created, how durable is it, and who receives it?
Temporary shocks are another strong case for borrowing
Governments also borrow for reasons unrelated to building assets.
A recession can reduce tax revenue at exactly the same time that unemployment support and other spending pressures increase.
A natural disaster can create an immediate reconstruction bill.
A pandemic can require emergency public-health and income support.
Trying to balance the Budget instantly by imposing a large tax increase during the shock can deepen the economic damage.
Treasury's fiscal-strategy research says debt can bridge a temporary mismatch between the need for expenditure and the economy's capacity to fund it at that moment.
Treasury — Debt and temporary fiscal shocks ↗
The important word is temporary.
Once conditions normalise, fiscal buffers need to be rebuilt.
That is what fiscal headroom is for
Keeping debt below the absolute maximum the Crown could theoretically carry has a purpose.
It creates room to respond when something goes wrong.
Earthquake.
Flood.
Recession.
Financial crisis.
War or geopolitical shock.
Pandemic.
The Public Finance Act requires prudent debt and net-worth levels that provide buffers against adverse events, prudent management of fiscal risks, and consideration of present and future generations.
New Zealand Legislation — Principles of responsible fiscal management ↗
Borrowing capacity is most valuable before the emergency, not after it has already been exhausted.
What is New Zealand's current position?
Current fiscal policy provides useful context, although it is a government strategy rather than an immutable economic law.
The Government's current long-term objective is to bring net core Crown debt below 40% of GDP and then maintain it within a normal-times range of 20% to 40%, subject to shocks.
Budget 2026 forecasts net core Crown debt at 42.4% of GDP in 2025/26, rising to a peak of 46.1% in 2027/28 before declining to 44.4% in 2029/30.
It also forecasts the operating balance measure OBEGALx moving from an $11.9 billion deficit in 2025/26 to a $2.6 billion surplus in 2028/29.
Treasury — Budget Economic and Fiscal Update 2026 ↗
Those numbers matter because new borrowing decisions do not happen on a blank balance sheet.
Every new commitment sits on top of the Crown's existing debt path.
Debt service is a real opportunity cost
The cost of borrowing is not only the principal that must eventually be refinanced or repaid.
Interest becomes part of future government expenditure.
That money cannot simultaneously fund another hospital, reduce tax or strengthen the fiscal buffer.
Treasury's 2026 fiscal forecasts identify finance costs as one contributor to the increase in core Crown expenses since before COVID-19.
This is why the statement “the Government can borrow” is incomplete.
The relevant question is:
at what cost, against what asset or public benefit, and what future choices does that debt service displace?
Tax also has costs
Debt has costs.
Taxation does too.
Taxes change disposable incomes and can affect work, saving, investment, consumption and business decisions depending on their design.
A sudden large increase can also create uncertainty.
The Public Finance Act now expressly requires fiscal and revenue strategy to consider efficiency and fairness, including the predictability and stability of tax rates.
Public Finance Act — revenue strategy and fairness ↗
That gives rise to the concept of tax smoothing.
What is tax smoothing?
Tax smoothing does not mean keeping tax rates frozen forever.
It means avoiding unnecessarily sharp movements in taxation by spreading fiscal adjustment across time where that can be done sustainably.
For example, if a one-off disaster requires $20 billion of expenditure, raising the entire amount through a sudden one-year tax increase could impose a much larger disruption than borrowing part of the amount and repaying it over several years.
Treasury has studied tax smoothing and intergenerational fiscal costs for decades.
The point is not that borrowing is always superior.
It is that the timing of taxation affects both efficiency and who bears the burden.
Treasury — Intergenerational Smoothing of New Zealand's Future Fiscal Costs ↗
But tax smoothing can become tax avoidance by another name
There is a dangerous version of the argument.
Government can claim it is “smoothing” taxes while simply accumulating debt because no one wants to make the permanent revenue or spending decision required.
If the underlying expenditure is permanent, eventually one of three things has to happen:
revenue rises,
spending falls,
or debt and debt-service costs keep increasing.
Treasury's 2025 Long-term Fiscal Statement demonstrates the intergenerational consequence of delaying adjustment: postponing tax increases can benefit people alive today while imposing significantly higher lifetime tax burdens on younger and future generations.
Treasury — He Tirohanga Mokopuna 2025 ↗
Tax smoothing is about timing a necessary burden intelligently. It is not pretending the burden does not exist.
Borrowing for infrastructure should match the asset life
If an asset lasts fifty years, borrowing can sensibly spread some of its capital cost across decades.
But the financing term should not be divorced from the asset.
Borrowing for thirty years to fund software expected to be obsolete in five years creates an obvious mismatch.
Likewise, using very short-term debt to finance an asset that will generate benefits for generations creates unnecessary refinancing exposure.
The maturity structure should reflect:
asset life,
revenue profile,
risk,
interest-rate exposure,
and the Crown's wider debt portfolio.
Not every dollar of a long-lived asset needs to be borrowed
This is another false binary.
A $5 billion project could be financed through:
current tax revenue,
existing Crown cash,
debt,
user charges,
asset revenue,
targeted levies,
or combinations of those tools.
There may be good reasons for requiring some current contribution even where borrowing is justified.
It limits leverage.
It forces current beneficiaries to contribute.
And it preserves future borrowing capacity.
Borrowing is strongest when the project expands future capacity
Suppose debt finances:
electricity transmission that removes a bottleneck,
water infrastructure that enables new housing,
port capacity that lowers export costs,
or a hospital that replaces failing infrastructure and reduces future operating costs.
The debt still has to be serviced.
But the asset may increase the economy's or the public sector's capacity to carry that obligation.
This is why productive investment matters.
Borrowing becomes more sustainable when what is built improves future income, revenue, productivity, resilience or avoided cost.
Borrowing is weakest when it finances a structural operating gap
Budget 2026 illustrates why the distinction matters.
Treasury estimates that around 60% of the 2025/26 OBEGALx deficit is structural rather than simply cyclical.
Treasury — Structural and cyclical fiscal position ↗
A cyclical deficit can shrink as the economy recovers.
A structural deficit does not disappear automatically.
Borrowing to cover it year after year increases liabilities without necessarily creating an offsetting asset.
That is exactly the pattern a sustainable fiscal framework should eventually correct.
Inflation also affects the tax-versus-borrow decision
Neither a tax-funded project nor a debt-funded project creates the engineers, concrete, machinery or electricity needed to build it.
But the financing choice can affect demand.
If the economy is already operating against real-resource constraints, rapidly increasing debt-financed spending can add pressure.
Higher taxes can, depending on their design, withdraw purchasing power elsewhere in the economy and offset some of that demand.
This does not mean “taxation pays for spending” in a simplistic mechanical sense.
It means fiscal decisions affect aggregate demand, and the Public Finance Act now explicitly requires fiscal strategy to consider its interaction with monetary policy.
Public Finance Act — fiscal and monetary interaction ↗
So when should New Zealand borrow?
I would start with five strong cases.
1. Long-lived productive or social assets.
Where future generations will receive substantial benefits.
2. Temporary economic downturns.
Where forcing immediate fiscal balance would deepen the cycle.
3. Major one-off shocks.
Earthquakes, pandemics and other exceptional events where costs cannot reasonably be absorbed in one year.
4. Lumpy renewals.
Where a large replacement serves users across many future years and debt improves intergenerational allocation.
5. Tax smoothing around temporary expenditure.
Where sudden taxation would impose unnecessary disruption and a credible repayment path exists.
And when should New Zealand be very reluctant to borrow?
1. Permanent operating expenditure with no matching permanent revenue.
2. Routine maintenance that should already be funded from current revenue.
3. Projects that fail the National Investment Test.
4. Assets whose useful life is shorter than the debt being used to finance them.
5. Spending undertaken simply to avoid an unpopular tax or spending decision.
6. New debt that would materially undermine the Crown's capacity to respond to future shocks.
My Borrow-or-Tax Test
Before choosing debt, I would require answers to these questions:
What is being funded? Asset, temporary shock or recurring consumption?
How long does the benefit last?
Who benefits? Today's taxpayers, future taxpayers or both?
What asset or capability remains?
Does it generate revenue or avoided future cost?
What does the debt service cost under stress?
How much fiscal headroom remains afterward?
Would a tax-funded approach create materially different economic effects?
Does borrowing worsen inflation pressure at the proposed time?
Is there a credible plan to stop borrowing when the temporary need ends?
A simple decision rule
I would summarise the framework this way.
Current services → current revenue.
Long-lived assets → consider long-term borrowing.
Temporary shocks → consider temporary borrowing.
Permanent fiscal gaps → fix the structural mismatch.
Mixed generations of beneficiaries → consider mixed funding.
Weak project → neither tax nor borrow for it.
The financing method cannot rescue an investment that should not happen in the first place.
My conclusion
New Zealand should not choose between tax and borrowing ideologically.
It should choose according to time.
What are we buying?
How long will it last?
Who receives the benefit?
Who will service the obligation?
And what choices will that obligation remove from future governments?
Debt can be an intelligent tool for intergenerational investment and temporary shocks.
Tax is the stronger tool for sustaining recurring public services and maintaining fiscal capacity.
Neither is free.
Neither is inherently virtuous.
The discipline is matching the funding burden to the life of the benefit.
Borrow when the future receives something worth helping to pay for. Tax when today's expenditure is principally today's responsibility.
Next
That leads to another question sitting underneath the entire series:
How much debt can New Zealand actually carry?
Part 18 will examine why there is no single magic debt-to-GDP number, what determines sovereign debt capacity, why interest costs and growth matter, how fiscal buffers work, and how a country can distinguish “more debt is possible” from “more debt is prudent”.
Primary sources
Treasury — He Puna Hao Pātiki: Investment Statement 2025 ↗
Treasury — How Fiscal Strategy Affects Living Standards ↗
Treasury — He Tirohanga Mokopuna 2025 ↗
Treasury — Budget Economic and Fiscal Update 2026 ↗
Public Finance Act 1989 — Principles of responsible fiscal management ↗