In the aftermath of the Global Financial Crisis, the New Zealand government’s de

Question

In the aftermath of the Global Financial Crisis, the New Zealand government’s debt increased from around $68 billion in 2008 to $136 billion in 2012, or from 37% of GDP to 69% of GDP. Plot government spending, taxes, and welfare payments annually from 2000 to 2015. Use these data to calculate the budget deficit. (I already plotted those data and calculated the budget deficit)

Could you please explain the cause of the increase in government debt and comment on the claim that the government did nothing in response to the crisis.

Explanation / Answer

Government debt increases because of increasing budget deficits. During the face of financial crisis the government spends more than earns, which creates huge amount of budget deficit year after year. Not only that the economic reform starts aftermath, which requires government spending too. Such huge amount of monetary burden makes the government takes loan, called government debt. Such debt must be very high.

The government should do nothing in this regard. It happens in the crisis period; therefore, nothing could be done; moreover, loan has been taken for making the economy stable – it increases government spending; therefore, increases GDP and per-capita income. Once the time goes on such debt should decrease by the increase in GDP in future. Therefore, for the sake of better future such debt should not be stopped today.

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