New Zealand faces rising debt and a longer period of budget deficits as natural disasters and a slowing economy squeeze the government’s finances.
(Bloomberg) — New Zealand faces rising debt and a longer period of budget deficits as natural disasters and a slowing economy squeeze the government’s finances.
Finance Minister Grant Robertson will deliver his annual budget on Thursday in Wellington with little room for sweeteners ahead of a general election in October.
Economists expect a return to surplus in 2026 — a year later than predicted in the December fiscal update — and increased borrowing as the government faces the cost of rebuilding after floods struck largest city Auckland and a cyclone swept across the North Island in February.
Prime Minister Chris Hipkins has already labeled it a “no frills” budget that won’t contain much in the way of significant additional spending or tax relief, even as he looks to win his Labour Party a third term in office. The Reserve Bank has also cautioned that loose fiscal policy wouldn’t help its efforts to curb runaway inflation.
“The government has been warned by the RBNZ that a profligate fiscal package will be countered by even higher interest rates,” said Mark Smith, senior economist at ASB Bank in Auckland. “Expect the messaging to be prioritized toward a few key priorities amid a no-frills budget backdrop.”
In December, the Treasury joined the central bank in predicting New Zealand faces a recession in 2023. The impact of slowing activity on tax revenue was evident in government accounts for the nine months through March, which showed a lower-than-expected sales and company tax take.
At the same time soaring inflation, which was 6.7% in the first quarter, has driven up wages for government workers alongside other costs.
Wider Deficits
The squeeze on the government’s accounts means Treasury’s forecasts that the budget deficit will shrink to less than NZ$500 million ($313 million) next year have been dashed, economists said. ASB sees a NZ$3 billion shortfall in 2024.
There is now likely to be a sixth straight deficit in 2025 before a return to surplus in 2026.
That makes it a real test to maintain existing services let alone announce new initiatives that might shore up government support ahead of the Oct. 14 election. Latest opinion polls show Labour and the main opposition National Party are neck-and-neck.
In order to have some flexibility, Robertson has already announced the government has found NZ$4 billion over the next four years from savings and reprioritizations. That includes curtailing some programs and pocketing underspending from previously announced initiatives.
Robertson said most of this extra funding has gone toward meeting cost pressures within government agencies that deliver core services such as health, education and housing.
But it may also allow him to introduce targeted initiatives aimed at providing relief from the rising cost of living.
Cyclone Gabrielle
Robertson has pledged to fund more infrastructure investment, with the initial focus on rebuilding roads and rail links destroyed by Cyclone Gabrielle. He has already announced a NZ$941 million package that includes building protection against future flooding.
The government can borrow to meet the costs of one-off events such as the Covid-19 pandemic and natural disasters. Net debt was 19% of gross domestic product at March 31, giving Robertson scope to increase borrowing and remain within a self-imposed 30% cap.
Economists forecast the government’s bond sales will increase by as much as NZ$12 billion in the four years through 2027.
How much debt will increase also reflects how deep the Treasury expects the economic slowdown will be. In December, the agency didn’t anticipate that GDP would contract in the fourth quarter of 2022 nor that the RBNZ would target an Official Cash Rate as high as 5.5%.
Miles Workman, senior economist at ANZ Bank New Zealand in Wellington, cautioned that despite Robertson’s determination to curb new spending, the budget may not be restrictive enough to ease the RBNZ’s inflation worries.
“Running wider-for-longer fiscal deficits and adding further macroeconomic stimulus to an already out-of-balance economy is potentially problematic,” he said. “In this environment even a no-frills budget could look pretty frilly from an inflation-fighting perspective.”
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