Coronavirus: Ballooning debt will cap scale of bail-outs, Westpac warns

Tuesday, 5 May 2020

13122016 Photo: ROSS GIBLIN\Fairfax Wellington earthquake affected buildings. Quirky yellow stickered structures. The Beehive annex housing the Press Gallery.

Westpac is forecasting the Government will splash out about $15 billion in fresh spending in next week's Budget, while BNZ has for 'working purposes' assumed a slightly lower $10b fiscal boost.

Westpac said Covid-19 would cast a shadow over the economy 'for years after the virus has passed' and is currently predicting a 16 per cent drop in June quarter GDP, with a 6.3 per cent fall over 2020 as a whole.

But chief economist Dominick Stephens said that 'despite the gloom' the bank was forecasting a more rapid economic recovery than after the 'global financial crisis'.

'For example, we anticipate four years of above-5 per cent unemployment, whereas after the GFC there were eight.'

The Government’s economic rescue package was proving effective, but 'ballooning debt' would eventually limit how much the Government could spend, the bank said in a report.

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'All told, we calculate that net core Crown debt will rise to around $180b by 2024, taking the debt-to-GDP ratio to 50 per cent.'

As the Government issued more bonds, the Reserve Bank would expand its $33b programme of quantitative easing to keep interest rates in check, it said.

But Westpac reiterated its view that the 'next cab off the rank' for the central bank would be for it to reduce the Official Cash Rate below zero, to negative 0.5 per cent by November.

That was despite what appeared to be a clear commitment from Reserve Bank governor Adrian Orr in March to keep the OCR at 0.25 per cent for at least a year.

Westpac economist Michael Gordon said 'circumstances change', noting that it was not that long ago that the Reserve Bank appeared to hint it would not cut the OCR outside of its normal six-weekly review cycle — which it then went on to do.

BNZ is also forecasting a ballooning-out of government debt as spending rises and tax receipts fall because of the drop in economic activity.

'We can easily see gross government debt rising to double the amount forecast in December’s Half-Year Economic and Fiscal Update (HYEFU),' senior economist Craig Ebert said in an update.

'So more in the region of $200b by 2023-24 or 60 per cent of GDP, rather than $100b.'

The Government had probably committed about $23b in 'discretionary' operational spending to provide Covid-19 support, he said.

'If this was all there was to the cost, it wouldn’t be a major issue.

'However, more significantly, core tax revenue is rapidly being eroded by the downturn that the economy is now tracing,' Ebert said.

'What does seem clear is that New Zealand public debt is on course to revisit the levels — as a proportion of GDP — that the country found itself in during the early 1990s.'

BNZ cautioned it could get harder to interpret the published government debt figures and compare 'apples with apples', given the Reserve Bank was buying government bonds through QE which meant those bonds became both an asset and a liability on the Crown's accounts.

'Our understanding is that QE will 'officially' take debt off the Government’s books,' Ebert said.

'This would, presumably, mitigate the extent of rise in Crown debt figures and forecasts, as presented by next week’s Budget.'