'No recession' but warning Budget 2023 may force Reserve Bank to 'push back harder' on interest rates

Thursday, 18 May 2023

Net core Crown debt stood at just under $58b after Grant Robertson delivered his third Budget in 2019; it is now forecast to top $151b in the year to June and nearly $179b a year later.

The Government has pushed back its expected return to surplus by another year after Cyclone Gabrielle and higher inflation blew its Budget forecasts off course.

But economists warn the rise in spending in Budget 2023 may put Grant Robertson on a collision course with the Reserve Bank and its plans for the OCR.

Finance Minister Grant Robertson on Thursday revealed the Treasury was no longer forecasting a recession, thanks to the rebuild and the arrival of more tourists.

The “strong economy” would weather the storm of a “challenging global environment” and the Treasury now expected inflation to drop back under 3% late next year, he said.

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The Treasury is forecasting relatively robust economic growth of 3.2% in the year to the end of next month, and a more tepid 1% rise in GDP the following year.

Robertson blamed the cyclone and “more persistent inflation” for the fact the Treasury is now forecasting the Government will stay in the red until the year ending in June 2025.

But he defended its record on debt by saying it was not taking any longer to get the Government’s income and expenditure back into balance than it took the National government in the period affected by the Global Financial Crisis in 2008 and Canterbury earthquakes in 2011.

“New Zealand continues to have some of the lowest public debt in the world and Budget 2023 is another step in the direction of bringing core Crown expenses as a percentage of GDP back towards pre-pandemic levels,” he said.

Robertson said as recently as December 14 that the Government’s operating (Obegal) balance was on track to return to surplus in the year ending June 2025, when theTreasury had been predicting a surplus of $1.7 billion.

“Getting the books back in the black will help to keep a lid on debt and take inflation pressure out of the economy, giving businesses more space to invest,” he said then.

But the Treasury is now forecasting a deficit of $3.6b that year – a $5.3b negative turnaround – with a modest $600m surplus the following year.

It is the second year in a row that the Government has pushed back the return to surplus by a year, after it last year nixed forecasts of a surplus in the year to June next year.

Net core Crown debt, which was the most-frequently quoted measure of government debt up until a presentation change last year, stood at just under $58b or 18.6% of GDP soon after Robertson delivered his third Budget in 2019.

It is now forecast to top $151b, or 38.5% of GDP in the year to June, and nearly $179b, or 43.1%, of GDP a year later.

By its new main debt measure, which takes into account the money the Government has saved in NZ Super and some other assets and debts, government debt is forecast to peak in real terms just over $91b or at 22% of GDP in the year to June next year.

That debt measure is more standard for governments internationally, but can be thrown about from year to year by rises and falls in stock markets.

Infometrics principal economist Brad Olsen said the Treasury was forecasting the “soft landing that everyone has been looking for”.

But he said it was “not a particularly restrained Budget” and was concerned the Reserve Bank would feel it needed to “push back harder”, with higher interest rates.

He was not confident that it would be possible to get inflation back under control as quickly as the Treasury was forecasting.

“What I think we are seeing with the Budget is a number of small spending initiatives that look like ‘restraint’ individually, but taken together represent a st`ill large increase in government spending,” Olsen said.

“By the end of the forecast period, government spending as a proportion of GDP will still be above pre-pandemic levels.”

The net effect was changes in government spending would be stimulatory next year “even as the Treasury expects inflation to start to pull back,” Olsen said.

Not` only had the return to surplus been pushed out, but the size of expected surpluses after that had been reduced, he said.

That meant there was a worry that the small $600m surplus forecast for the June 2026 year could easily not be achieved, which would push a return to surplus back a further year, he said.