Expect Government deficit to hit $30b for next two years: Westpac

Friday, 8 May 2020

New Zealand should expect to see the Government report deficits of close to $30 billion a year in the next two financial years, Westpac economists say.

That would represent 10 per cent of the country’s gross domestic product.

The bank's economists said it was unlikely that the country would return to surplus within five years.

“The Government has so far committed over $20b to cushion the economy through the lockdown phase. Next Thursday’s Budget will include billions more in new spending and investment to support the recovery phase, and it’s likely that even that won’t be the end of it.

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'What’s more, a drop in tax revenue means that the Government will have to borrow billions more just to cover its existing spending programmes, let alone its new ones.”

They said Government bond issuance could increase by more than $100b.

'Based on our estimates of operating deficits and increased capital spending, we expect the Budget projections to show net core Crown debt reaching about 50 per cent of GDP after five years, compared to around 20 per cent today. That suggests the Government will need to issue more than $100b of additional debt over that time, and perhaps half of that in the next year alone.'

The Government's previous Budget Responsibility Rules, limiting debt, would be 'out the window', Westpac said.

But it would still need to show it had a credible path back to fiscal stability.

“The government debt-to-GDP ratio was set to explode higher over the coming decades as age-related spending mounts up, even before Covid-19 came along.

“The Covid-19 crisis means that those long-term projections will be coming from a much worse starting point. That’s not just because of the additional spending during the crisis and recovery phase… Covid-19 will inevitably result in some economic ‘scarring’, putting the economy and therefore tax revenue on a permanently lower path compared to the Treasury’s previous assumptions.'

That would mean some reduction in spending and a hunt for new sources of revenue would be required, they said.

'We don’t think that any tax changes will be announced just yet, lest it undermine confidence during the recovery phase. But over time, it’s increasingly likely that new or increased taxes will enter the conversation.'