Government expected to need to borrow up to an extra $15b in Budget

Friday, 29 March 2024

ANALYSIS: BNZ and Westpac economists believe the Government may need to reveal a need to borrow as much as $15 billion extra in the Budget, as they and other analysts continue to digest the Budget Policy Statement issued on Wednesday.

Meanwhile, credit-ratings agency S&P has appeared to voice scepticism over an assurance from Finance Minister Nicola Willis that tax relief in the Budget would be entirely funded from savings and additional revenues, describing that as “a challenge”.

Willis has three big moving parts to juggle in the Budget; tax relief, government spending and the level of borrowing.

A deterioration in the economic outlook forecast by the Treasury meant something had to give in the Budget Policy Statement.

The Treasury forecast economy activity will total nearly $43 billion less in the period up to June 2028 than it had expected in December and that tax revenues over that period would be almost $14b lower than it thought then.

Despite a last-minute flurry of calls for the Government to reconsider tax relief, Willis appeared most willing to compromise over the projected date for a return to surplus.

Westpac chief economist Kelly Eckhold said the extent to which the Government might water-down or delay proposed tax relief was not yet clear.

But Willis repeated five times that its proposed tax relief would be “meaningful”.

“I want New Zealanders to have no doubt, we will keep our commitment to them; from July they will get meaningful tax relief,” she said.

She gave perhaps equal emphasis to a commitment that the Government wouldn’t prioritise getting its books back into the black over maintaining front-line services.

“We won't be chasing a surplus in one particular year at any cost, particularly if that cost would be front-line public services,” she said in what appeared her key tone-setting comment on Wednesday.

That means the increased difficulty of delivering tax relief in a deteriorating economic climate will need to come at a different cost.

Willis confirmed a return to surplus by the Treasury’s previously-slated date of the year ending June 2027 had effectively been abandoned and, more surprisingly, that it was “not a given” a surplus would be achieved even the following year.

Eckhold said “one of the clearest moving parts is that it looks like we'll have more debt to issue over the next few years”.

Before the Budget Policy Statement, Westpac had been forecasting the Government would need to increase the size of its bond programme — the means through which it finances its debt — by between $7 billion and $10b over the next four years.

But Eckhold believed it might now need to pencil-in an extra $15b of borrowing over that period.

ANZ has forecast the Treasury will need to issue an extra $10b to $12b of bonds.

BNZ research head Stephen Toplis said history showed such forecasts weren’t very reliable, but agreed extra borrowing was likely to land in the range of $10b to $15b.

A troubling scenario would be if credit-ratings agencies took the delay in the return to surplus as a sign of a lack of fiscal discipline and it helped prompt them to downgrade the country’s sovereign debt rating later this year.

That would be the clearest objective indication that the country’s reputation for sound financial management had been wounded.

In practical terms, it would mean that as well as more debt, the Government would need to pay a higher interest rate on that debt.

The Budget Policy Statement noted that the cost of financing government debt was already expected to climb to $8.8b this financial year.

New Zealand’s credit-ratings have appeared under some pressure due to the stubborn current account deficit, which saw the country spend more than $61 billion more than it earned in 2023 and 2024 combined.

S&P Melbourne-based sovereign analyst Martin Foo told The Post a delay in the Government’s return to operating surplus was no surprise given weak economic data and that the Treasury had only been projecting an “extremely thin” $140m surplus in 2026-27.

“On our broader measures, which focus on residual cash — rather than the operating balance — and also consolidate the activities of local government, we still expect the fiscal deficit to narrow over the next three years,” he said.

Also on the bright side, net government debt should stabilise at a level that “compares favourably to those of most highly-rated peers”, Foo said.

“However, it will be a challenge to fund promised tax cuts entirely through reprioritisations, savings, and new revenue measures and we await further details in Budget 2024,” he cautioned.

“The total fiscal deficit has been quite elevated over the past three years and contributed to pressures on inflation and external accounts.”

Bank economists don’t appear to believe the threatened delay to the Government’s return to surplus will be enough to tip ratings agencies to pull the trigger on a downgrade.

Eckhold said they would likely see the deterioration in the fiscal outlook as reflecting a cyclical downturn, rather than anything more permanent.

Nor did he believe the delay in the return to surplus pointed to any fundamental reduction in the Government’s appetite for spending cuts.

Rather, it had come to recognise “they're pushing pretty hard already and pushing much harder comes with risks”, he said.

Kiwibank chief economist Jarrod Kerr said that although there had been some warnings from S&P, “it's highly unlikely that we get downgraded”.

It would help if ratings-agencies bought the argument that the Government was borrowing to invest, and cutting spending to pay for tax cuts, he suggested.

Kerr said it took him 20 minutes to cycle to work from Mission Bay in Auckland but the commute could take him 45 minutes by car and he would be “more than happy for the Government to significantly increase debt in order to tackle infrastructure problems”.

“If we tackle infrastructure problems, which are the bugbear of many people like myself, there's a stronger, faster, healthier, more efficient economy at the end of it.”

But he agreed that what the Government was borrowing for was “subjective”.

Anyone could choose to argue that it was cutting operating spending to invest and borrowing to pay for tax cuts, after all.

“I listened to an S&P analyst say we could effectively double our debt,” Kerr said.

But he described concerns about what might then happen in the wake of a major natural disaster as “bang on”.

“We can definitely increase our debt quite a lot, but it is nice to keep some headroom in case we have an earthquake.”