New Zealand’s fiscal space has narrowed following significantly higher debt and slippage of fiscal consolidation targets in recent years amid wider external deficits and weaker growth, says Fitch Ratings. Fitch expects the next government to remain committed to consolidation, but we believe achieving the stated target of fiscal surplus in the fiscal year ending June 2027 (FY27) could be challenging.
In September’s Pre-election Economic and Fiscal Update, the government forecast a 2023 fiscal deficit of 2.5% of GDP under its preferred fiscal balance metric, the operating balance before gains and losses (OBEGAL). This is significantly wider than its previous 1.8% deficit forecast published in May, as tax revenues have underperformed expectations as the economy slows. The Pre-election Update shows the OBEGAL returning to surplus in FY27, one year later than in May’s forecasts.
The latest projections incorporate policy measures identified by the Labour government in August to achieve expenditure efficiencies and boost revenues. However, the Pre-election Update does not entirely set out specific measures to achieve its envisaged deficit reduction, which entails a 1.3% of GDP increase in annual revenue and 1.6% of GDP in spending cuts, and we think reaching a fiscal surplus by FY27 will require further policy actions.
The task of formulating and implementing such measures is likely to fall to a new government after the incumbent Labour Party lost nearly half its parliamentary seats in the 14 October general election. The centre-right National Party was set to win about 50 of 121 seats, making it almost certain to lead an incoming coalition with the free-market ACT party - with potential support from the populist New Zealand First, depending on the final results due on 3 November.
A commitment to return to fiscal surplus and putting the ratio of government debt/GDP on a downward trajectory was an important factor in our affirmation of the sovereign rating at ‘AA+’/Stable on 29 August. There is a long-standing commitment to prudent fiscal policies across the political spectrum, and the National and Labour parties outlined similar fiscal plans in their election campaigns, both pledging to return to surplus by FY27. The National Party has portrayed itself as the party of fiscal responsibility; and while its programme includes some tax cuts (via interest tax deductibility and income tax band adjustment), these are modest and would be funded through expenditure reductions and efficiencies. ACT and New Zealand First appear to be broadly in alignment with National on fiscal policy.
Nevertheless, persistent fiscal slippage (the May target of returning to fiscal surplus in FY26 was itself one year later than previously forecast) and a more challenging macroeconomic backdrop have raised risks to Fitch’s deficit and debt projections at our August sovereign review. Then, we forecast the general government deficit (using the government finance statistics measure rather than the OBEGAL) to narrow to 2.5% of GDP in FY23 and 0.6% by FY26, from 4.6% in FY22. We also expected gross general government debt to peak at about 47% of GDP in FY24. Fitch’s next quarterly forecast update towards end-2023 could incorporate more detailed policy announcements by the next government, for example in December’s mid-year fiscal update or a potential ‘mini-budget’, if available.
30 Comments
In a world awash with debt, it's not unreasonable to expect our lenders will charge us a premium for years to come. This will likely have negative implications for our currency, inflation and of course local borrowing rates may remain higher for longer. Selling expensive houses to each other for years has only exposed our vulnerabilities. Those heavily vested in property STILL feel they're entitled to more of the same and now they are paying dearly along with the innocents in all of this.
J H
Muppets. Neither the Treasury, RBNZ, or Fitch forecasts focus enough on the two metrics that interact with the level of govt debt and GDP - the amount of private sector borrowing and the current account deficit (aka overseas savings). The other metric they miss is domestic savings - but these dont move around much.
When you do a forecast based on the metrics that matter, it is clear that the mild GDP increases that Treasury and RBNZ are forecasting are based on private sector debt increasing this year (to June 24) by around $24bn (6% of GDP) and a bit more in the next few years (8% pa). This would mean private sector debt staying at around 140% of GDP.
In the first two months of this year, private debt increased by about $2bn so we are already way behind where we need to be.
All of this shows, sadly, that our economy relies on keeping house prices high and levels of private sector debt at perilous levels. It also shows that without a housing borrowing boom in the next 10 months we will be back in recession quick smart.
Yep housing and it's associated industires is all NZ has and that is why someway, somehow house prices are going to have to continue to push higher. Govts know this and rather than implementing policies to promote productive business, they simply open the immigration flood gates time and time again. Luxon has been very loud refering to his "business" background so surely he understands such things, however I'm not holding my breath.
They will inflate the debt away.
Explain how the debt can be "inflated away". While the idea of inflating away debt is easy to understand on the surface, it is based on crude assumptions that increasing money supply will be commensurate with the rate of increase in incomes.
Government debt is purely a measure of our monetary base of NZ Dollar currency which the government has created through its spending and households then have available to spend or to add to their net savings and the government even pays us interest for holding it.
A much better deal than money which we have to borrow from the banks and pay them interest on. All money is created as someones liability or debt and so when the government runs a surplus it is simply destroying its money and our savings.
"The auditor-general in their annual report states:
"...this year we continued to focus on improvements needed to the information that public organisations provide about their performance. It is still too hard to tell what New Zealanders are receiving for about $160 billion of central government expenditure each year, and whether it represents value for money."
https://www.kiwiblog.co.nz/2023/10/the_auditor-general_is_right.html
try looking up the pay rates of nurses, doctors, teachers, police, prison officers etc from when labour came in power and when they left, it's the normal cycle so now those same people will only get rises in line with inflation for a few years and when the parties swap around they will fight, strike for catch up pay rises. we would be much better off if we could increase them each year rather than a big bump up then squeeze, then a big bump up
We have much bigger problems than how long its going to take to get back into surplus & National has no plans to fix it.
https://www.newshub.co.nz/home/money/2023/10/cost-of-living-kiwis-revea…
https://www.newshub.co.nz/home/money/2023/10/cost-of-living-crisis-more…
The interesting thing here is that because Jacinda and Grant focused on Well-being budgets, they did not focus on deficits. So we now have to pay $11 billion in interest payments this financial year.
The structural surplus of the past is now replaced with deficits.
Thankyou Grant and thankyou Jacinda, you have successfully left us in a wonderful place in a world where interest rates are rising.
The 6th labour government will be judged by the history books based on the economic carnage that they have done to New Zealand. All our economic gains of the last 40 years have been wiped out, by the extreme left Ardern/Hipkins Labour government.
And now we are at risk to growing interest charges due to rising world govt bond rates.
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