Government borrowing likely to increase as result of quake, Finance Minister English says

Govt likely to increase borrowing after quake, but still targeting surplus; third quake would be a struggle, English says. Should NZ borrow more?

By Alex Tarrant

The cost of Tuesday's deadly earthquake in Christchurch means government would have to increase its borrowing program, Finance Minister Bill English says.

Early estimates put the overall cost of Tuesday's quake anywhere between NZ$10 billion and NZ$20 billion. The Earthquake Commission (EQC) will initially pay out NZ$1.5 billion in cover to home owners, and has reinsurance in place for another NZ$2.5 billion after that. It would also be able to contribute further if needed.

However, EQC payments will not cover businesses in the city's CBD, which will have to be covered by private insurance. Insurance also does not cover public infrastructure such as roads or sewerage or water.

Eighty to ninety per cent of the costs in the CBD "you see on the TV" should be covered by reinsurance from private reinsurers, English said on Andrew Patterson's Radio Live Sunday Business Show. Private insurers had told the government they had sufficient reinsurance offshore to cover their costs, English said.

However, the extent of the damage, which includes damage to public infrastructure such as roads and sewerage systems, was "likely to mean some sort of increase" in government borrowing, English said.

The government is currently borrowing on average NZ$300 million a week to cover its budget spending. Strong demand for New Zealand government debt at low interest rates had allowed Treasury's Debt Management Office (NZDMO) to accellerate its borrowing program over recent months. Treasurer Philip Combes told interest.co.nz two weeks ago the NZDMO was looking to progressively ease the program down as the government sought to return its books to surplus over the next three years. The NZDMO is currently planning to borrow NZ$13.5 billion in the 2010/11 year. See more here at NZDMO.

Surplus track still in the picture

English said the government would see whether it could still return to surplus in 2014/15 as planned, and would take another look at its upcoming May budget due to the quake.

Government had already been planning to tighten its spending by cutting back office costs in the public sector, English said, although would still maintain peoples' income support and frontline public services.

"If we had a third earthquake we'd find that a bit of a struggle," English said, adding the costs of Tuesday's quake "will take a bit of pain on the government's part".

Government would be setting out to maintain its current credit rating, English said. Credit rating agencies Standard & Poor's and Moody's have said the latest quake had no implications on New Zealand's sovereign rating as yet, although both would be watching any increases in government debt above previous projections, which had net government debt peaking at 28.5% of GDP in 2015. See Treasury's Crown net debt track in this article on its upside and downside scenarios for the New Zealand economy from its half year update in December.

Doubt on levy

Meanwhile, English said government would prefer not to introduce a levy on taxpayers in order to help pay for the quake costs. Home owners would already be paying higher private insurance and EQC premiums due to the quake, he said.

Green Party co-leader Russel Norman proposed the introduction of a small levy on higher-income earners as a way of helping pay for the quake costs. See more on his proposal here.

Asked whether government would do whatever it took, financially, to rebuild Christchurch, English said they would "take a balanced approach". Following Tuesday's quake, Prime Minister John Key promised Christchurch would be rebuilt. 

"You don't write a blank cheque for anything these days," English said.

"Yes it can and yes it will [be rebuilt]," English told Patterson.