Finance Minister Bill English says after earthquake govt return to suplus now more likely in 2015/16 than 2014/15

By Alex Tarrant

The New Zealand government's net debt could rise above 30% of GDP by June 2014 as government frontloads its debt program over the next few years to pay for the immediate costs of the Christchurch earthquakes, Finance Minister Bill English says.

English was confident government would be able to borrow the amount of money it needed, although the increase in debt would put a greater emphasis on controlling government spending in order to get back to surplus by 2015/16 and start paying down its borrowings. 

The total cost of the two earthquakes that hit Christchurch on September 4 and February 22 could be in the order of NZ$15 billion to NZ$20 billion, with government, private insurers and international reinsurers sharing the burden. The direct cost to government could be NZ$10 billion, including NZ$5 billion in lost tax revenueover four years due to the economic disruption caused by the quakes.

New Zealand's net Crown debt had been forecast in December to top out at 28.5% of GDP in four years' time. Last year Prime Minister John Key sought to calm fears of a sovereign credit rating downgrade by saying international ratings agencies such as Standard & Poor's would not take any notice of a nation's net debt levels until they hit 30% of GDP.

"The ratings agencies tell us ‘look if your debt is under 30%, you’re of no concern to them, if it’s between 30-60% they think it might hold back growth a little bit, but again of no major concern, anywhere near 100% then you really get their attention,'" Key said in December.

Surplus track pushed out a year

Speaking this afternoon to an ANZ Capital Markets conference, English said government would have to increase its debt track in the short term in order to pay the costs arising from the two quakes. This would take the government outside its comfort zone in terms of how much debt it had, but there was no choice but to do it, he said.

“Officials are still working through their updated forecasts as we prepare for the Budget. But two things are already clear: First, the earthquake is likely to slightly delay our return to budget surplus. Second, meeting the Government’s share of the immediate earthquake costs will require a quite substantial front loading of Crown debt in the next year or two,” English said.

"The Government intended to get back to surplus in 2014/15 – a year earlier than forecast in the December Half-Year Update. A return to surplus is now more likely in 2015/16, depending on final Budget forecasts," he said.

"Due to the earthquake and other factors, this year’s operating deficit before gains and losses could be more than 8%, or more than NZ$16 billion – up from the NZ$11.1 billion forecast in the December update."

There was scope that operating deficit could be cut in half, to about NZ$8 billion, in the 2011/12 year, English said.

Cap on spending increase

Meanwhile, in comments to media after his speech, English signalled the government’s increase in its budget spending in May could be below NZ$800 million. Prime Minister John Key had earlier this year signalled the cap on the increase in spending could be between NZ$800 million and NZ$900 million.

“Well that [NZ$800 million] would be the maximum,” English said.

“The Prime Minister signalled that we would be moving from NZ$1.1 billion down to NZ$800 million, and as we move through the budget process we’ll see where that ends up. But we’ll be putting quite a lot of pressure on that,” he said.

“It’s possible [it could be lower]. But over the next month or so we’ll make those decisions and that’ll become clear in the budget.”

Immediate costs

Despite the Christchurch rebuilding effort beginning in six months' time, the government needed to pay a number of earthquake bills right now, hence the immediate increase in borrowing.

“First there’s the cash costs that will feed into the deficit straight away – for instance the wage subsidy program is going to cost at least NZ$120 million, possibly more. Temporary housing, the whole rescue effort, we’ve got to pay for that, business support.

The government's NZ$16 billion operating deficit would also be large because government needed to recognise future costs beyond this year that would be incurred.

“That’s why the cash deficit may not move as far as the operating deficit, because the cash costs we meet might be a billion or so, maybe less. The costs we have to recognise for the next two or three years could be considerably larger than that," English said.

Read Bill English's announcement below:

The Canterbury earthquakes are likely to slightly delay the return to budget surplus, but it is important the Government gets debt back to pre-earthquake levels to absorb future economic shocks, Finance Minister Bill English says.

“Officials are still working through their updated forecasts as we prepare for the Budget,” Mr English said in a speech to ANZ’s Capital Markets Conference in Wellington today.

“But two things are already clear: “First, the earthquake is likely to slightly delay our return to budget surplus. Second, meeting the Government’s share of the immediate earthquake costs will require a quite substantial front loading of Crown debt in the next year or two.”

The Government intended to get back to surplus in 2014/15 – a year earlier than forecast in the December Half-Year Update. A return to surplus is now more likely in 2015/16, depending on final Budget forecasts, Mr English says.

Due to the earthquake and other factors, this year’s operating deficit before gains and losses could be more than 8 per cent of GDP, or more than $16 billion – up from the $11.1 billion forecast in the December update.

As a result, net Crown debt could now exceed 30 per cent of GDP by June 2014 – up from around 28 per cent in the December update and a rapid increase from around 14 per cent in June 2010. (See Prime Minister John Key's January comments here suggesting that government debt would not worry ratings agencies until net debt hit 30% of GDP).

“It’s important that we get net Crown debt back to pre-earthquake levels so we can absorb future economic shocks when they come along – as they surely will,” Mr English says.

“The other reason we are concerned about the rise in Government debt – from levels that were quite modest by world standards – is that it pushes up New Zealand’s total net foreign liabilities. They are extremely high at about 85 per cent of GDP, and are being watched closely by foreign lenders and credit ratings agencies.

“So over the next few years – and for all the reasons we have outlined over the past year – we are not keen to increase debt more than we need to. It will require some careful decisions about where we prioritise spending, which we will do in a considered and balanced way.

“These changes will be long-term spending decisions made on their own merits – not short-term decisions to meet the immediate bill from the earthquake.”

Those decisions will be based on three general principles:

* The cost of the earthquake will essentially be borne by the Government’s balance sheet, rather than by cutting operating spending or increasing taxes. In practice, that will mean both taking on more debt and redirecting some projected capital spending towards Christchurch.

* Any changes will ensure that the Government’s commitment to protecting the most vulnerable and maintaining public services continues.

* And the Government will press on with its broader economic programme to reduce New Zealand’s vulnerability to foreign lenders, get the Government’s finances in order and build faster growth based on higher national savings and exports. Fears from some regions that major infrastructure projects could be deferred to pay for Christchurch reconstruction have been exaggerated, Mr English says.

“Major projects the Government has already committed to will not be deferred – they have proved their economic worth and can’t simply be switched on and off. Which projects we undertake ultimately depends on their costs and benefits. These will not have changed much due to the quake.

“And our economy has the capacity to absorb the impact of the quake. The Reserve Bank last week forecast GDP growth to peak at over 5 per cent in 2012 and unemployment to fall below 5 per cent, but 90-day interest rates rising to only 4.6 per cent.

“That forecast combination of high growth and moderate inflation would be good for our export industries and should contribute to a material rise in New Zealanders’ living standards,” Mr English says.