Key, English warn of 'zero budget' as fears grow that Standard and Poor's may downgrade NZ govt and bank credit ratings

By Alex Tarrant

The government has its eyes on New Zealand’s sovereign credit rating as it looks to produce a budget with no net additional spending from a year ago. It faces a potential downgrade just as it has to cope with Christchurch earthquake costs and higher interest costs from an expanded borrowing programme.

Prime Minister John Key and Finance Minister Bill English say there are some factors for New Zealand's credit rating the government cannot influence, as international ratings agencies review how they asses certain risks, which may lead to a downgrade under tighter rating criteria.

The Christchurch earthquakes could cost the government in the order of NZ$10 billion over the next four years, with government choosing to ‘front-load’ its borrowing programme to pay for the immediate costs such as business assistance packages and temporary housing.

However government is signaling budget spending cuts in areas other than health and education as it tries to get its books in order to pay for future costs arising from the quake, including higher debt servicing costs, as it seeks to return to surplus by 2015/16 and start paying down that debt.

The government’s net debt is expected to rise to over 30% of GDP in the next four years, up from forecasts for a 28.5% peak in December, before the latest big quake on February 22.

“We’re all in this together,” Prime Minister John Key said this morning in Parliament in answer to a question whether government schemes initiated due to coalition agreements could face the axe in the May 19 Budget.

“In the end we’ve got to find ways of making sure that our budget is balanced, that we’re in a position where the country doesn’t suffer a downgrade unnecessarily,” Key said.

“I can’t stop the sorts of things Standard & Poor’s are looking at at the moment. They’re taking a complete review of the way they look at ratings, and that includes the Australian banking system, so we can’t stop that,” he said. See threat from S&P methodology review and S&P warning on NZ private sector debt.

International credit rating agency Standard & Poor’s announced last year it was reviewing how it assessed certain sovereign and private sector risks due to debt crises in countries like Ireland, Greece, Spain and Portugal.

New Zealand’s Sovereign credit rating was placed on negative watch in November, suggesting a one-in-three chance of a downgrade in the next two years.

Standard & Poor’s also commenced a review of Australasian banks’ credit ratings, saying there was a chance the review could lead to downgrades as it looked at how it assessed the banks’ funding risks. Ratings downgrades for both government and the banks would increase their respective costs of borrowing on global financial markets.

“What we can do is we make sure we demonstrate to the rating agencies, the IMF and others that the government hasn’t got its head in the sand,” Key said.

“I think if we sat around with such an enormous expenditure that’s going to come in the short-to-medium term, with no response at all, I think both the public of New Zealand and the international agencies that watch New Zealand would think that there’s a complete disconnect between the government and what’s happening in reality.”

'Who would know with ratings agencies'

Finance Minister Bill English joined Key in saying there were some factors for the country's credit rating the government could not control, as the agencies reviewed how they assessed certain risks.

“Well who would know with the ratings agencies? They’re in a world where their perception of risk is rising, they’re getting more concerned about countries with a lot of debt, and between the government and the private sector, New Zealand has one of the highest debt levels in the developed world," English told journalists in Parliament this morning.

“So if they’re getting more concerned about that then they may change their view about our credit rating. What’s important for us though is to make sure we’ve got our spending and debt obviously under control, and that we are getting on with the programme that’s going to lift our economic growth," English said.

The ratings agencies will make up their own minds, we’re focused on doing the right thing for this economy,” he said.

What a difference three days make

This morning English faced questions why he had as late as Thursday said government was looking to increase the budget spend by as much as NZ$800 million, then three days later the Prime Minister effectively ruled this out.

“Well that [NZ$800 million] would be the maximum,” English told media on Thursday after a speech to an ANZ Capital Markets conference.

“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,” English 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,” he said.

This morning English defended the Prime Minister's comments that there would likely be no or very little extra spending in the budget this year.

“He’s really just describing what’s been going on in the budget process, which is that we’ve been looking to tighten government spending because we’ve got to be pretty careful about our debt levels," English said.

"We’ve had the IMF publish statements this morning which indicate that, with more countries borrowing more money - we’re significant borrowers in the world market, and that world market’s getting more sensitive to our debt," he said.

"And the market doesn’t worry about the reasons. The fact that we’ve had an earthquake is interesting, but they just see it as more debt, and so we have to demonstrate to the people who lend us the money that we’ve got that under control.”

The Christchurch earthquake was not the only reason for the need for budget cuts but certainly played a big part in the decision making process.

"There’s no doubt that, as the Prime Minister said yesterday, the fact that the earthquake’s occurred means that choices we thought we might have had, we now don’t have, we do need to tighten up,” English said.

Government did not have the option of spending cuts to pay for the immediate costs of the quake.

"So we’ve made it clear that costs like the wage subsidies, the housing costs, the costs of the civil defence operation, they are all going to add to our debt and deficit for this financial year. So we’re not looking right now to go and save money to pay for that," English said.

"But as I indicated in the speech [on Thursday], and as the Prime Minister indicated yesterday, we want to get back to surplus by 2014/15, and that means we have to tighten government spending over the next couple of years,” he said.

"The earthquake, on top of other events has put pressure on our debt, and we’re going to be tightening up government spending.”

IMF says 'control spending'

English's and Key's comments on the 'zero budget' come at the end of a regular annual 10-day visit from the International Monetary Fund, which recommended government cut spending in order to get back to surplus by 2014/15. For more on what the IMF said see yesterday's article here.

Asked whether the trip had pushed any panic buttons, English replied it had not. English met with the IMF to discuss its report after the IMF had briefed media. See the IMF's report on its website here.

"We’ve been working on a pretty considered plan from the start of the year to tighten up the budget spend. We might have been in a position where we could have made significant progress on our deficit, but because of the earthquake that’s no longer possible. In fact, it could push us backwards. So there has been growing pressure to tighten up government spending,” English said.

Meanwhile English played down the IMF's prediction the government's fiscal deficit would hit 9% of GDP this year (year to June 30), higher than government's 8% forecast.

“As we get information about particularly the shorter-term earthquake costs, then that number will move around, but it will be somewhere around 8 or 9% of GDP. What we know is that that is a very big number. It will be a very large deficit for a developed country and we are aiming to reduce it pretty quickly over the next couple of years," English said.

(Updates with comment from English on IMF visit, video of English's IMF comments)