Borrowing blow-out

A sobering statistic is buried in the Budget that means more to most New Zealanders than just about anything else pored over in the past couple of days. Hardly anyone has talked about it or debated it on talkback radio.

It is the big number that Bill English and John Key don't really want to discuss or do much to change but this big number is driving interest rates for mortgage borrowers and savers. It is also the number foreign investors care most about.

That figure is the amount the Government is likely to borrow to fund its deficits for the next decade - $52.9 billion, according to Treasury's assumptions spreadsheet stuck inside its website.

It means the Government will borrow the equivalent of $13,225 for each New Zealander in the coming decade.

It means that every week the Treasury will go into the wholesale money markets and ask to borrow around $200 million. Every week the Government will borrow the equivalent of what it costs to build a hospital.

Every working day it will borrow about $50 million. That's the equivalent of a big Lotto winner every hour. In the space of that 10 years the Government will borrow an amount so large that it will dwarf the amount saved by the New Zealand Superannuation Fund. It will be a massive lead weight dragging on the economy.

To put it into context, this borrowing is worth more than half of the entire savings built up by New Zealanders in bank accounts and directly in the stock market over the past century of around $100 billion.

It will push up interest rates. Key and English were worried about a credit rating downgrade because, they said, it would push up interest rates by 1.5 per cent in the coming years.

They managed to stave off that downgrade, but they may not keep interest rates down. Long-term rates have already risen that much in the past three months.

Another piece of news that virtually no one noticed on Thursday was a quiet announcement by ANZ National, New Zealand's biggest bank. It put up its two, three and five-year mortgage rates by as much as 35 basis points.

This wasn't directly linked to the Budget, but it's a taste of things to come. Long-term interest rates globally have spiked sharply higher in the past week because of the fears of heavy government borrowing around the world. America borrowed US$100 billion ($160 billion) in the past week. By the end of the week investors were choking on all the paper. The scale of the borrowing in New Zealand is much smaller.

Our Government will borrow up to 5 per cent of GDP by the end of next year, while the US Government is already borrowing more than 10 per cent of GDP.

The problem for New Zealand, however, is that our Government will have to compete on the same global markets for this money. All this borrowing will inevitably push up longer term mortgage and savings rates.

The five-year mortgage rate has already risen from around 6 per cent to 7.6 per cent since early March. Given the scale of the recent moves on wholesale markets, five-year mortgage rates could hit 9 per cent by the end of the year.

For someone with a $200,000 mortgage, that is an extra $115 a week. The non-delivery of tax cuts pale into comparison with such numbers.

Yet it won't light up the switchboards on talkback radio. Maybe it should.

Bernard Hickey is managing editor of www.interest.co.nz, providing information on interest rates, banks, finance companies and the economy.