Having been a fierce critic of her predecessor, Grant Robertson, for spending more than he said he would, she is expected to confirm her intent to increase operational expenditure by $2.4 billion in Budget 2025.
While this is a relatively small increase, Willis has signalled she’s unprepared to focus on returning the books to surplus at all costs.
The elephant in the room is the chorus of public and private sector economists flagging concerns over the sustainability of the track the Government’s finances are on.
“Ongoing pressure on health and superannuation spending from an aging population, pressure on infrastructure from climate change and past underinvestment, and rising debt-servicing costs as higher Government bond yields meet the last Government’s debt-funded spending spree are all major challenges waiting for us down the road,” ANZ senior economist Miles Workman said.
“One could argue that if the Government is unable or unwilling to significantly reduce spending in order to get the books back into shape before the next crisis comes along (and there are good reasons not to cut spending too aggressively), then it would be appropriate to consider revenue initiatives that would help get the books on a more sustainable path.
“While that might make sense from an economic standpoint, politics do tend to get in the way.”
The Government is hiking existing taxes and levies where it can, but doesn’t plan on materially broadening the tax base.
Rather, it is looking for ways of getting the private sector to take on the debt to deliver public goods (undoubtably at a cost).
Until the impact of this is better understood, the Government is expected to have to issue more debt than planned at the Budget in May.
Workman expects the Treasury to increase its forecast bond (debt) issuance programme by between $4b and $6b in the four years to 2027/28 to $132b.
This level of bond issuance remains wildly above pre-Covid levels. Without a surplus, the Government can’t repay its Covid debt, so is renewing it, all the while issuing new debt to pay for new spending.
The portion of government debt owned by offshore investors is rising, partially because the Reserve Bank is selling the bonds it printed money to buy in response to the pandemic.
While overseas investors continue to view New Zealand Government Bonds favourably, UBS economist Nic Guesnon was conscious of the fact “a fairly concentrated” group of foreign investors was also being asked to absorb a whole lot of bond issuance from governments around the world.
This is putting upward pressure on borrowing costs, or the interest rates governments need to pay to ensure their bonds are attractive to investors.
“Compounding this issue, domestic savings are relatively scarce, so New Zealand is running a large current account deficit of above 6% of GDP, with capital inflows required to finance domestic investment,” Guesnon said.
“Nominal GDP has also slowed sharply to about 3% year-on-year, below the 10-year government bond yield at around 4%, implying it is more costly to run budget deficits in the current environment than it has been since around 2009.
“If the current environment continues, large budget deficits will drive up debt as a share of GDP, which would raise debt repayments materially over the long term, if interest rates remain around current levels.”
Workman concluded the Treasury’s forecasts are likely to look a bit worse than the outlook was back in May.
“How far that downgrade goes is the big question,” he said.
“But with monetary restriction being rapidly withdrawn [the Official Cash Rate falling], it would be very surprising if the Treasury’s forecast didn’t include a solid recovery from the latter half of 2025.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
