Ratings agency doubts state 'fat'

Prime Minister John Key. Photo / Steven McNicholl

International ratings agency Standard & Poor's has welcomed the Government's plan to bring its finances back into surplus sooner but doubts there is sufficient fat in the state sector for cuts there to yield meaningful savings.

Standard & Poor's surprised many late last year when it put New Zealand's AA+ credit rating on "credit watch negative" signalling a one-in-three chance of a downgrade within two years.

A downgrade in New Zealand's credit rating would lead to higher interest rates for government and private sector borrowing.

Yesterday, Standard & Poor's sovereign rating analyst Kyran Curry told the Herald his firm welcomed Prime Minister John Key's state-of-the-nation speech, in which he indicated plans to hold increases in government operational spending at $800 million to $900 million a year and return to surplus by 2014 or 2015.

"That would be supportive of the rating.

"We acknowledge the Government's fiscal position is in a cyclical weakening point and the sooner it returns to surplus the better. This Government has articulated a fiscal consolidation strategy and we believe it's credible."

However, unlike Key, Curry said Standard & Poor's did not regard the state sector as "bloated and inefficient".

"Generally, we look at the Government in New Zealand as being relatively small and compared to its peers it's quite efficient."

Furthermore, Curry said New Zealand was "relatively light" in government related entities.

He noted the Government's plans for partial asset sales, "but if you look at what's left, the sorts of government related businesses in New Zealand are quite minimal compared to a lot of other countries".

Standard & Poor's was also heartened by the Savings Working Group's recent report on how New Zealand's debt problem may best be tackled.

"The comments they made are very valid and the goals they established are the sorts of things we'd be looking for in a high level sense," said Curry.

Curry noted the group's proposals for creating incentives for households to save and for the Government to maintain its relatively low level of dependence on foreign borrowing.

Curry said it was the business and household sectors' dependence on foreign savings that was driving Standard & Poor's negative outlook on the country's credit rating and the "robust debate" around the issue "needs to be followed by concrete changes".