Credit team gives warning on Budget

Finance Minister Bill English has promised higher spending on health and education. Photo / Kenny Rodger

The Government needs to get its books out of the red within five years, says one of the three men who will decide after Thursday's Budget whether New Zealand's international credit rating will be downgraded.

The Treasury has told Finance Minister Bill English that with no changes to spending policy, New Zealand would have recurring operating deficits of more than $10 billion a year and borrowing would be about $135 billion by 2023.

Standard & Poor's analyst Kyran Curry said the group was looking for New Zealand to reach a stable position soon.

He is one of three S&P executives in New Zealand this week to decide whether to take the country's AA+ rating off negative watch and back to stable or to downgrade it.

A downgrade would increase the cost of international borrowing.

"We are looking for a more sustainable position over the medium term," Mr Curry told the Herald.

"It is hard to put a timing on it, but we would expect that over the cycle of the Government [it] would be recording operating surpluses within, I guess, the next three to five years."

Standard & Poor's would be looking for the Government "to articulate a path to a more fiscally conservative or a more stable fiscal position."

"By that we mean either prioritising its spending or just doing what it needs to do to rein in some of those operating deficits that were articulated in the fiscal and economic update in December."

A downgrade could add $600 million to Government debt interest costs, Secretary to the Treasury John Whitehead has predicted.

Mr Curry said there would be a tolerance for modest operating deficits.

"But obviously if the external position is going to remain as weak as it is, the Government's fiscal position needs to be as strong as it can be."

Mr Curry said the December economic and fiscal forecasts had "painted a picture of a dramatically weakening operating position", but the new Government had said the forecasts were unacceptable and it did not intend them to be realised.

"[National] has a strong history of fiscal conservatism and we believe it will stick to its knitting and will do what is needed to stabilise its fiscal position."

Mr Curry said New Zealand's main weakness was a "very intense dependence on foreign capital" mainly for consumption and housing in the private sector.

The risk associated with high external debt meant investors funding the consumption could lose confidence in New Zealand's ability to meet its obligations on time and in full.

"What we do is look to the strength of the Government's fiscal position to offset some of those weaknesses."

S&P looked for flexibility in the Government's position so that it could respond, for example, to a bank in New Zealand that needed support.

"When we see more recently the Government's fiscal position weakening, we see it having less flexibility and less general ability to provide support in an extreme-distress scenario.

"We are paid to worry, and we like to see governments in as strong a position as possible to offset that external side."

New Zealand's current account - the income flow between New Zealand and the rest of the world - was in deficit by about 9 per cent of gross domestic product.

"We have been hearing year after year it is going to get better but it really doesn't, or that improvement is modest or it is pushed back further."

New Zealand was placed on negative watch in January.

Mr Curry will be in New Zealand with David Beers, the London-based managing director of sovereign and international public finance ratings, who last week oversaw the decision to put Britain on negative watch, and another Melbourne analyst, Brendan Flynn.

They will be given an advance copy of the Budget tomorrow and will be briefed by Treasury officials and Mr English.

Mr Curry expects that the agency will issue a bulletin on Thursday night after the Budget, as it did after the Australian Budget two weeks ago.

Mr English has promised higher spending on health and education, and public sector chief executives, with the Treasury, went on a savings hunt in December and January.

The Treasury told Mr English in December it had found $2.5 billion in potential savings, and the expected dropping of the 2010 and 2011 tax cuts will save about $1 billion a year.