Ministers on Budget Day. Photo / Mark Mitchell
New Zealand’s large government deficit and rising debt levels are in the sights of the major credit ratings agencies, who are keen to see some improvement in the state of the books.
New Zealand currently enjoys very high ratings from all the big three, S&P, Moody’s, and Fitch, and has done for most of the time since the agencies began rating New Zealand decades ago.
The Herald spoke to all three ratings agencies, with each confirming that while New Zealand was in a good position with relatively low debt and a track record of getting the books back in order after an economic shock, there were still areas of some concern.
S&P’s primary analyst for New Zealand, Martin Foo noted that New Zealand’s general government balance, by his company’s preferred metric for whether the Government was in surplus or deficit, showed a deficit greater than 6% of GDP - putting New Zealand in the realm of France and the United States, which are not countries which New Zealand Governments have traditionally welcomed comparison.
A recent speech by Treasury’s chief economic adviser Dominick Stephens acknowledged that international financial markets were “watching” the Government.
“They’re not worried, but they are watching,” Stephens said.
“There’s an acknowledgement there’s an issue in New Zealand and there’s a plan to turn it around,” he said.
Stephens highlighted the importance of maintaining a good reputation from international market participants, saying that keeping the books in “good order” avoided higher bond rates, which raised the Government’s cost of borrowing. In 2024, the Government spent $8.9b servicing its debts, more than twice as much as it spent in the last years before the pandemic. At 2.2% of GDP, debt servicing costs are higher as a share of the economy now than at any point since 1999 - a time before Fitch, one of the big three agencies, began rating New Zealand (it started in 2002).
Stephens added that when the Government had to pay more for its debt there were flow-on effects to the rest of the economy - including higher mortgage rates.
“As government has to pay more for its debt that’s going to affect what other actors in the market are going to have to pay for their debt. So particularly local government and corporates who are a little bit more in competition with government debt are likely to feel a bit of an effect [of higher borrowing costs],” Stephens said
“At the long end, we could see this putting upward pressure on longer term mortgage rates,” Stephens said, although he added this would not affect short-term mortgage rates so much as these were more affected by the Reserve Bank’s OCR.
S&P last assessed the Government in September, giving it a AAA (stable) and AA+ (stable) rating for New Zealand’s domestic and foreign currency debt respectively.
Foo told New Zealand these ratings were “extremely high” on a global scale. The AA+ rating was only enjoyed by a “handful” of other countries.
In a note from last October, S&P warned there was a downside scenario which could see the ratings lowered “if the fiscal deficit does not narrow as we forecast, driving government debt and interest costs substantially higher”. Unfortunately, Treasury’s half-year forecasts (HYEFU) published in December, suggest that scenario might be playing out with larger deficits and weaker growth forecast.
Foo said S&P had not updated its analysis since HYFEU, but “risks are tilted more to the downside now than they were previously. We haven’t acted on the outlook, but we are constantly monitoring how things play out”.
However, Foo said the deficit is still projected to narrow “and as long as that happens, we think we can maintain the rating where it is … all of our credit ratings are supposed to be forward-looking. We are always more interested in what happens over the next two years than what has happened in history, but we do need to have some confidence that the fiscal repair path or fiscal consolidation is actually happening”.
He did not think that what had occurred recently could be called austerity, because spending was still high.
“Fiscal spending as a share of GDP really soared in the pandemic and its aftermath and it hasn’t come down that much. Despite what a lot of people are saying about the Government’s so-called austerity, the cuts relative to GDP haven’t actually been that sharp yet,” he said.
Foo said around the world, the pandemic “really shifted public expectations around what government is supposed to do” and governments themselves have been slow to “retract” to their traditional remits - or to fund new spending with new taxes.
In the case of New Zealand, the temporary school lunch programme, launched during the pandemic, has been made permanent, despite New Zealand continuing to run enormous deficits.
“I think a lot of spending programmes that we thought would be temporary have turned out to be rather permanent and have not been accompanied by revenue raising measures to fund them,” he said.
He warned the Government had a “delicate balancing act” to rebuild the books without cutting so much that you create a negative feedback loop that impedes growth.
Fitch ratings has New Zealand at a AA+ (Stable) outlook for both domestic and foreign currency debt.
Fitch director Krisjanis Krustins told the Herald the Government’s fiscal consolidation was “fairly gradual”
“Recognising the difficult cyclical position the New Zealand economy is in right now. At the moment this approach doesn’t signal a rapid turnaround in the ... debt path,” he said.
He said this caused Fitch “to look very closely at that assumption that we have … that the Government is committed to return to surplus”.
He said that if this assumption, that the deficit reduced and New Zealands’ debt-to-GDP ratio begins to fall, proved to be incorrect, it might prove to be a problem.
“If we lose confidence in the consolidation and the fact that debt-to-GDP will eventually come down, that could be negative for the rating,” he said.
Martin Petch, the sovereign analyst for New Zealand at Moody’s said one of the key aspects in the way New Zealand is thought about by the agency was its “solid history of policymaking”.
New Zealand Governments had a history of getting on top of unsustainable debt and gradually reducing the debt pile.
He also cautioned that “the way we think about all our ratings is … in comparison with peers”.
In New Zealand’s case, this means thinking about New Zealand’s books not in comparison with an arbitrary metric, but in comparison with other similar countries.
“If we get shocks like the pandemic, everybody’s fiscals deteriorated so your peers are moving pretty much in the same way as you and so there’s no relative change,” he said.
He said Moody’s, which currently has New Zealand at Aaa (stable) for both domestic and foreign currency debt, was looking at whether governments were “using fiscal policy effectively to support growth and what about once the shock has worked its way through the economy, do they start to rebuild the fiscal metrics”.
He said while Moody’s was watching to see whether the Government’s fiscal repair job would be “sustained” and move towards “smaller deficits over the next few years”.
Petch said there was a “tension” between “reining in some government spending” and the fact that “excessive tightening” might “harm the recovery from a growth perspective”.
Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the Press Gallery since 2018.
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