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Weekly Commentary

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Rating outlook: budge it up

Tue, Jun 2 2009, 04:50 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

Last week’s Budget was a reflection of the tough times, striking a balance between supporting the economy through the recession in the short term, and implementing fiscal discipline further out. While it wasn’t as frugal as we thought it could have been, it was enough to satisfy the credit rating agencies.

As expected, the Budget revealed a worse economic picture underpinning the fiscal forecasts than depicted in the half-year update in December. Real GDP growth is forecast to remain well below trend over the next three years, registering growth of -0.9% in March 2009, -1.7% in March 2010, and just 1.8% in March 2011, as the impact of the global economic slowdown and a combination of domestic factors sees businesses and households cut back on investment and spending.
Unemployment is expected to rise substantially over that period, peaking at 8% in September 2010. These are reasonably conservative forecasts – the Government is clearly not counting on growing its way out of deficits.

With tax revenues falling sharply and spending commitments rising, the outlook has rapidly changed from surpluses to deficits for the foreseeable future. Without any changes to policy, gross Government debt was projected to be 70% of GDP and rising by 2023 – a prospect alarming enough to prompt Standard & Poor’s to place New Zealand’s foreign currency rating of AA+ on negative outlook back in January.
Some tough choices had to be made in order to keep projected debt at more manageable levels. In the end the Government took the path of least resistance, by maintaining existing entitlements (i.e. no-one is left significantly worse off) while cutting back on future policy commitments.
That meant axing the personal tax cuts scheduled for 2011 and 2012, suspending contributions to the Super Fund, and reducing the allowance for new spending initiatives in future Budgets. While some have portrayed this as a slash-and-burn Budget, most of the ‘cuts’ have actually come in the form of smaller projected increases in spending – Government is still set to expand from 31.8% of the economy in 2008 to 37.3% in 2010 and 36.3% in 2013. Indeed, we are a little surprised that the Government has not done more to rein in future expenses.

Even with these sacrifices, a return to operating surpluses isn’t forecast until 2019. Gross debt is expected to lift from 17.5% of GDP in 2008 to 38.6% by 2013, and is not projected to peak until 2017 when it will reach 43% of GDP. It appears this is sufficiently under control to satisfy the rating agencies, with S&P returning New Zealand’s rating to a stable outlook and Moody’s affirming their previous judgement.

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Published on  Tue, Jun 2 2009, 04:54 GMT