Budget 2021 was always going to be a balancing act between fiscal repair and addressing some of New Zealand’s underlying vulnerabilities – namely child poverty, increasing inequality, housing affordability and climate change. The Budget duly delivered, with the government choosing to spend rather than bank much of its recent revenue windfall, thereby continuing to support economic momentum in the near term. The biggest winners on the day appeared to be beneficiaries, students, Māori, healthcare and infrastructure.
In terms of the fiscal outlook, the Budget numbers confirmed the New Zealand economy had recovered much of its pre-pandemic losses, in turn helping to repair the government’s finances and limiting a further blow-out in debt. Fiscal deficits are now forecast to narrow to -0.6% of GDP by 2025 with net debt set to peak at 48% of GDP (down from 52.6% at the December update).
Net Core Crown Debt (year ending 30 June)
The improved fiscal outlook has also led to a $10 billion reduction in cumulative bond issuance over the next four years.
Annual bond programme - gross inssuance (year ending 30 June)
Greater fiscal restraint will likely be required in future years if the Crown is to repair its balance sheet and cap the surge in debt. But while net debt is unlikely to fall to anywhere near its pre-pandemic level of 20% of GDP over the medium-term, the government should be comforted by the recent credit rating upgrade to AAA by Standard & Poor’s.
Financial markets were little moved by the Budget announcements. Nonetheless, the $10 billion reduction in government bond issuance was at the lower end of expectations and news of a 30-year bond syndication later in the year should maintain pressure for higher government bond yields and wider swap spreads. Indeed, bond issuance could lift from its current weekly run-rate of $300 million, which could see the RBNZ skew its own $350 million weekly bond buying programme to longer-dated bonds.
Focus now turns to next Wednesday’s RBNZ Monetary Policy Statement as to whether upgrades to the economic outlook will have implications for the medium-term inflation outlook and the Bank’s own OCR projections.
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