Economic Weekly: Keeping the taps on trickle in Budget 21

The NZ 2021 Budget (Thursday 20th May, 2pm) takes centre stage this week.  NZ has dealt with the COVID-19 pandemic relatively well and our economic performance has held up remarkably as a result.  Compared to the chaos and dire economic forecasts which formed the backdrop for the 2020 Budget, the 2021 Budget should be comparatively straight forward.  Nonetheless, debt is up, owing to a lift in spending over the past year, while revenue has trended sideways.  As a result, the NZ Government has little wiggle room with spending decisions and will need to take a more considered targeted approach to this Budget, compared to last year’s ‘kitchen sink’ approach.

The global pandemic is not over yet, so there remains the expense of keeping borders closed and vaccinating the entire country free of charge this year.  Furthermore, the NZ economy is still in a fragile place and the Government needs to avoid weaning off fiscal support too soon.  To be working in harmony with monetary policy settings, fiscal settings also need to be stimulating the economy over 2021, rather than restraining it.  Finally, infrastructure is creaking at the seams as the population growth of recent years has placed pressure on everything including health, education and transport.

A detailed look at our forecasts for this week’s Budget is in a full note by Senior Economist Mark Smith (see here).  Compared to previous fiscal updates, the stronger economic backdrop means that annual deficits are expected to be smaller over the forecast horizon, and public debt is expected to rise less rapidly - and then fall away faster.  We forecast net core Crown debt will peak under 50% of GDP by 2023/23 and then drop back to 41% by 2025.  The Australians have a similar target in last week’s Budget, with Australian net debt forecast to peak at 40.9% in 2024. This places NZ and Australia in a relatively strong position compared to some of our international counter parts who have been hit harder by COVID-19, such as the UK and the US which are both forecast to see net debt rising to over 100% of GDP by 2025 (according to the IMF’s April World Economic Forecasts).

Financial markets will be more closely focused on the projected bond issuance programme, and we expect the NZ Government bond programme will be trimmed by up to $40bn over the next 4 years.  We expect issuance of around $20-25 billion per year over the next three years.