Brian Fallow: Ratings agencies pacified but no straying off track

Finance Minister Bill English points to forecast growth averaging 3 per cent over the next four years, delivering 170,000 more jobs by 2015. Photo / Mark Mitchell

The Budget is good enough for the credit rating agencies but they continue to warn that the country's high level of external debt and dependency on foreign savers leave it vulnerable.

Both Standard and Poor's and Moody's have left their ratings unchanged.

Additional borrowing necessitated by the earthquake is expected to push gross Crown debt to a peak of 38 per cent of gross domestic product in the 2013/14 year.

But S&P analyst Kyran Currie noted that that was only half the median level for AA-rated sovereigns.

And Moody's analyst Stephen Hess said the deficit and debt trajectories the Government had laid out were "exactly what one would hope and compatible with the rating we have - if they are achieved".

The focus of concern is instead the amount the country as a whole has borrowed, and will still need to borrow, from the rest of the world.

The Budget forecasts have the current account actually in surplus - for the first time in decades - by $1 billion in the year to March 2011, but that reflects a surge of reinsurance money flowing in as a result of the earthquakes.

But even with a strong outlook on the trade front, it expects current account deficits to return and climb back to 7 per cent of GDP by 2015, with an associated rise in the level of overseas debt.

Compared with the forecasts last December, which predated the more recent and destructive of the Canterbury earthquakes, growth in the year to March 2012 has been cut from 3.4 to 1.8 per cent.

But that is offset by a strong rebound the following year to 4 per cent from 2.9 per cent previously.

Private sector forecasters also see a strong rebound next year as the task of rebuilding Christchurch kicks in in earnest, on top of the boost to farm incomes from record export commodity prices.

Treasury forecasts residential construction activity to jump by more than 50 per cent next year, after flat-lining over last year and this year.

It also sees a steep drop in unemployment from 6.6 per cent now to 5.7 per cent by March next year and 4.8 per cent a year later, spurred by the rebuilding of Christchurch. That is more bullish than consensus forecasts of 6.4 per cent next March and 5.5 per cent in 2013.

Finance Minister Bill English pointed to forecast growth averaging 3 per cent over the next four years, delivering 170,000 more jobs by 2015 and wage growth of around 4 per cent per annum.

But ANZ chief economist Cameron Bagrie thinks the potential growth rate will be closer to 2 per cent.

He does not quarrel with the forecast drop in the unemployment rate but points out that the labour supply has now passed the sweet spot and faces the constraints of an ageing population.

The Budget forecasts inflation to hit 5.3 per cent at the next reading, for June 2011, but settle back to around 2.5 per cent once the spike of last October's GST rise drops out of the annual rate.

The Treasury says the current account balance can also be seen as the difference between national saving and investment. It expects the national saving rate to rise on the back of a faster return to surplus on the Government's part and an increasing rate of household saving.

S&P analyst Kyran Currie said achieving the Government's stated fiscal targets - which include a return to surplus by 2015 - would be an important component of the improvement in the country's external position the agency is looking for.

A swifter adjustment of public finances might be needed if banks' international funding costs rose.

"If investors lose confidence in them and start charging them more for their wholesale funds, the Government might need to provide support. The stronger the position of the Government the better position it is in to do that," he said.

The Budget forecasts consumer spending to grow moderately over the next four years, in line with incomes and not boosted by any return to a housing boom and rapid credit growth.

It expects house price inflation to rise to only 3 per cent per annum over the next four years.

Private consumption per capita is not expected to return to its 2007 peak until 2013.