Darren Gibbs, senior economist at Westpac, expects $4b to be added to the programme over the duration.
There was nothing in Finance Minister Nicola Willis’s pre-budget speech to Sharesies last Tuesday to suggest markets should be concerned, he said.
“The body language did not suggest that we have anything to worry about, but we will see,” Gibbs said.
Last month, the Government said its new Defence Capability Plan contained $12b of funding over the next four years, which includes $9b of new spending.
This will raise New Zealand’s defence spending from just over 1 per cent of GDP to more than 2 per cent in the next eight years.
“It’s our expectation that there might be some more capital spending and defence is one of those areas where they have made commitments that were not there at the time of the [December] fiscal update,” Gibbs said.
“There is more uncertainty about the Government’s plans for capex: in particular, how much of foreshadowed new spending on defence will be met within existing unallocated capital allowances, as opposed to additional borrowing,” Gibbs said.
The Goverment’s debt to GDP ratio is in the low 40% zone - high relative to recent history but low compared to the ratio in Western Europe and the United States.
“But you have to remember that New Zealand is a small economy that is prone to big shocks, including economic shocks, but also natural disasters, and we need that capacity to respond when the proverbial hits the fan.”
Despite the bigger borrowing requirements over recent years, New Zealand paper - which still carries a high sovereign credit rating - has no shortage of takers.
Gibbs said if there is a small single-digit increase in the bond programme, the market would probably breathe a sigh of relief.
The Government has said it would reduce the amount of new spending by slashing the operating allowance from $2.4b to $1.3b for 2025/26.
Gibbs said the cut in the allowance was evidence the administration’s appetite for debt had reached its limit.
BNZ economists, in a preview, said no matter what the Government estimates for its bond programme, current economic uncertainty would raise “significant questions” as to the likelihood of such forecasts being achieved.
The bank said the Government’s defence capability plan was likely to be funded through existing allowances, likely facilitated through reprioritisations.
ANZ economists expected a $2b increase in bond issuance over the forecast horizon, but said forecasting bond issuance is “notoriously” difficult.
“And with the half-year fiscal and economic update’s whopping $20b increase to bond issuance guidance fresh in our minds, we are nervous about the possibility that the Treasury unwinds recent tweaks to its tax model assumptions – a risk that we think skews towards a lower bond programme than otherwise,“ ANZ said.
ASB said there is a need for a protracted period of fiscal consolidation to rebuild fiscal buffers.
“We don’t expect that the NZ Debt Management will increase the size of the annual bond tenders (likely to be capped at $40b per annum), but that $2b will be added to the programme for 2026/27 (lifting it to $40b) and 2027/28 ($30b), with $22b issued for 2028/29,” ASB said.
“While the programme size is quite large by historical standards ($132b over 2026/29), we expect it to be manageable considering that we look to be at the high-water mark for borrowing,” the bank said.
The Government’s borrowing requirement, before the onset of Covid-19 in 2020, looks puny compared with what’s coming up.
In the December 2019 update - just a month before the outbreak, NZ Debt Management outlined plans to raise a total of $42b over the ensuing five years, starting with a meagre $10b bond programme for fiscal 2020.
Since Covid, net public debt has jumped by $120b.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
