“[The Treasury] will be cognisant that markets can only take down so many bonds before government funding costs push meaningfully higher, or worse, excess supply induces a bout of market dysfunction,” he said.
“Whatever the finer details, bond markets are bracing for increased supply [of bonds]. The pain is coming, it’s just a question of intensity.”
Workman’s warning came as the Labour-led Government has continued to borrow and spend a lot after the worst of the Covid-19 pandemic and during a time of high inflation, and while National is campaigning on tax cuts that risk having to be partly debt-funded.
What’s more, the Government is already paying a lot of interest on its debt.
Core Crown finance costs hit $6 billion in the 11 months to May – a similar sum to what’s spent on law and order (police, Corrections, Justice, Customs, etc) in a year.
Workman expected the Treasury to increase its forecast bond issuance programme to $130b in the four years to 2026/27 when it releases its Pre-election Economic and Fiscal Update on Tuesday.
In December, the Treasury expected it would issue $100b of bonds over this period.
Then at the May Budget, it upped its forecast to $120b to pay for the catastrophic weather events that hit the country over the summer, as well as new election-year spending commitments.
Workman expected the Treasury to make a further upward revision to account for the fact the slowing economy, partly thanks to high interest rates and a sluggish Chinese economy, saw the Crown’s tax revenue come in $2b below forecast in the 11 months to May.
“Given the weaker economy, that forecast miss isn’t looking temporary – it’ll need to be baked into the outlook,” he said.
Workman’s assessment took account of the fact the Government last week announced $4b of spending cuts over four years.
He said this wouldn’t provide huge relief when it came to easing inflation or interest rates, “but every little bit helps”.
ANZ economists believed the Government’s books would be back in surplus in 2026/27 – a year later than the Treasury forecast at the May Budget.
However, Workman said: “Forecasting surpluses by signalling lower spending well into the future is one thing, actually delivering surpluses is quite another.”
He questioned the approach the Government had taken to managing the economy over the past couple of years.
Rather than save in the good times and spend in the bad times, he noted the Government spent a lot when the economic recovery from Covid surpassed expectations to the extent there wasn’t enough capacity in the economy to absorb the additional demand.
This dynamic exacerbated inflation, countering the Reserve Bank’s efforts to cool inflation by lifting interest rates.
Workman noted the Government was obliged, under the Public Finance Act, to ensure its policy interacts well with that of the Reserve Bank.
He recognised New Zealand government debt is relatively low by international standards.
He believed it had to be, because the country is vulnerable to natural disasters, is a small open economy (so can’t hide from global economic shocks), has an ageing population, and has borrowed a lot from the rest of the world over the years.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
