ANALYSIS
Capacity to respond, rather than access to cash, is the largest roadblock the Government faces in the wake of Cyclone Gabrielle and flooding in the upper North Island.
The Government borrowed an unprecedented amount in response to Covid-19. But its books are in decent shape, all things considered. There is capacity to borrow more (albeit at a cost) to support hard-hit communities and repair and rebuild infrastructure.
The bigger issue is capacity constraints – getting enough people with the right skills and equipment to where they’re needed to help with the rebuild.
Much of the inflation the country has been suffering from has been caused by a lack of economic supply in relation to demand.
Demand for home building soared on the back of record low interest rates in 2020 and 2021, while the movement of people and materials around the world was limited. This pushed construction costs up. Bad weather also hiked food prices.
With crops destroyed by the cyclone and floods, and an enormous rebuild effort required, food and construction costs can only go north.
BNZ’s head of research Stephen Toplis said the timing of these disasters couldn’t be worse, with a recession pending, inflation high, an existing infrastructure deficit and Covid still costing.
“It’s all well and good talking about the rebuild and recovery but who is going to do it?” he added.
Finance Minister Grant Robertson, in a speech on Friday, noted how special visas were issued to enable foreigners to help with Canterbury’s post-quake rebuild. He said immigration would “absolutely” need to play a part in the recovery.
The Government, late last year, said it was also going to reprioritise its work programme.
It will now need to do more reprioritising than planned, at least in the short to medium-term, as resources will need to be shifted to restore basic infrastructure to parts of Hawke’s Bay, Tairawhiti, Coromandel, Northland and Auckland.
In the medium to longer-term, investment in infrastructure – housing, transport, water, energy, and communications – will need to rise.
Robertson suggested the Government’s multi-year capital allowance would need to be expanded in this year’s Budget.
In his 2023 Budget Policy Statement, delivered in December, he pencilled in $12 billion of new capital expenditure over Budgets 2023 to 2026. This was several billions more than previously planned.
All eyes will be on how much that sum rises by, and whether Robertson will increase the duration of his four-year rolling envelope for new capital investment, so that better long-term planning around infrastructure investment can be done across political cycles.
Former Robertson adviser Craig Renney, who’s now an economist at the Council of Trade Unions, said the timing of when different projects were delivered would likely change.
He stressed the constraints were physical, not financial.
Robertson, in his speech, was less definitive when it came to how the weather events would affect the $4.5b of new operational expenditure earmarked in December for the 2023 Budget.
He said the Government was continuing to look at ways of alleviating the pain caused by inflation, but people shouldn’t expect to see big new spending initiatives in the Budget.
Toplis said, “If anything is to make further fiscal stimulus prohibitive (including such things as tax cuts), it will be these cost pressures and excess demand, generally.
“The last thing we need to see is the Reserve Bank being cornered into having to raise interest rates further to compensate for the increase in demand.”
Let’s go back a step and look at the starting point from which the Government will need to tackle these disasters.
As at the end of December, the Crown accounts were $2.8b in deficit.
Toplis noted every billion dollars the Government needs to borrow will add 0.27 per cent to debt as a percentage of gross domestic product (GDP).
If it needed to borrow, say, an additional $20b (which would be a lot), this might take the peak in the net debt track to 27 per cent of GDP, up from the 21.4 per cent forecast.
To put these figures in context, as at June 2022, the Government had physically spent $38b of the money it allocated to the Covid response.
Robertson suggested the response to these weather events won’t be as large, as they don’t affect the whole country.
In saying so, it will be a multi-year event, much like the 2010/11 Canterbury, and 2016 Kaikoura earthquakes.
The Treasury will update its forecast debt issuance programme at the Budget.
In December, it forecast issuing $30b of New Zealand Government Bonds (NZGB) in the 2023/24 and 2024/25 years, followed by $20b in each of the following two years.
Pre-Covid, the Treasury forecast issuing only $6b of NZGBs in 2023/24.
Part of the reason debt issuance is expected to remain so high, even though the Government is no longer spending several billions on Covid, is because it is helping the Reserve Bank unwind its Large-Scale Asset Purchase (LSAP) programme.
The programme saw the Reserve Bank create money to buy $54b of NZGBs from banks, which bought them from the Treasury to help fund the Covid response.
The Reserve Bank, which is now tightening rather than loosening monetary conditions, last year started selling some of the bonds back to the Treasury.
It wants to normalise the size of its balance sheet to make it easier for it to potentially create money to buy bonds to lower interest rates again in a future economic downturn.
The issue is, the Treasury doesn’t have billions of dollars sitting there to buy the bonds back from the Reserve Bank. So, it’s issuing $20b of additional debt over four years to fund the bond buy-backs.
ANZ senior strategist David Croy suggested that depending on how much extra debt needs to be issued to pay for the cyclone and floods, and depending on investors’ willingness to buy this debt, the Reserve Bank could slow the rate at which it sells its NZGBs back to the Treasury.
This could take some of the pressure off the Treasury and prevent unnecessary stress in the bond market.
New Zealand’s credit risk may be another factor that influences how much debt the country can take on. New Zealand is currently viewed very favourably by credit rating agencies.
Croy recognised it is still early days, so the Reserve Bank might not have anything to say about its bond sales when it releases its next Monetary Policy Statement on Wednesday.
The floods and cyclone haven’t prompted most economists to revise their official cash rate (OCR) outlooks.
Most continue to see the Reserve Bank hiking the OCR by 50 points to 4.75 per cent, however some, like Kiwibank’s chief economist, fear further hikes at this point will be an overkill.
“There’s not much [the Reserve Bank’s] monetary policy can do to help in an event like this – the response is best left to fiscal [government] policy, which is faster acting and can be targeted where it’s needed most,” Croy said.
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