“The authorities have pushed back the targeted return to surplus repeatedly since December 2022 amid worse-than-expected economic performance as well as costs related to natural disasters,” Fitch said.
“The latest slippage largely reflects a weaker outlook for tax revenues.”
The vulnerability of public finances to the economic downturn also reflected large spending increases during the Covid-19 pandemic, which were proving difficult to reverse, it said.
While the recent tax cuts were noted, Fitch acknowledged Government efforts to offset the revenue loss with spending cuts.
“The Government is offsetting revenue-negative tax policy changes through spending cuts and has tightened future operating allowances, aiming to reduce core crown expenses to 30% of GDP over time.”
New Zealand’s long track record of prudent fiscal management appears to have bought us some leeway.
“Long-standing commitment to prudent fiscal policies across New Zealand’s political spectrum is evidenced by multiple episodes of large, sustained fiscal consolidation in recent decades,” Fitch said.
“The incumbent National Party has emphasised fiscal responsibility, but the previous Labour Government also announced some consolidation measures in its pre-election fiscal update.
“New Zealand’s fiscal framework is designed to enhance transparency for fiscal management but does not impose legally binding constraints. A weakening of the culture of fiscal responsibility would pose risks to the rating, in Fitch’s view.”
Fitch forecasts real GDP growth to slow to 0.1% in 2024, from 0.8% in 2023, as “the lagged effects of tighter monetary policy fully translate into higher debt servicing costs, a softening labour market and weak consumer sentiment amid sluggish house prices”.
But the agency noted that Monetary Policy easing had begun “in earnest”.
The RBNZ had lowered the official cash rate by 25bp from 5.5% last Wednesday, “having been one of the first developed market central banks to start tightening policy in October 2021″.
“We expect monetary easing to support growth rates of 2% in 2025 and 2.5% in 2026, still weaker than in recent history. Weaker terms of trade and softening external demand continue to drag on the economy, mitigated by a bounce-back in tourist and net migration flows.”
Vulnerabilities around New Zealand’s high household debt had remained contained despite higher interest rates over the past two years, Fitch said.
Fitch noted that New Zealand only scored an AA- rating based on its proprietary Sovereign Rating Model (SRM).
But its sovereign rating committee adjusted the output from the SRM score, adding one extra notch to offset GDP volatility caused by the pandemic shock as well as to “reflect the country’s strong policy institutions and sound macroeconomic policy framework, which enhances its resilience to economic and financial shocks”.
It also added a notch to reflect its expectation that the debt/GDP ratio would peak and then decline over the medium term.
“This expectation is based on the Government’s strong record of prudent fiscal management, providing confidence that buffers will be rebuilt.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
