Financial markets are looking for a Budget that curbs spending and offers a credible plan to rein in runaway growth in government debt, economists say.
"It will be a beauty pageant with Standard & Poor's and Moody's as the judges," said ASB chief economist Nick Tuffley.
But the trends which
concern the credit rating agencies should worry the rest of us as well.
Over the past five years, government spending has increased by 50 per cent - twice as fast as the economy or tax revenues have grown.
But now tax revenues are falling as the recession lays waste to the tax base. Treasury secretary John Whitehead says it will be some time in 2011 before the level of economic activity is back to where it was in 2007.
This would see gross government debt double by 2013, relative to the size of the economy, and in the absence of a policy response climb to over 75 per cent of GDP by 2023. That is where it peaked in 1987; only by 2023 there will be the added pressure of baby-boomer pressure on health and superannuation costs.
Whitehead in a speech on May 15 spelled out what that level of debt would mean. It would be $49,000 for every man woman and child in the country: "A family of four would basically have another mortgage of close to $200,000".
Interest on the debt would cost more in dollar terms than the Government now spends on the entire health system. And this deterioration in the Crown accounts occurs when the country (as distinct from the Government) already has a conspicuously high level of overseas debt, equivalent to more than 90 per cent of GDP.
"They will really need to slow the rate of growth in government spending and get more bang for the buck," Tuffley said. "But they have said they won't reduce entitlements and there will be more for education and health. Those are the big-ticket items."
Westpac expects the tax cuts earmarked for 2010 and 2011 and the annual contribution for the New Zealand Superannuation Fund will be postponed.
"The Government is also going through a rigorous process of assessing and reprioritising all spending decisions, and recent commentary suggests some significant savings have, and will continue to be, made," Westpac economist Donna Purdue said.
"But as we see it the most effective way the Government can begin to get on top of expenses is by reducing the spending allowances for future Budgets, currently set at $1.75 billion for the 2009 Budget and increasing by 2 per cent a year in each of the next three Budgets."
Over four years that provision is a cumulative $18 billion in new spending. "We expect the Government to halve those spending allowances," Purdue said. It does not include nearly $6 billion over four years earmarked for new capital spending.
"The bulk of the gains will not be felt until later in the forecast period [out to 2013]."
But collectively these measures should stabilise the gross debt to GDP ratio around 36 per cent by then, which was the prevailing level in the late 1990s. That would greatly cut the risk of a credit rating downgrade, he said.
It would still require a government bond programme of $10 billion next year, rising to $12 billion by 2012 before dropping back to $10 billion the following year .
"Our focus will be more on the details provided around the delays to the tax cuts and any suggestions about when or if they will be reintroduced, and the timing and scope of the capital spending programme."
Bank of New Zealand economist Craig Ebert said that the fiscal numbers were very sensitive to the economic cycle - in both directions.
"The risk is that just as the Treasury underestimated revenue in the boom they will overestimate the structural deficit ahead."
Tuffley expects the Treasury's economic forecasts to be gloomy but only realistically so.
After a period of excessive borrowing and spending on the part of households, the process of getting their balance sheets back in decent shape would be a gradual, long-drawn-out affair, he said.
WHAT THEY WANT
* Market economists are looking for a Budget to contain a credible plan to get government debt under control.
* Not just to placate rating agencies but for its own sake.
* With tax revenues falling, further tax cuts are seen as off the table.
* And they expect the allowance for new spending initiatives to be slashed.
John Key. Photo / Martin Sykes
Financial markets are looking for a Budget that curbs spending and offers a credible plan to rein in runaway growth in government debt, economists say.
"It will be a beauty pageant with Standard & Poor's and Moody's as the judges," said ASB chief economist Nick Tuffley.
But the trends which
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