They expect Treasury to forecast deeper deficits over the next few years, prolonging the return to surplus by a year to 2026/27.
If this eventuates, the books would’ve been in deficit for seven years from 2019/20, when Covid-19 came along. They were in deficit for six years when National was in government around the time of the Global Financial Crisis and Canterbury earthquakes.
Westpac economists believe this will mean that instead of issuing $120b of New Zealand Government Bonds (debt) in the four years to 2026/27 (as forecast in May), Treasury will need to issue $135b.
In other words, if the Government sticks to its spending plans, and if Westpac economists’ forecasts of Treasury’s forecasts eventuate, the Government will need to borrow an extra $15b over the next four years.
This would add to a string of previous upward revisions, which would see Treasury issue $35b (or 35 per cent) more debt over the four-year period than expected in December.
“There isn’t much money floating around,” Eckhold said.
“The Government will have some difficult choices to make over the next few years.”
To add another layer of downside risk to the situation, Westpac economists’ forecasts of Treasury’s forecasts are predicated on their expectation Treasury will take a rosier view of the economy than they have.
Eckhold, who used to work for the International Monetary Fund, said that if he was an external adviser to the New Zealand Government, he’d say it should allow automatic stabilisers (like the welfare system) to support vulnerable people, and target other spending.
He said in the current climate, the Government should fund new spending commitments by cutting spending elsewhere, to avoid “blowing out the bottom line”.
‘Why?’ some observers will ask, noting pockets of people are doing it tough, while the Government is under pressure to pay doctors, nurses, teachers etc more to prevent them from going to Australia.
Eckhold acknowledged that compared to other countries, New Zealand Government debt was low relative to the size of the economy.
He noted credit ratings agencies were reasonably comfortable with country’s debt position, saying they have “much bigger fish to fry”, looking at the United States’ debt-to-gross domestic product (GDP) ratio, for example.
The pinch, however, is that the pandemic has seen New Zealand’s current account widen.
This means the value of New Zealand’s imports is surpassing the value of its exports by a lot – $33b, which is equivalent to 8.5 per cent of GDP.
While slowing growth in China will hurt New Zealand exporters, the current account deficit is expected to narrow as the tourism sector recovers and high interest rates curtail Kiwis’ demand for imports.
Nonetheless, the combination of the Government spending more than it’s receiving, and New Zealand importing a lot more than it exports, is the issue, in Eckhold’s view.
He believed persistent “twin deficits” could change the risk appetites of the offshore investors New Zealand borrows from, especially in the event of the country being hit with another crisis.
This could make it more expensive for New Zealand to borrow and could weaken the currency. A weaker currency would see New Zealand pay more for its imports, which would exacerbate inflation.
Eckhold said the twin deficits show the economy has been running in excess.
Looking ahead, he said the Government had to prioritise balancing its revenue and spending.
“The reality is, it’s a challenge,” Eckhold said, noting this could result in cuts in public services.
He concluded it was tough going into a downward part of the economic cycle during an election year.
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.
