The Government’s borrowing requirement is set to dwarf pre-Covid levels.
Market expectations are for an expanded bond tender programme in this Thursday’s Budget, reflecting subdued economic growth, a big Cyclone Gabrielle repair bill and a post-Covid hangover.
Bank economists expect the programme for the current year to June to stay unchanged at $28 billion.
But in the years beyond, economists expect to see the Government going to the market to raise substantially more funds than what was outlined at the last fiscal update in December.
Westpac expects to see a $33b bond tender programme in 2024 (from $30b in the fiscal update), $33b in 2025 ($30b), $23b in 2026 ($20b) and $23b in 2027 ($20b).
Over the five-year forecast period, Westpac sees the Government raising $140b, $12b higher than the previous forecast of $128b.
By comparison, the Government’s pre-Covid December 2019 fiscal update forecast for 2020 was just $10b.
Westpac senior economist Nathan Penny said the relatively modest programme outlined late in 2019 was a reflection of five consecutive Budget surpluses compared with the three deficits already experienced during Covid, with three more deficits likely in the immediate future.
“It’s not unexpected, given what has transpired between 2019 and now.
”And it’s hard to argue against the idea that we have underinvested in infrastructure as well, over time.
“To expand borrowing for good infrastructure projects is reasonable, too.”
Penny said the market would absorb the extra paper coming on stream over the forecast five-year period, but said the market may baulk if it came on higher at, say, $19b over and above forecasts, as some economists have suggested.
Westpac economists expect to see a $12b increase over the period, relative to last year’s fiscal update.
“Circa $10b of this increase reflects the increase in the forecast deficits resulting from reduced growth assumptions,” the bank said in a report.
“We have also allowed for a small increase in borrowing ($2b) to fund infrastructure costs relating to the Cyclone recovery.
“We have spread the increase evenly across the forecast period, although arguments could be made for this to be front-loaded to a degree,” Westpac said.
“Crucially, we expect Treasury to factor in a weaker economic outlook, translating into lower tax revenues in future years.”
ANZ economist Miles Workman said that, as always, there was a lot to consider when it came to “guesstimating” NZ Debt Management’s (NZDM) likely bond issuance guidance.
“A weaker outlook for tax revenue, plus the additional cyclone-related spending net of any re-prioritisations, means Government debt needs to lift, and that debt will need to be funded,” Workman said in a pre-Budget report.
Despite the “no-frills” label being attached to Budget 2023 ahead of its release, Workman expected it to add a little more stimulus to an already capacity-constrained economy.
“While fiscal policy is the right tool to respond to cyclone Gabrielle, the decision not to fund the rebuild by increasing taxes or introducing a levy means the response will require re-prioritisation of spending,” he said.
“And to the extent that that doesn’t cover the cyclone’s tab, it’ll likely mean higher-than-otherwise interest rates as the Reserve Bank responds to any inflationary implications of the larger deficits, resulting in reduced private sector activity,” he said.
“There is no such thing as a free lunch.”
Workman said a weaker starting point for tax and a possible downgrade to the economic outlook suggested the fiscal outlook would be weaker.
Cyclone spending - net of any re-prioritisations – would also weigh on the Government’s books.
He said it’s now likely that the first post-pandemic operating surplus will be delayed by another year to 2025/26.
Looking to the 2024 fiscal year, ANZ expects to see a $32b bond programme, up from $30b forecast in last year’s fiscal update.
For the 2024 to 2027 year period, he sees a total of $110b being raised.
“All up, while responding to the cyclone is absolutely the right thing to do, running wider-for-longer fiscal deficits and adding further macroeconomic stimulus to an already out-of-balance economy is potentially problematic.
“New Zealand’s record-wide current account deficit, a near record-low unemployment rate and CPI inflation near a multi-decade high are all good reasons to consolidate the fiscal position faster than otherwise, but it’s not clear that Budget 2023 will deliver that.”
Workman said the Budget needed to show “a very clear and credible strategy” towards eventual fiscal consolidation.
As it stands, NZDM is running weekly tenders at $400 million per tender, which Workman said was about as much as the market can absorb.
Looking ahead, he expected to see three of four large syndications take on board the extra issuance.
Workman said the Government’s current fiscal position was a hangover from the post-Covid economy.
“What this does show is that the economy survived the lockdown phase, and those parts of the pandemic, initially,” he said.
“However, we are still not out of the woods,” Workman said.
“There is this very long-lasting hangover that we are going to have to work through.”