Ratings agency unimpressed by ‘worse than expected’ performance in Budget

Finance Minister Nicola Willis with members of the Government on Budget Day. Photo / Mark Mitchell

A major ratings agency thinks forecasts released with last month’s Budget highlighted a “deterioration” in “projections for fiscal performance [of the Government] over the next few years”.

Fitch, one of the big three international ratings agencies, noted that New Zealand had persistently failed to keep to its path of returning to surplus as the economy deteriorated.

In a release, Fitch said that official forecasts published by Treasury had “proved too optimistic in recent quarters, with the projected return to Obegal surplus being pushed back several times since December 2022 amid worse-than-expected economic and budget performance”.

They said the “latest slippage” in the Budget “largely reflects the weaker economic outlook, significantly lower-than-expected tax revenues and the impact of recent tax policy changes, though the government is partly offsetting these through savings on the expenditure side”.

Put simply, the latest delay in the return to surplus is partly the result of broader economic factors hitting the economy and tax revenue, but it is also partly a result of the Government’s tax package.

New Zealand has an AA+ outlook with Fitch, which was affirmed in August 2023.

The release said the debt trajectory would be revised in the wake of the Budget, which will feed into New Zealand’s credit rating. Ratings agencies regularly revise credit ratings.

The agency had forecast “gross general government debt to peak at about 47 per cent of GDP in FY24″ which was “slightly above” the median of other ‘AA’ countries. Fitch forecast debt would decrease after this peak.

“Our projections for New Zealand’s debt trajectory have deteriorated since then - as has the ‘AA’ category median - and we expect to revise these further in the wake of the latest budget,” the release said.

Fitch said New Zealand’s rating reflected its view that the Government’s commitment to get back to surplus would put the Government’s debt ratio “on a downward path in the medium term and backing for prudent fiscal management across the political spectrum supports the ratings more broadly”.

The release said that a failure to achieve this goal would have a “negative rating sensitivity”, meaning it would be put pressure on the agency to downgrade New Zealand’s credit rating.

New Zealand has enjoyed good credit ratings for some time, including during the pandemic. Ratings agencies’ verdicts are a factor in the market determining the safety of New Zealand as a borrower. A higher credit rating means a lower cost of borrowing.

This is not the only instance since the pandemic of a ratings agency making critical remarks about the Budget. A Treasury briefing from October 2022 said that while New Zealand was “in a strong position with respect to its ratings”, the most recent review from S&P was “slightly less positive about New Zealand’s ratings outlook... and the relative score for New Zealand’s debt burden was downgraded”.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.