New Zealand has staved off an immediate credit rating downgrade by producing a budget which forecasts a return to surplus one year earlier than previous forecast, despite the multi-billion dollar cost of the September 4 and February 22 quakes which badly damaged Christchurch.
Standard & Poor’s left the country’s rating unchanged at AA plus (with a negative outlook) after the budget was delivered yesterday which revealed a huge, near $NZ 6 billion jump in the budget deficit for the 2011 financial year thanks to the impact of the quakes and rebuilding after them.
The budget foresees an operating deficit, on accrual basis excluding investment gains and losses, of $NZ16.7 billion (8.4% of GDP) in the 2010-2011 financial year (ending June 30, 2011) compared to the NZ$11.1 billion (5.5% of GDP) foreshadowed in the Half Year Economic and Fiscal Update announced in December 2010.
The deficit is considerably higher than the NZ$6.3 billion (3.3% of GDP) deficit recorded in 2009-2010
Further fiscal deficits of NZ$9.7 billion (4.7% of GDP) and NZ$4.1 billion (1.8% of GDP) are predicted in fiscals 2011-2012 and 2012-2013, respectively.
The budget is forecast to return to a small surplus of NZ$1.3 billion (0.5% of GDP) in 2014-2015, a year earlier than previous expectations.
According to the budget net debt is expected to rise to 20.8% of GDP this year from 14.1% last year
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Debt is likely to peak at 29.6% of GDP in 2015 and decline to less than 20% by the early 2020s.
Much of the increase in the deficit this year reflects the immediate costs (including search and rescue, temporary welfare and housing payments, and demolition and repairs to infrastructure) associated with the two earthquakes.
The budget also sees modest increases elsewhere in health, education and justice spending which have been largely offset by changing the mix of spending elsewhere and in civil-service reforms.
The budget forecasts lower assistance to some families and students, and ‘Kiwisaver’ pension savings reforms (cutting the tax deduction) over the forward estimates.
The NZ government now expects additional borrowings to fund the cost of the earthquakes will result in gross Crown debt peaking at about 37.9% of GDP in 2013-2014.
What is new is the government for the first time detailing its plans to raise between $NZ5 billion and $NZ7 billion by partial privatisation of its four state-owned energy companies and extending private ownership of Air New Zealand.
(These sales were flagged last in last December’s statement.)
Starting next year, the government wants to sell off stakes in Genesis Energy, Meridian, Mighty River Power and coal company Solid Energy.
The exact proportion of private ownership has not been decided but the government said yesterday it will retain a majority shareholding.
There are plans are to sell shares in the companies through a public offering, with New Zealanders "at the front of the queue".
There was, so far, no mention of any foreign ownership restrictions.
The sales are planned for a three to five year timeframe starting next year depending on market conditions.
"As we promised, we are now clearly setting out our policy to New Zealanders well before the election in November," Finance minister Bill English said yesterday.
"The Treasury estimates that extending the mixed ownership model to the four energy SOEs and reducing the Government’s majority shareholding in Air New Zealand are likely to free up between $NZ5 billion and $7 billion of capital — depending on the final structure of the program (and the state of the markets)."
Mr English said in his speech the move would help the government reduce debt while also providing investment opportunities.
The government expected to have to spend more acquiring assets (infrastructure mainly) by 2015, requiring $NZ 21 billion.
"Rather than simply borrow this amount, the government will use proceeds from the mixed ownership model to recycle existing capital towards high priority future investment in assets like schools, hospitals and broadband," Mr English said.
"The proceeds will fund about a third of the Government’s new investment in core social infrastructure."
Mr English said the budget set "a credible path back to surplus" by 2014-2015 and would help increase national savings.
Standard & Poor’s said in their report yesterday that the "negative outlook on the New Zealand foreign currency rating reflects the possibility of a downgrade if New Zealand’s external position does not improve.
"Achieving the government’s stated fiscal targets will be an important component of such an improvement.
"Public finances may need to be adjusted faster if New Zealand’s real cross-border interbank funding costs rise.
"On the other hand, the ratings could stabilize at the current levels upon a sharper-than-expected improvement in the external accounts, led by stronger export performance and higher public savings."
The budget forecasts growth of 1.8% in the year to March, accelerating to 4% in 2012-13, thanks to the impetus from the rebuilding of Christchurch.
