New Zealand’s strong response to COVID-19 and the subsequent recovery has resulted a greater economic activity than expected. This has had a positive impact on the Government’s fiscal outlook as forecast by the Treasury in the Half Year Economic and Fiscal Update (HYEFU).
In response to the COVID-19 pandemic the Government has increased spending to support New Zealand as it took measures to limit the spread of the virus and support New Zealanders through the lockdowns and the subsequent recovery. COVID-19 continues to impact the Government’s fiscal outlook. However, the strong performance of the economy following the lockdowns has seen the Government choose to run budget deficits and increase the level of debt.
The strong recovery sees the Government fiscal outlook improve from the pre-election economic and fiscal update (PREFU). Higher levels of economic activity have seen tax revenue levels remain higher than expected. Meanwhile, unemployment has been lower than expected resulting in benefit expenses lower than forecast. The stronger than expected performance is expected to improve the fiscal outlook across the five years forecast by the Treasury in the half year economic and fiscal update (HYEFU).
The stronger than expected recovery from the COVID-19 enforced lockdowns that stalled economic activity has had a positive impact on the budget deficits forecast over the next five years as well as the expected levels of net core crown debt.
The budget deficit, as recorded in the operating balance before gains and losses (OBEGAL), is now forecast to be $21.6 billion in 2020/21. This is $10.1 billion less than forecast prior to the election. The budget deficit is then expected to fall each year for the forecast period reaching $4.2 billion by 2025. To compare this to the long term forecast before the election the deficit in 2024 is now expected to be $4.9 billion less than forecast.
The reduction in the budget deficits forecast over the next five years has positive flow on effect for net core Crown debt which is forecast to be $128.6 billion in 2021. Although this is $1.6 billion less that forecast prior to the election the stronger than expected performance of gross domestic product (GDP) sees the forecast of net core Crown debt as a proportion of GDP in 2021 fall from 43 percent before the election to 39.7 percent.
Looking further into the future net core Crown debt is expected to peak at $194.2 billion in 2024 (50.7 percent of GDP) before falling to $190 billion (46.9 percent) by 2025. The pre-election forecasts of net core Crown debt in 2024 was $202.1 billion which was equivalent to 55.3 percent of GDP.
The Reserve Bank of New Zealand (RBNZ) forms part of the Government for reporting purposes. The Funding for lending programme (FLP) which will commence this month is expected to have an impact on the net core Crown debt as it creates an asset in the form of lending to banks while increasing debt by funding the lending through issuing settlement cash. If the FLP is taken up in full the Treasury expects it to have a large impact on net core Crown debt. The asset created from the advances to banks are excluded from net core Crown debt as advances are less liquid than financial assets. If the assets created by the advances to banks are included the net core Crown debt reduces to $174.4 billion (45.6 percent of GDP) in 2024 and $184.2 billion (45.5 percent of GDP) in 2025.