Posted By

Tags

Treasury allays fears but warns economic recovery would be longer

Sourced and Edited Content
Wellington, September 16, 2020

Finance Minister Grant Robertson

The economy has come through the initial impact of the Covid-19 pandemic in better shape than expected but faces a tougher and longer road to full recovery, according to the Treasury.

The Pre-election opening of the government books (PREFU) showed a budget deficit of $23.4 billion for the year ended June 2020, while the level of debt is marginally better at 27.6% of Gross Domestic Product (GDP).

Robust signs

“These are signs that the New Zealand economy is robust, and that our plan to eliminate Covid-19 and open the economy faster is the right approach,” Finance Minister Grant Robertson said.

The shorter lockdowns and strong rebound in activity have helped to support government finances with the tax take moderately lower on a year ago, while the initial measures to support households and businesses caused government spending to surge to $108.8 billion.

Mr Robertson said that government spending had cushioned the blow of a one-in-100-year shock, which would need to be maintained for the near and medium term.

“There will be tough times ahead for many in our country,” he said at a PREFU media briefing.

But he warned that although the current situation of the economy is better than expected, it would get tougher and take longer than had been forecast in the May budget.

Growth at 2.8%

The Treasury has forecast that the economy will average annual growth of 2.8% over the next four years from a budget forecast of 3.9%, but it has trimmed its unemployment forecast to peak at 7.7% next year after which it gradually declines over the next four years to 5.3%.

That is based on an assumption that borders will remain closed until 2022, and that world growth will be lower and slower because of resurgence of the virus around the world.

Consequently, government spending and borrowing will remain elevated for some time.

Net debt is now forecast to peak at 55.3% of GDP in 2024, marginally higher than in the budget, while budget deficits peak next year at $31.7 billion, before reducing to $12.4 billion in 2024.

Borrowing deemed essential

“The borrowing is necessary … but it comes at a cost,” Mr Robertson said.

He said the government had $14.1bn uncommitted to be spent on future measures if there should be a significant return of Covid-19 to the country.

“We can afford the debt without cutting key core services … we will manage the books responsibly … we will keep a balance.”

The above Report has been published under a special agreement with www.rnz.co.nz

Following is a Statement issued by Finance Minister Grant Robertson:

The Pre-election Economic and Fiscal Update released today shows that the near-term economic recovery has been stronger than the Treasury and many economists predicted at the May Budget, as the economy bounced back strongly out of lockdown.

Debt peak and rebound

The Treasury now forecasts the unemployment rate to peak at 7.8%, down from 9.8% forecast in the Budget, because the economy is stronger than expected. That compares to an expected peak of 10% in Australia, while countries like the US and Canada have already recorded unemployment peaks above 13%. The unaudited Crown accounts for the year to June 30, 2020 back up the evidence of a rebounding economy, with core Crown tax revenue of $84.9 billion coming in higher than the $82.3 billion forecast, indicating more activity than expected.

Net core Crown debt was 27.6% of GDP as at 30 June, compared to the Budget forecast of 30.2%, and the OBEGAL deficit of 7.7% of GDP as at 30 June was lower than the 9.6% forecast.

These are signs that the New Zealand economy is robust, and that our plan to eliminate Covid-19 and open up the economy faster is the right approach. We can see this in the forecasts, with the New Zealand economy predicted by the Treasury to grow by an average of 4.2% across 2021 and 2022, compared to Australia at 3.6% and the US at 3.5%.

Difficult period ahead

The Treasury, similar to other economists, initially forecast June quarter GDP to fall by about 23.5% in June from March. In the latest forecasts, the Treasury has reduced that to 16%.

All this goes to show is that forecasting month-to-month, let alone years in the future, is incredibly difficult with such an uncertain global environment and an unpredictable virus.

However, global headwinds and this 1-in-100-year economic shock caused by Covid-19 will have a long-term effect on the Government’s books.

The forecasts illustrate our balanced plan to manage debt and reduce the deficit caused by Covid-19, while protecting our investment in services like health and education.

Covid-19 is hurting economies around the world but because New Zealand went into this with low debt and a growing economy, we will come out better than other advanced countries.

Subsidies and Incentives

Policies like the Wage Subsidy, business tax refunds and small business cashflow loans protected jobs and kept businesses going. We have also invested to secure PPE and ventilators, and make sure our testing and contact tracing systems are world-class. Taking on debt to fund this response is the right thing to do as we fight Covid-19

There is no free lunch here. These measures require significant investment. It has been necessary to use the Government’s strong financial position to do this.

What counts is our strong track record. Before COVID-19, despite constant urging to the contrary we stayed disciplined with our spending and reduced debt below 20% of GDP while successfully investing in critical public services.

Our strong starting position that means even at its peak of around 56%, New Zealand’s net debt will be considerably lower than other economies around the world – advanced economies went into Covid-19 with net debt averaging about 80% of GDP.

Long-term relief

The PREFU long-term projection model shows debt reducing to 48% of GDP by the end of the projection period. The difference between debt of 56% and 48% at the end of the projection period represents $46 billion less debt than if debt just remained at its peak.

The projections show the deficit caused by Covid-19 reduces steadily each year from 10.5% of GDP this year, to less than 1% of GDP by June 2028.

The PREFU also shows the benefit of locking in low interest rates for the long-term debt that has been used to fund the response, with annual core Crown finance costs forecast to reduce by around $800 million over the next four years.

Low cost of borrowing

Because the Government can borrow for 20 years or longer at rates below 1%, it makes sense to lock these in now to fund the response before interest rates rise. Because the Treasury has already been able to secure more funding at lower rates, and because the Government’s cash position has improved since the Budget, the Treasury today announced it has reduced its debt programme over the next four years by $10 billion.

There are challenges ahead, but we have a five-point plan to grow the economy, support businesses and seize the opportunities created by our world-leading Covid-19 response.”

*

Share this story

Related Stories

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Indian Newslink

Previous slide
Next slide

Advertisement

Previous slide
Next slide

Advertisement

Previous slide
Next slide

Advertisement

Previous slide
Next slide

Advertisement

Previous slide
Next slide

Advertisement

Advertisement

Previous slide
Next slide

Advertisement

Previous slide
Next slide

Advertisement

Previous slide
Next slide

Advertisement