Budget 2020: Setting the scene

New Zealand too increased its borrowing to fund initiatives in response to the GFC and then the Canterbury earthquakes, meaning the Government debt to Gross Domestic Product (GDP) ratio hit 40% in 2013.

Since then, successive governments have paid down debt resulting in a recent low of 19.3% of GDP in March 2020. This prudent approach put New Zealand in a relatively fortunate position heading into the COVID-19 outbreak especially when compared to other advanced economies’ debt-to-GDP ratios like the US (107%) and even Australia (43%).

This approach has given the Government a significant advantage in their ability to respond to COVID-19 and reduce the expected economic fallout. The Government has approved $52 billion of emergency spending power and has not yet exhausted that allocation.

Globally, G20 governments have pledged over USD$6 trillion of fiscal support to prop up ailing economies. This brings government debt to levels unseen since the aftermath of World War Two. The International Monetary Fund estimates suggest that global government debt will increase by USD$6 trillion to $66 trillion by the end of 2020. The consensus is that COVID-19 will cause the worst global economic crisis since the Great Depression of the 1930s when global GDP dropped 15% over several years.

Exit strategy?

The exit strategy for fiscal support will be a balancing act, dependent on how effectively the disease can be contained and a vaccine found. Without a vaccine, border controls are expected to remain in place in some form, constraining immigration and tourism. Even after the final COVID-19 restrictions are removed, questions will remain over how soon consumer and business confidence will rebound.

An extended downturn is likely to demand continued COVID-19 government support measures, possibly into 2021, significantly increasing the level of government spending required. Until the unemployment rate starts to fall again (unlikely for at least 6-12 months) and businesses can stand on their own, political pressure to continue support packages will be high.

This situation demands decisive and delicate decision-making on the Government’s part. Withdrawing support too early risks de-stabilising the recovery just as it’s getting going. Keep support running too long and we rack up debt we will be paying off for decades to come, undermining the Government’s ability to provide support in inevitable, but unpredictable, future crises. In addition, higher borrowing now could translate into the need for higher taxes and lower spending in the future as the Government tries to get its books back into the black.

The scale, focus areas and type of targeted spending will also have a large impact on how easily the Government can repay its debt in coming years. This is an opportunity for the Government to apportion significant sums of money to long-term economy-boosting projects. The Government had already opened its wallet at the end of 2019, directing investment into state assets, infrastructure and the regions. We expect Budget 2020 to lay out additional long-term investment projects to aid the economy and increase future productivity and living standards.

The Government has used its fortunate fiscal position to cushion the blow from COVID-19 and the corresponding shutdown of the local and global economies. Once the immediate impact of the virus and various short-term support packages fade, what matters most is how the Government leverages its increased debt to provide effective longer-term support to help New Zealand businesses and households recover from the COVID-19 hit. We hope to see these details outlined in the May Budget.