Budget 2021: Budget at a glance

Economic overview – Budget 2021

A lot has changed for the New Zealand economy since Budget 2020 and the updated forecasts and analysis highlight the significant positive change in the economic outlook over the last year. The New Zealand economy is now expected to see Gross Domestic Profit (GDP) growth rebound back to a pace of 4.4% year on year (YOY) by 2023, supported by stimulatory interest rates and on-going Government expenditure. Of note, the Treasury’s economic forecasts consider the borders re-opening partially from mid-2021 and then opening fully from the start of 2022.

Unemployment is now expected to peak at 5.3% in September 2021 before heading back below 5% from the middle of next year. This is a significant improvement on the estimated peak of 10% unemployment forecast in Budget 2020.

Given the Government’s rhetoric around migration settings, it is interesting to see that net migration is expected to pick back up to 43,000 by mid-2025. This remains well down on the peak of around 95,000 at the start of 2020. The mix and number of migrants will be important to our economy in terms of helping to relieve some of the growing capacity constraints in our labour market. There were no updates in today’s Budget on migration policy, with work currently underway by the Productivity Commission consdiering preferred migration settings.

The Treasury views the inflation outlook as reasonably benign, with rising price pressures seen as temporary and is forecasting that interest rates in NZ (and internationally) will remain at around current levels until the end of 2024. However, inflation is rising rapidly and it is increasingly uncertain that price pressure will prove temporary. There is a growing risk that inflation is sustained and monetary policy will need to respond and the Reserve Bank of New Zealand (RBNZ) will lift the Offical Cash Rate (OCR) much sooner than 2024 – which is the Treasury’s current forecast for interest rate hikes.

In order to ensure a sustained economic recovery, the Government is continuing its focus on investing in infrastructure with investment lifted from $42.2 billion to $57.3 billion of investment in Crown infrastructure over the next five years. This additional investment is a positive for the economic recovery and will provide a backbone of activity that will have positive spillovers to employment and more general consumer spending and confidence in the economy. However, this is a sizeable investment programme with large amounts of physcial and labour resources required. In the current environement of supply chain issues and an increasingly tight labour market, delivering this level of infrastrucutre investment in the proposed timeframe is likely to prove difficult. The alternative risk is that, particularly in residential housing, government investment could start to crowd out private investment.

The Treasury expects house prices to peak at 17% this year before falling back to 0.9% YOY in 2023 in repsonse to the recent Government policy changes and the re-instatement of LVR restrictions by the RBNZ. House price appreciation is then expected to remain around 2% YOY over the subsequent couple of years. While not quite forecasting an outright decline in house prices, this is a notable pullback from price gains seen over the past decade. In our view, the balance of risks to the Treasury’s forecasts is that inflation actually turns out to be more sustained than its current forecasts and that interest rates will start to rise earlier.

Bond issuance and debt to GDP

With a more positive economic outlook and a smaller operating deficit, the Debt Management Office (DMO) have reduced their debt issuance forecasts by $5 billion in 2022/23 and 2023/24, down to $25 billion. Debt issuance forecasts for 2021/22 and 2024/25 are unchanged at $45 billion and $25 billion respectively.

Net core Crown debt is now expected to peak at 48% in 2023, down from 53.6% previously forecast in the Half Year Economic and Fiscal Update and fall back to 43.6% of GDP by 2025.