14 May 2020

Government's debt mountain to fund early recovery

2:36 pm on 14 May 2020

The economy is expected to have a relatively solid and early bounce back from the Covid-19 pandemic but it will come largely as a result of debt-funded government spending.

New Zealand dollars

Photo: 123RF

A slump in growth is expected in the coming year, with the economy forecast to shrink by 4.6 percent in the year ended June, with growth still shrinking by 1 percent the year after.

But then recovery is expected to take hold with the economy growing by 8.6 percent in 2022, before easing to average 4 percent over the next couple of years.

The forecasts are based on a Treasury assumption that virtually all pandemic-related restrictions on the economy and border entry have been relaxed.

But the government's finances are set to be savaged and its borrowing will reach Mt Everest-sized proportions.

At least seven years of budget deficits are expected, averaging about $28 billion in each of the next three years, before they sharply decline to $4.9b in 2024.

The seven weeks of lockdown and the prospect of reduced economic activity well into next year knocks the tax take and other revenue by 7 percent for the next two years, and it's not until 2022 that the government coffers return to pre-virus levels.

But official expenses will mushroom as the government spends up to $50b on Covid-related related relief measures, infrastructure, housing and industry support programmes.

The gap between spending and income over the next four years will be come from $190b of borrowing, through the sale of government bonds.

The net debt level, once sitting at 20 percent of the value of the economy and vaunted as a sign of fiscal responsibility, will hit a peak of 53.6 percent of GDP in 2023, but is projected to sit above 40 percent well into the 2030s.

Finance Minister Grant Robertson said there are other options for fiscal stimulus if needed, although he ruled out the prospect of tax changes.

He also ruled out broad-based cost cutting of spending programmes, saying he was no fan of austerity.

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