Relative to 2020, Budget 2021 is comparatively upbeat, the sentiment supported by marked improvements in the Government’s forecasted operating deficits, net debt levels, and Gross Domestic Product (GDP).
The immediate financial market response was muted. The Budget document, while offering some spending and forecast surprises, contained little of direct impact to the markets. A $10 billion reduction in planned debt issuance was the most notable, but did not impact sovereign debt yields or the interest rate swap curve.
The operating deficit (OBEGAL) for FY21 is projected to be -$15.1 billion, moderately lower than the -$21.6bn forecast at the Half Year Economic and Fiscal Update (HYEFU) in December and substantially lower than the -$29.6 billion forecast presented in Budget 2020. Beyond 2021, the OBEGAL projections in Budget 2021 broadly align with those present in the HYEFU.
From a net debt perspective, a modest $5 billion reduction in projected issuance for each of the 2023 and 2024 financial years (from $30 billion to $25 billion) contributed to a lowering of forecasts. While lower, the figures still amount to the addition of $150 billion in debt which doubles total Crown borrowings by 2025. For context, this time last year the expectation was for a near tripling of physical borrowing.
Net debt as a percentage of GDP is now projected to peak at 48% in 2023, declining to 43.6% by 2025. The achievement of this lower peak percentage is a result of a double-whammy impact of a lower numerator (lower borrowings) and an improved denominator figure (improved GDP). GDP growth is expected to be rosier than previously believed, gradually advancing to reach 4.4% in 2023.
While the borrowing and deficit revisions have had little immediate impact on the financial markets, the Government’s projections for the Consumer Price Index (CPI) may prompt additional market interest over the coming days. Budget 2021 projects CPI inflation of 2.4%, 1.7%, and 1.8% across the 2021, 2022, and 2023 financial years, respectively. Those projections fall short of the target inflation rate identified by the Reserve Bank of New Zealand (RBNZ) at their Monetary Policy Statement (MPS) in February.
The central bank specified CPI sustained above 2% as being a key threshold that must be crossed before changes to monetary policy settings (higher base interest rates) will be enacted. The RBNZ expected such an outcome would require “...considerable time and patience”. A fresh Monetary Policy Statement is scheduled for release on 25 May. An additional measure of time and patience may be necessary if the RBNZ’s CPI forecasts next week align with those presented in Budget 2021.
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