NZ Treasury’s economic outlook remains optimistic, any downside surprise to infuse tougher decisions in future Budgets

New Zealand’s Treasury’s Budget Update forecasts show the Government’s books are expected to remain in good shape over the next four years.

Government spending has been bumped up on both the operational and capital side. This means smaller surpluses and higher debt, but all within (at) the limits of the Government’s fiscal targets.

Debt Management’s bond issuance guidance has been lifted – more than we expected, and largely reflecting increased spending. Issuance for both the 2019-20 and 2020-21 fiscal years has been lifted by $2 billion to $10 billion, while issuance for the 2021-22 fiscal year has been bumped up by $1 billion to $8 billion. The 2022-23 guidance of $6 billion is unchanged from the Half-Year Update.

A new bond syndication has been announced, to occur before December 31, 2019: a May 2031 replacement nominal 10-year benchmark. Treasury bills on issue are also expected to be a little higher than forecast in December, reflecting larger short-term funding requirements.

The NZD was little changed post-Budget, but the 10-year NZ Government bond yield lifted around 2.5bps as a result of the higher issuance plan. That said, the increase in the bond programme will be welcomed by the market, especially in the face of large maturities over coming years, ANZ Research reported.

As expected, the Government’s updated fiscal strategy (to target net debt within a 15-25 percent of GDP range once the 20 percent of GDP point target is achieved in 2021-22) had little impact on the fiscals.

Underpinning all this, the Treasury’s economic outlook remains a little more optimistic than our own. A downside surprise in the coming years could make for some tougher decisions in future Budgets.