Moody's: New Zealand Budget Shows Steady Fiscal Improvement, Even With 2015 Deficit

Moody's Investors Service says that the New Zealand (Aaa, stable) government budget presented on May 21 shows a continuing positive trend in the government's finances, reflecting the relatively good underlying economic fundamentals. The budget supports the country's Aaa rating and stable outlook, in that debt ratios will continue to decline over the medium term if the budget projections are realized.

The budget estimates that the operating balance will have recorded a small deficit of 0.3% of GDP for the 2014-15 fiscal year, ending June 30. Despite the government not meeting its original goal of a small surplus, the small size of the deficit nonetheless allows the ratio of gross government debt to GDP to remain unchanged at 35.0% in June 2015 from its level at the end of the last fiscal year. Going forward, the budget projects a return to surplus in the coming year and a gradual increase to 1.3% of GDP in fiscal 2018-19. This trend will support a drop in the debt ratio, which, according to the government's projections, will drop to 29.3% of GDP by 2019.

Although Moody's looks at the gross debt numbers as the starting point of its analysis, the government's main policy target is net debt, which takes into account the assets of New Zealand Superannuation as well as of the Reserve Bank. On this front, the figure is estimated in the budget as 26.3% of GDP at the end of this fiscal year, falling to 22.9% by the end of fiscal 2018-19. The stated goal of the government is to have this ratio at or below 20% of GDP in the early 2020s.

According to Moody's, New Zealand's government debt is low in comparison to other Aaa-rated sovereigns, and the further declines in debt ratios as presented in the budget indicate that its relative position is likely to improve.

New policy initiatives on the spending side were few in this budget, although increases in health and education expenditures continue the trend of recent years. There are no significant new revenue measures, in keeping with the government's policy of not increasing taxes. Control of expenditures remains the focus of fiscal policy in New Zealand.

Underpinning the improvement in the budget balances is the economic outlook, which, in comparison to other Aaa-rated sovereigns remains healthy. After real GDP growth of around 3% recently, the government expects the rise to average 2.8% annually in the coming four years. GDP growth is supported by a relatively low interest rate environment at present, continued investment in housing in particular, and positive net immigration. Risks are related mainly to the global economic and fiscal conditions, particularly growth in China and Australia, which are New Zealand's main trading partners.

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