New Zealand's half-year budget shows strong public finances

Moody's: New Zealand's half-year budget shows strong public finances, robust economic growth

Singapore, December 12, 2016 -- Moody's Investors Service says New Zealand's (Aaa stable) half-year economic and fiscal update (HYEFU) for 2016-2017 demonstrates its strong public finances, providing the government with significant financial flexibility to face negative shocks such as the Kaikoura earthquake.

Against this backdrop, Moody's expects policies and reforms that foster economic growth and maintain sound public finances to remain a key focus under a new leadership.

Moody's conclusions are contained in its report "Government of New Zealand: Strong Public Finances, Robust Economic Growth Bolster Sovereign Credit Profile".

Although government spending on social assistance and quake-related costs will increase, a better than expected economic performance and improvement in the terms of trade in 2016 has also resulted in stronger tax receipts relative to the budget.

The HYEFU, released on 8 December, shows the government expects an operating balance before gains and losses (OBEGAL) surplus of 0.2% of GDP for the fiscal year ending June 2017, only slightly lower than the 0.3% projected in the budget and consistent with Moody's fiscal projections.

The update also highlights the government's commitment to increasing budget surpluses over the longer run.

As the government is committed to not raising taxes, revenues will grow in line with nominal GDP, which will benefit from recovering dairy prices, higher migration, increasing tourism and reconstruction.

Core crown revenues will remain stable at around 30% of nominal GDP over the next five years, in line with Moody's assessment.

The government forecasts average annual GDP growth of 3.5% over 2017 and 2018, which is slightly higher than Moody's forecast and points to some downside risk to the revenue projections. Nevertheless, New Zealand will remain among the fastest growing economies in Moody's Aaa-rated universe.

Overall, increasing fiscal surpluses will reduce the government's debt burden, which Moody's expects will fall below 30% of GDP in coming years -- significantly lower than the median for Aaa-rated sovereigns.

Stronger fiscal surpluses in the outer years will be based primarily on expenditure restraint. Although this may be challenging given large spending commitments on health, education, social security and welfare, we expect slippages, if any, to be small.

New Zealand's very strong institutions have demonstrated a track record of managing significant shocks through effective fiscal policies.

Following large fiscal deficits in the wake of the Christchurch earthquake, the authorities have lowered government expenditure from 39.9% of GDP in 2010 to an estimated 34.5% in 2016, returned the budget to surplus and stabilized government debt ratios. This record bolsters prospects for continued strength in fiscal management in coming years.

Subscribers can access the report at https://www.moodys.com/

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