N.Z. English Defers Tax Cut; Averts Rating Cut Threat
New Zealand’s Finance Minister Bill English deferred tax cuts to curb the budget deficit, prompting Standard & Poor’s to raise the country’s credit rating outlook.
The cash deficit will widen to a record NZ$12.52 billion ($7.7 billion) in the year to June 30, 2011, from NZ$8.46 billion this year, the government said in Wellington today. The economy will start growing in 2011 after a 1.7 percent contraction in the 12 months to March 31, 2010.
The New Zealand dollar rose after S&P increased the outlook on the AA+ foreign-currency rating to stable from negative, saying the budget will support the nation’s fiscal position. English, 47, who had promised income-tax cuts for 2010 and 2011 to help win last year’s election, also suspended payments to the nation’s pension plan, while maintaining spending to buoy an economy in its worst recession in three decades.
“It’s ‘mission accomplished’ for the budget,” said Stephen Toplis, head of research at the Bank of New Zealand Ltd. in Wellington. “They wanted to get the rating agencies off their back and assure them they had things under control.”
Standard & Poor’s said in January it may downgrade New Zealand’s rating, a move that Prime Minister John Key said this week would add about 1.5 percentage points to interest rates.
“The fact they have viewed the budget positively reversed that threat,” English said after the S&P decision. “New Zealand households and businesses would have ended up paying higher interest rates.”
Currency Gains
New Zealand’s dollar rose to 61.80 U.S. cents at 5:35 p.m. in Wellington from 61.62 cents before the budget was released. The currency has gained 23 percent in the past three months. The fixed payment made to receive floating rates on two-year debt dropped to 3.57 percent from 3.66 percent yesterday.
Gross sovereign debt is forecast to peak at 43 percent of gross domestic product by 2017 from 18 percent in the year ended June 30, 2008. Debt will fall to about 37 percent of GDP by 2023.
English said that without the policy changes, New Zealand’s debt would have risen to 70 percent of GDP by 2023.
“Because the starting point for the debt ratios is low, a rising trend for the next several years does not necessarily threaten the government’s rating,” Steven Hess, an analyst at Moody’s Investors Service, said in a statement. Moody’s said the nation’s Aaa credit rating and stable outlook is unchanged.
Bond Sales
The government will sell NZ$8.5 billion of bonds in the year ending June 30, 2010, to help finance the deficit. About NZ$50 billion of bonds will be offered over the next four fiscal years payday advance.
New Zealand succumbed to recession in the first quarter of 2008, earlier than most of its trading partners, as a drought curbed farm production and the central bank raised borrowing costs to cool a housing-market bubble.
Over the previous nine years the economy had expanded at an average pace of 3.6 percent, benefiting from rising prices for the dairy products that make up 20 percent of its exports.
The economy is now being buffeted as the worst global recession since the Great Depression hurts prices for milk, lumber, fish and lamb and deters tourists, whose spending accounts for about 10 percent of GDP.
Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, yesterday cut its milk-price forecast 12 percent and said U.S. export subsidies are “bad news for our farmers.”
Export Revenue
The drop in export revenue has helped to push the current account deficit to 8.9 percent of GDP, as the nation spends more than it earns.
S&P cut the outlook on the nation’s AA+ long-term rating to negative in January, citing concern that the current account deficit would put pressure on the nation’s growth and fiscal performance and saying the government needed a “credible medium-term fiscal plan.”
The debt outlook should be “sufficient for anyone, including the rating agencies,” English told reporters. “At the heart of this budget are steps to future-proof the government’s financial position.”
The government has “struck the right balance” between borrowing to support the economy and outlining a plan to reduce debt, English said. He forecast the current account deficit would fall to 5.4 percent of GDP by March, 2011.
Deferred Tax Cuts
Deferring tax cuts will save NZ$900 million a year, English said. Payments to the National Superannuation fund of about NZ$2 billion have been suspended and may not be revived for as long as 11 years, he said.
Reviews of government spending freed up about NZ$2 billion over the next four years, including NZ$454 million in the period to June 30, 2010, he said.
“There will be ongoing restraint in future spending,” English said, adding that there will be a NZ$1.1 billion cap on spending increases.
Basic welfare, pension and student entitlements were unchanged and the government has boosted spending on prisons, roads, schools and houses. It also plans to spend NZ$323 million over four years to insulate and heat as many as 180,000 homes.