National has announced a new government debt target over the next eight years, and increased expected capital infrastructure spending in the next four Budgets, partly driven by costs stemming from the Kaikoura earthquakes.
Finance Minister Steven Joyce announced the measures in a pre-Budget speech to the Wellington Chamber of Commerce Thursday, in his first set-piece speech ahead of the 25 May Budget.
National will target net debt of 10-15% of GDP by 2025, Joyce announced.
“We have made great progress in our immediate target of reducing net debt to around 20% of GDP by 2020,” he said.
“Net debt is expected to be at 24.3% of GDP by the end of this financial year. Now it’s time to set a new target for net debt out to the middle of the next decade.
“We have learnt from the Global Financial Crisis and the Canterbury earthquakes that shocks can come along at any time, and sometimes they come in pairs.”
The primary driver for announcing the new debt target was to position the government's books to be able to absorb shocks similar to the Global Financial Crisis and the Canterbury earthquakes, Joyce told media after his speech.
“If you’ve got lower debt, particularly if you’ve got a couple of major shocks, then you are going to be dealing with a better interest rate profile than if you’ve already got significant debt before you get started,” he said.
“I just don’t think we’re in a position to sit there and say, ‘oh yeah, it probably won’t come along again for a while’. I think it’s a reasonably dangerous approach to take in a country like New Zealand. We’ve just got to progressively get to a point where we could do something similar again.”
While New Zealand is not likely to be faced with the twin costs of a global crisis and earthquakes at the same time again, Joyce said there were other scenarios, such as a major earthquake hitting Wellington, that could cost a future government “a lot of money.”
Asked whether the government had considered keeping the 20% target and instead using the extra money to invest in infrastructure, Joyce said there will be an opportunity to make those investments alongside the new proposed target.
“You have to get to a point where you have that capacity to respond. And I’d much prefer to have net debt of 10-15% if the balloon went up in a way that it did in Christchurch and the GFC, than be sitting at 20% and having the same experience," he said.
“With a small country you don’t get the same capacity to borrow at the same rate as if you’re a really big country. That has impacts on your credit ratings, it has impacts on your interest rates and you have overseas debtors telling you what you want to.”
Ratings agency Moody’s had said recently that while they were happy with New Zealand’s situation at the moment, “they did indicate some of the risks that they’d be worried about if they happened."
“This is all about managing the risk, it’s about resilience, it’s about not spending everything you get today, today, and setting aside, as a country, that capacity for the future," he said.
Meanwhile, the government’s intention of resuming contributions to the Cullen Fund when net debt hit 20% of GDP was unchanged by the announcement of the new targets, Joyce said. He had been asked whether the new target meant the debt track was now the priority over other spending pressures such as the Super Fund.
“We stand by that, there’s no change there. But in terms of having a longer-term debt target, we’re only three years away from 2020 now. We have to set up what we think the target should be. I’m very concerned to make sure we have the capacity to deal with future shocks.”
The new target was over a “reasonable time frame,” he said. “There’s no point being hairy chested about it.”
Infrastructure spending - Kaikoura costs
Elsewhere in the speech, Joyce said the government will allocate $11bn in new capital infrastructure over the next four budgets. The focus will be on infrastructure that “supports growth,” he said. Capital investment in Budget 2017 will be increased to $4bn from $3bn expected in Treasury’s half year update. Of this, $812m will be allocated to reinstating State Highway One north and south of Kaikoura.
“The $11bn is additional spend on top of investments already planned by the Government.”
Joyce said the capital allowance will be increased in Budget 2017 from a forecast $3bn to $4bn, in Budget 2018 it will remain flat at $2bn, in 2019 it will increase to $2.5bn from $2bn, and in 2020 $2.5bn from $2bn, giving the $11bn figure, up from $9bn in Treasury's half year report.
“Details of how the first tranche of that money will be invested will be laid out in the Budget, but in anyone’s language, this is a very big capital spend over the next four years.”
The government will target greater use of public-private partnerships and joint ventures between central and local government and private investors, Joyce said.
Govt books in order
Joyce noted that the government’s books in the first eight months of the financial year had been boosted by tax revenue nearly 4% above Budget 2016 predictions and 7.7% ahead of the same period last year.
“A growing and more resilient economy allows us to meet some of the pressing needs that the Government is faced with from time to time,” he said.
Kaikoura quake costs, EQC fund
Joyce used the speech to detail the expected costs from rebuilding road and rail corridors that were damaged by the Kaikoura quakes:
The biggest challenge created by the earthquake is the reinstatement of State Highway One and the rail line both north and south of Kaikoura. It’s a massive job – but I can report today that the entire project is not expected to cost as much was originally estimated.
The current expected range for re-instating the road and rail corridors is now $1.1 to $1.3 billion dollars, down from the previous estimate of $1.4 to $2 billion.
Both the road and rail corridors will be able to be largely re-instated where they were previously – except for 2.5 kilometres of new alignment north of Kaikoura.
The Kiwirail share of the corridor rebuild is estimated to be up to $400 million, the largest part of which will be covered by insurance. The Government has put aside a capital contingency for the balance of the rail costs.
The rebuild of the state highway is now expected to cost between $800 and $900 million dollars. So today Transport Minister Simon Bridges is announcing the Government will commit $812 million to the State Highway One rebuild as part of the capital budget in Budget 2017.
The New Zealand Transport Agency and Kiwirail both continue to expect their respective parts of this crucial transport corridor to open before the end of this calendar year.
Meanwhile, he provided an update on the position of the government's EQC fund:
The costs to EQC of the Kaikoura earthquake sequence are now expected to be $550 million. This will be met from EQC’s current cash position, but EQC will have very few funds available of its own after this event and the Edgecumbe floods.
The Government of course stands behind EQC, and the organisation carries billions of dollars of reinsurance to cover a major event, but the Kaikoura earthquake hastens the need to finalise decisions in relations to EQC’s future operations. Minister Brownlee and I intend to announce decisions on the EQC review in the next two to three months.
The total cost to government of the Kaikoura earthquakes continues to evolve – but currently is still expected to be in the order of $2 to $3 billion.