By Tracy Withers
May 27 (Bloomberg) -- New Zealand Finance Minister Bill English, wary of the threat of a credit ratings downgrade, will likely focus on spending cuts in his first budget since the National Party swept to an election victory in November.
The minister tomorrow may defer tax cuts planned for 2010 and suspend payments to a national pension plan to narrow the ballooning deficit. Standard & Poor’s cut the outlook on the nation’s AA+ long-term rating to negative in January.
English, 47, inherited an economy in its worst recession in more than three decades, with government finances depleted by falling tax revenue and rising welfare payments when his party ended nine years of opposition by ousting the Labour Party. A downgrade to S&P’s third-highest ranking would add about 1.5 percentage points to New Zealand interest rates, making mortgages and company loans more expensive, Treasury Secretary John Whitehead said last week.
“English will need to convincingly demonstrate how the government will rein in spending so as to avoid a rating downgrade,” said Donna Purdue, an economist at Westpac Banking Corp. in Wellington. “Achieving this will be no mean feat.”
The government’s priority on narrowing the deficit means English is likely to refrain from adding to February’s stimulus package. In contrast, Australia’s Treasurer Wayne Swan announced his nation’s biggest ever building program, pushing the budget deficit to a record in 2010.
Early Recession
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 gross domestic product.
Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said today it may pay suppliers 12 percent less next season. New Zealand’s dollar slid to 62.27 U.S. cents as of 10:29 a.m. in Wellington from 62.46 late yesterday. The currency has gained 7.4 percent this year.
Business confidence is at a record low and the jobless rate reached a six-year high in the first quarter. Warehouse Group Ltd., New Zealand’s biggest discount retailer, said May 8 third- quarter sales fell 2.8 percent as consumers reduced outlays.
Export Earnings
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. A report yesterday showed the trade deficit dropped as New Zealanders curtailed their demand for imports.
S&P in January cited concern that the current account deficit would put pressure on the nation’s growth and fiscal performance, and called on the government to deliver a plan to prevent the debt growing further.
“A credible medium-term fiscal plan combined with an easing of New Zealand’s external imbalances could result in ratings stabilizing at the existing levels,” S&P said on Jan. 13. “Absent such developments, the foreign-currency rating could be lowered.”
English said in April that the government’s “books are undoubtedly in worse shape” than in December, when he predicted a deficit for the year to June 30 of NZ$6.63 billion ($4 billion), ending eight years of surpluses.
Those surpluses were mostly spent by the Labour-led coalition on targeted payments to low-income families, and increased outlays on hospitals and education.
Tax Cuts
English said in April that he would have to reconsider whether the government could afford the tax cuts in 2010 and 2011 that it promised in the election campaign. He also put under review the NZ$2 billion annual payment to the National Superannuation Fund, which was set up to pay future pensions.
The National Party, which last year won the most seats since 1996, had 52 percent support in a Roy Morgan Research poll of 985 voters this month. Labour had 31.5 percent backing.
Prime Minister John Key, 47, said this week he was confident the government has done enough to dissuade S&P from lowering the rating, which was last at AA in 1996.
“I personally don’t think we’ll be downgraded when the rating agencies look at the budget,” Key told Television New Zealand this week.
The budget has been prepared with the ratings threat in mind, Key said, adding that the government will review “wasteful” spending begun by the Labour government.
Pension Payments
Welfare, student and pension payments won’t be touched and extra spending on health and education required to keep pace with rising costs and already announced new services is also locked in, Key said earlier this month.
The government is also committed to more capital expenditure, which it expects to generate jobs and accelerate an economic recovery next year. In February, it announced NZ$500 million of spending on schools, state highways and state-owned houses and said it had NZ$5 billion for roads and railways over the next three years.
To fund the deficit, English may have to sell as much as NZ$10 billion bonds in the year ending June 30, 2010, up from NZ$5.5 billion in the current year, according to Westpac.
To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.
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