Dawn chorus: NZ interest bill 0.3% GDP
Govt finance costs to fall to $1b by 2023 despite quadrupling of debt as interest rates fall under 1%; Govt could borrow $400b for the cost of $4b of rent subsidies; Fed set to print more for longer
TLDR: Treasury upgraded its outlook for the economy and the Government’s finances yesterday in its half yearly update (HYEFU), forecasting a $25b reduction in deficits and borrowing over the next four years. New Zealand’s net debt could rise to just 43% of GDP, which is less than half that of other AAA-rated countries.
The Government’s financing costs were forecast to fall to just $1b or less than 0.3% of GDP by 2023 because bond yields are under 1%. For comparison’s sake, the Government is forecast to spend over $4b per year on accommodation supplements and income related rents by 2023 and $18.6b on pensions. Amazingly, the financing costs after the quadrupling of debt to $200b are two-thirds of what they were before Covid-19.
Comparing Governments with households is a fraught thing, but the Government will soon spend $4b on subsidising rents for poorer families. That would be enough to service $400b of debt with a 1% borrowing cost, which would be enough to build 1.6m houses. There are currently only 1.8m households in New Zealand and the housing need over the next couple of decades would be around 500,000.
Essentially, the Government now faces the same choice that young renters face, but without the deposit problem. Potential first home buyers have enough in rent to pay the mortgage, but can’t save up enough for the 20% deposit. The problem is no longer financial. It’s political. At least over the longer term.
The post-script to yesterday’s HYEFU is Treasury forecast a 32% rise in house prices over the next four years. Finance Minister Grant Robertson said he wanted moderate house price inflation and home owners should continue to expect some inflation, just not the double-digit rates per annum being seeing currently. He also said the windfall reduction in forecast deficits would likely not be spent, but would be used for debt reduction.
Elsewhere in our political economy, the Government announced a $1.10/hr increase in the minimum wage to $20/hour from April 1, as promised in its first term, but a rejection of calls from employers for relief after Covid-19. Workplace Relations Minister Michael Wood said the Government had yet to spell out its minimum wage plans for the next three years, other than it would take a ‘balanced’ approach for workers and employers.
Look out later today for the Government to announce its vaccine rollout plans at 9am. They are likely to indicate an opening of the borders later in 2021 than earlier. And we’ll get September quarter GDP figures at 10.45am which are expected to show a 12-14% bounce from the June quarter’s 12.2% fall.
Overseas overnight and this morning, the US Federal Reserve’s Open Markets Committee extended its plans to print US$120b a month to buy bonds until “substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” and it pledged to keep its cash rate near 0% for three more years. The US Congress looks set to finally agree a US$900b stimulus plan later today, including direct payments to individuals and businesses.
Elsewhere, Boris Johnson rejected calls from doctors to keep Britain locked down over Christmas, the British pound rose to a 20-year high on hopes for a Brexit deal and Bitcoin jumped to a fresh record high over US$20,000 as the Fed announced extended money printing.
In our political economy
In the global political economy
Chart of the day
Longer reads worth your time
Threads worth unravelling
Coming up
Dec 18 - The last Kāka dawn chorus for 2020. I’m off to jump in the sea. Even in Wellington. It’s been that kind of year.
Feb 1 - The Climate Change Commission will release its first draft of the national carbon budget under the Zero Carbon Act
Feb - Global Financial Action Task Force’s mutual evaluation report of New Zealand’s money laundering and terrorism financing compliance is expected in February.
Ngā Mihi
Bernard
PS Many thanks to Joshua Keaton for today’s picture from Zealandia, where we should all buy life memberships here. Just $56 for adults and $99 for a family. FYI this wasn’t an ad. I don’t take them. I just love Zealandia.
