Grant Robertson has faced consistent calls to open the purse strings and spend. Photo by Hagen Hopkins/Getty Images

New Zealand goes into the red with $12b to be borrowed for infrastructure

The government’s books are now expected to go into the red this financial year with a forecast deficit of $900 million, down from a budget forecast surplus of $1.3 billion.

The government will borrow $12 billion to spend on transport, schools, hospitals and investment in the regions over the next five years, in a bid to offset lower economic growth.

The investment was revealed in the Half Year Economic and Fiscal Update today, with details of specific projects announced next year.

A lower tax take, higher than expected government costs and the impact of global economic “headwinds” are all to blame for the forecast deficit. At the May budget, growth was predicted to be 3% this financial year, but that’s been revised down to 2.2%. It also forecast a $1.3 billion surplus, which has been downgraded to a $900 million deficit.

However, the economy is expected to pick up from late next year, partly driven by higher government spending and the effect of persistently low interest rates, delivering surpluses from the next financial year onwards.

In a bid to stimulate growth, the government will borrow an extra $12 billion to spend on capital infrastructure like schools, transport networks and hospitals over the next five years, dependent on whether there’s enough capacity to actually get the projects under way.

Specific projects will receive $8 billion in funding and the rest will be added to the yearly spending allowance.

This will boost government debt as a percentage of GDP higher than previous forecasts in the coming years, but by 2024 is still predicted to be well within the government’s self-imposed debt limits of 19.6%.

“With debt low and borrowing costs at record lows, the conditions are right for the government to invest to future-proof New Zealand,” finance minister Grant Robertson said.

It would be “ludicrously stubborn” not to borrow money to fix problems with government assets or meet other demands, even if that meant bumping up against the government’s own debt limits, before the new band came into effect.

The forecast deficit is due to the government collecting $500m less in tax, having to budget more for ACC claims because of the impact of low interest rates on its forecast investment returns, and higher social services costs.

But the labour market remains “tight”, with unemployment predicted to stay steady at around 4.2% and wage growth to reach 3.7% by 2024.

Treasury said New Zealand remained vulnerable to international conditions with global growth slowing and the outlook easing.

“Escalating trade protectionism, and the associated uncertainty, has weakened global trade and dampened investment spending.”

But it said demand for New Zealand’s major export commodities had “remained firm”.

Robertson had already announced $400 million for school upgrades around the country, and has today flagged the areas of priority for capital spending: road and rail, regional investment opportunities, DHB “asset renewal”, and “public estate decarbonisation” – moving schools, hospitals and prisons towards more environmentally friendly ways of heating was one example given.

With $6.8 billion tagged for new transport projects, road and rail were the “dominant force”, he said.

The government already had several projects in mind, some of which were “shovel ready”, but Mr Robertson said the government wanted to make sure all the “i’s are dotted and the t’s crossed” before announcing any of them publicly – that will happen at the start of election year.

Anyone who viewed this as an election year slush fund was “deeply cynical”, he said.

This story was first published on Radio New Zealand.

The Spinoff is made possible by the generous support of the following organisations.
Please help us by supporting them.