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Budget 2020: delicate sound of thunder

Benjamin Wilton

Written by Benjamin Wilton

Fixed Income Analyst at Kiwi Invest. Ben’s responsibilities include credit analysis and identifying investment themes across regions, sectors and industries.

Friday 15 May, 2020

The 2020 Budget was released yesterday, widely considered the most important Budget in New Zealand history. The announcement fell on the day the majority Kiwis were allowed to get back to work after roughly seven weeks locked up in their homes producing nothing but loaves of sourdough and TikTok videos, while COVID-19 turned the global economy on its head.

budget 2020

As anticipated, this Budget is BIG. The Government dished out around an additional $10 billion on top of the $22 billion previously announced, and it doesn't end there. Minister of Finance, Grant Robertson has said there would be a "rolling maul" of spending initiatives to follow, announcing the total ticket as a $50bn fund, dubbed the COVID-19 Response and Recovery Fund (CRRF).

As a result of all this spending, our previously cherished net debt/ Gross Domestic Product (GDP) of ~20% will become but a distant memory, with this figure set to reach 54% by 2023, a level we haven't witnessed since the early 90s. However, it's sensible to remember that it's times like these, the "rainy days", that are the reason why we have been so fiscally prudent over the last two decades. This is as stormy as it gets, and now is the appropriate time to take a dip into that tightly woven kete.

Jobs, Jobs, Jobs…

The key ingredients to recovery from this crisis are policies aimed at holding on to and creating jobs. A point made evident in the days leading up to the release.

Key policies targeted at COVID-19 related job losses included a $3.2 billion extension to the wage subsidy to keep Kiwis affected by lockdown employed, this time more targeted to at-risk industries. For those who have and will inevitably become displaced by the pandemic, the Government will offer free tertiary education programmes through a $1.6bn trades and apprenticeships package to help foster upskilling and reskilling.

Other, less directly targeted policies included increased spending on infrastructure, including the construction of 8000 statehouses, and a large environmental jobs package, which will consist of new roles like cleaning waterways and eradicating pests.

All up, Budget forecasts suggest the jobs stimulus measures could see as many as 138,000 jobs saved in the current economic quarter alone and add 234,000 jobs over the next two years.

Keeping to the “Wellbeing” framework

The Government stuck to the "Wellbeing Budget" framework again, focusing more on social outcomes than raw GDP figures. A move touted as revolutionary just last year.

Some significant proposals included the 8,000 new state houses (killing two birds with one stone), $900 million focused on helping the Maori population that will undoubtedly be hit disproportionally by the crisis and billions to DHBs across the country.

Another titbit I see as especially promising was that 200,000 Kiwi kids will now be receiving free lunches at school, up from only 8,000 currently. We can all agree that it's paramount that all children in this country receive at least the bare minimum nutrition needed to learn and develop critical thinking skills.

Treasury's cloudy crystal ball

Treasury's new unemployment forecast, incorporating the stimulus provided from yesterday's Budget is now predicting that unemployment will peak in June, at the rate of 9.6% and could drop back to the pre-COVID-19 rate of 4.2% within just two years.

This new prediction is seen as very optimistic with many of the banks previously forecasting figures north of 10%.

Treasury's new forecasted 4.6% contraction in GDP by June is also viewed as being rather rosy.

However, they have carefully communicated the uncertainty around these projections. The enormous amount of fiscal stimulus will certainly help, but it cannot provide a full offset.

Market reaction

The New Zealand dollar fell slightly, and NZ Government bond yields went up as the amount of New Zealand Government Bond Issuance that will be coming was greater than what the market expected ($60 billion vs. expectations around $45 billion).

A foundation for a recovery, but much more work needed

As the Minister moves to the next step, with an extra $20 billion in his back pocket, more work will be needed to lay out a vision for the future, lift confidence and target growth in new areas. What was really lacking yesterday were the details, and these are needed to justify the resulting debt burden.

Through this Budget the Government have cushioned those hit hardest, alleviated some of the social ills and laid a foundation for recovery; now, they need a detailed plan that focuses on ambitious, forward-thinking initiatives that will rebuild and position New Zealand for growth in a very new world. Ultimately, it's that growth that will pay back the gigantic sum we have just borrowed.

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