Rating agency reaction to Budget 2026 | Herald NOW Business

Added: 2026-05-31

[00:00:00]Here with the Herald now business, New Zealand's fiscal recovery is facing mounting pressure with S&P Global ratings warning global uncertainty and election year politics could slow deficit reduction. Yesterday I spoke with Martin Food director and lead sovereign analyst for New Zealand at S&P Global ratings, and I started by asking him why fiscal consolidation is proving difficult.

[00:00:20]>> When we wrote about the fiscal consolidation proving difficult, what we were pointing to is the fact that the government has the New Zealand government has repeatedly delayed its return to an OBGAL surplus or OBGAL ex-surplus.

[00:00:34]Today's budget was slightly pleasant surprise in that the return to surplus was moved forward by 1 year to fiscal 2029, but that's still predicated on things going pretty well in the Middle East, a relatively quick resolution to the to the Middle East crisis, and relatively tight operating expenditure control, especially in the outer years of that medium-term horizon going on to 2027, 28, 29. So, you know, these are positive developments, but we'll have to wait and see if the government can actually stick to this very tight allowance that it set to itself.

[00:01:10]>> Is it an overly optimistic outlook?

[00:01:15]>> Well, I think at the moment, you know, all sorts of forecasters and economists are prognosticating about which way the Strait of Hormuz may go and and whether a peace deal is likely in the Middle East.

[00:01:27]What I would say is that the budget position gets worse before it gets better on the particular metrics that we look at as a rating agency focusing on the overall cash deficit or what the government calls a residual cash deficit. That's still projected to widen in 2027 to something like 5, 5.1% of GDP. And if the government proceeds in line with its own budget forecast, that would be one of the widest deficits of of any government at this uh very high sovereign credit rating level of of AA+ behind only the United States. And then it's only projected to get better over the subsequent years. So, uh in some sense, um yes, we we think uh the budget is a little bit optimistic in that it assumes a quick resolution to the Middle East.

[00:02:16]Um but even with that quick resolution, things are going to get worse before they get better.

[00:02:20]>> And I guess then if you look at uh measures the budget such as reducing the bond issuance guidance by Kieran McAnulty, I think 6 billion uh to June 2030. Does that seem again like a an optimistic kind of a head into the headwinds that we're facing?

[00:02:36]>> The reduction in uh gross issuance is um again a a little bit of a pleasant surprise. We understand that it was uh significantly better than than most market participants or or interest rate strategies had expected. But it is important to remember that on a net basis, net public debt is still continuing to rise. We still project net debt to GDP to rise to somewhere around the low uh 40% mark of of GDP.

[00:03:02]That's pretty good on a global basis, but it is quite a significant deterioration since pre-COVID levels.

[00:03:09]So, you know, the government has talked a big game about fiscal repair and fiscal consolidation, but for us the proof will be in the pudding.

[00:03:17]>> And I guess the you know, the the the revenue side of things is important in all of these. It's not just a case a question of uh of crunching costs. Was there much in the detail there that gives you a picture of New Zealand's revenue picture ahead again being anything but optimistic?

[00:03:32]>> Look, our first impressions of the budget having had uh a pretty quick look at the budget papers uh so far is that uh the revenue forecasts don't seem um you know, wildly out of sync with what we would have expected.

[00:03:46]Um there are a few um new measures in the budget, of course. There was the surprise new financial sector levy.

[00:03:53]Um, but most of the other announcables in this budget were were already foreshadowed or signaled over the past couple of months. So, it's it's very much a a no surprises, no frills budget.

[00:04:03]What we see across um many governments worldwide, not just New Zealand, but many governments is that the inflation shock from something like the Middle East crisis can actually be a slight positive um because inflation tends to um you know, force people to pay a little bit more income tax and companies to pay a little bit more corporate tax as well. So, that's actually been a slight positive um a slight tailwind for the budget. So, um again, I think what we are most focused on is the expenditure side of the ledger and whether the government can realistically hue to these very stick uh to sorry, to these very tight um expenditure controls that it has set for itself.