Combining central and local government debt, it expected New Zealand’s cash deficit to widen to more than 5% of GDP in 2026-27 before gradually narrowing.
“New Zealand’s general government deficit has averaged more than 5% of GDP since the pandemic – the second highest out of the 18 sovereigns we rate ‘AA+’ or above. Only the US has averaged deficits larger than New Zealand during this period,” S&P said.
While S&P wasn’t particularly upbeat on New Zealand, its outlook for the country remains stable. In March, Moody’s and Fitch changed their outlooks for New Zealand to negative.
Investors look at credit ratings when assessing risks. The riskier a country is seen to be, the greater the return investors may demand for lending to New Zealand.
This said, since the start of the conflict in the Middle East, investors have been demanding higher returns for lending to governments around the world.
S&P highlighted the fact the conflict, and its effects, could persist for longer than Treasury assumed.
Treasury saw the effects being temporary – delaying, rather than derailing New Zealand’s economic recovery.
So, while it believed uncertainty and high prices caused by the conflict would see the economy deteriorate through 2026, it saw a decent bounce-back occurring from 2027.
However, S&P made the point that the economy was exposed to the conflict and supply-chain disruptions.
“Downside risks such as prolonged supply challenges and elevated prices for both oil and fertiliser could drive the country’s inflation and interest rates higher, hindering the country’s recovery in the economy, budget, and external accounts,” S&P said.
“While we forecast real GDP growth will pick up to about 2% over 2026, downside risks could see the country’s wealth gap and fiscal deficits widen compared with other advanced, highly rated sovereigns. If sustained, this could exert downward pressure on the sovereign rating.”
BNZ head of research Stephen Toplis believed the Budget should have appeased credit rating agencies.
“The big question is whether the economic forecasts on which this analysis is based, and the ensuing fiscal forecasts are credible? And, will they survive the next election,” he said.
Indeed, Toplis believed there was a clear risk Treasury’s outlook was too rosy.
However, he cautioned it was “unwise to be critical of anyone’s forecasts in the current environment”.
“There are simply too many moving parts and even slight changes in assumptions about key variables, such as oil prices, can have disproportionate impacts on outcomes,” he said.
ANZ senior economist Miles Workman had a similar view.
He didn’t see the Budget being a catalyst, pushing S&P to change its outlook of New Zealand.
However, Workman believed credit rating agencies would have taken more comfort had the return to surplus come from more concrete spending cuts and/or tax hikes, rather than revisions to Treasury’s forecasts.
He, too, saw these as being on the rosy side.
Infometrics chief executive Brad Olsen believed it was “pretty impressive” for the Government to deliver the Budget it did, against a backdrop of war and uncertainty.
He noted S&P’s commentary might have been a bit tougher on the Government than other ratings agencies, as its outlook was stable, rather than negative.
Indeed, Moody’s released a statement after S&P, also noting the risks around Treasury’s forecasts, but saying the earlier than expected to return to surplus was “a positive development”.
“This is consistent with our view of the strength of New Zealand’s institutions’ commitment to effective fiscal policy frameworks,” Moody’s said.
Do you have questions about the Budget? Ask our experts – business editor at large Liam Dann, senior political correspondent Audrey Young and Wellington business editor Jenée Tibshraeny – in a Herald Premium online Q&A here at nzherald.co.nz at 9.30am on Friday. And for all our Budget coverage, click here.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
Stay ahead with the latest market moves, corporate updates, and economic insights by subscribing to our Business newsletter – your essential weekly round-up of all the business news you need.