With interest rates at record low levels there is an argument that the benefits of cutting rates further become less. Whilst the Reserve Bank of NZ (RBNZ) still thinks this is an efficient lever to generate demand, monetary policy has its limitations and needs support to stimulate the economy and meet their inflation and employment targets.

Central banks globally, most notably the European Central Bank, the Reserve Bank of Australia and the RBNZ, have been calling out for fiscal stimulus to play a bigger role in assisting growth.

In a bid to support growth (and deliver on its own objectives), the Government announced a boost in infrastructure spending of $12bn in the recent Half Year Fiscal and Economic Update (HYEFU).

The RBNZ had been expecting fiscal stimulus to step in to help the economy. They will have noted the positive development and will be looking at Treasury’s forecasts vs their own to see how impactful the additional spend will be.

The boost in infrastructure spending was well signalled but the devil is in the detail.

  • Although $12bn of additional spend was announced, $3.9bn of this will not be deployed until after 2025
  • Only $0.2bn will be allocated in 2020 followed by $1.4bn 2021
  • While we are waiting for further detail on the projects, the Finance Minister noted several projects were “shovel ready” but no specifics were provided, if there is capacity to achieve them and what the expected lead times are
  • The Treasury estimates that this extra capital spending will boost economic growth (0.3% of GDP in 2021), however, its impact is forecast to peak at 0.4% of GDP in 2022.

While the headline stimulus is positive, RBNZ Governor, Adrian Orr likely wanted more and whether it was enough to offset the current trajectory for interest rates remains to be seen.

The HYEFU was a definite step in the right direction with a clear indication that there is more to come at the full year budget in 2020.

As previously discussed here, net public debt is forecast to hover around the midpoint of the Government’s relatively conservative new self-imposed target debt range (15% to 25% of GDP) peaking at 21.5% in 2022 which leaves reasonable headroom for more fiscal support.

With a general election to be held by late November 2020, this provides scope for more fiscal stimulus that would be directly felt in voters’ pockets e.g. tax related which would see more immediate effects on the economy. The RBNZ will be looking at further fiscal stimulus as a high probability event which will likely be front of mind when considering monetary policy in the new year.