Budget 2021

Budget Policy Statement

Financial and Physical Capital: Our Built and Financial Assets

Financial and physical capital refers to assets owned by households, companies and the government that range from cars and databases to financial assets, such as cash and shares.

The global economic shock related to COVID-19 has seen financial capital depleted around the world as asset values have fallen and governments have engaged in unprecedented fiscal stimulus to support their economies.

In New Zealand, gross domestic product (GDP) fell by 11% in the June 2020 quarter as a result of the restrictions put in place to protect lives and livelihoods. This strong health response was also the best economic response, as it allowed our economy to open up faster than the economies of many of our peers, and maintain a relative degree of openness as subsequent local outbreaks were quickly brought under control. In the September quarter, GDP rebounded by 14% off the back of New Zealand's economy opening back up, with the size of the economy returning to slightly above pre-COVID levels. BNZ economists noted that only China, Taiwan and Ireland had achieved this alongside New Zealand.[6]

We went into COVID-19 in a strong position, with net core Crown debt below 20% of GDP and running surpluses. This meant the Government has been able to use its strong balance sheet to cushion the blow of COVID-19 on businesses and workers and support the economy through this global shock.

New Zealand's Government debt is forecast to remain at levels that are sustainable, and relatively low compared to the rest of the world. While we have run one of the largest fiscal stimulus packages globally as a proportion of GDP, our debt levels remain considerably lower than those of our peers on comparative measures (see the Economic and Fiscal Forecasts section). The impact of COVID-19 on the Crown’s balance sheet was presented in the Half Year Update in December 2020. Net core Crown debt is forecast to be 46.9% of GDP by the end of the forecast period in 2024/25. This is low relative to other Organisation for Economic Co‑operation and Development (OECD) economies, with advanced economies going into COVID‑19 with average net debt above 80% of GDP.

Reserve Bank of New Zealand data shows that firms and households, in aggregate, paid down non-mortgage debt between February and October 2020, while household mortgage lending increased. Household debt levels, in aggregate, remain manageable because of low interest rates. However, pressure on some households' disposable income will increase if unemployment rises. While most households will be able to weather the economic effects of COVID-19, those with high levels of debt may struggle to meet debt repayments.

The HLFS wellbeing supplement found the number of people who have ‘not enough money' or ‘only just enough money' rose slightly from 29.6% in June 2020 to 31.4% in September 2020. The proportion of people who have received help from a church or foodbank also rose slightly from 4.3% in June to 5.2% in September. Sole parents, Pacific people, the unemployed, and those not working due to their own illness, injury or disability were more likely to report that their income was inadequate to meet their everyday needs.

COVID-19 affected incomes mainly through its impact on employment. While New Zealand's unemployment rate of 4.9% in the December quarter was well below early forecasts for unemployment to have risen above 10%, there were still 25,000 more people classed as unemployed at the end of 2020 compared to the December 2019 quarter.

The Treasury analysed incomes of all employees in March 2020, and how they had changed for the same people by August. This work showed that Māori and Pacific workers were more likely to have dropped into a low income bracket (of between $200 and $300 per week). The numbers of Māori and Pacific in this low income bracket had increased by 85% and 69% respectively, while the number of Europeans in the low income bracket increased by 27%. Most of the people in this income bracket were on benefits, although some remained employed but working reduced hours.

Housing market activity has been strong, with the Real Estate Institute of New Zealand (REINZ) House Price Index 17.3% higher in December 2020 than the same period a year ago as demand increased - and house sale volumes in December were up 36.6% from December 2019. This partly reflects higher demand for housing from New Zealanders returning from overseas. Record-low interest rates and the temporary suspension of the Reserve Bank of New Zealand's loan-to-value-ratio restrictions have also boosted demand at a time when annual building consents are running at near record highs.

New Zealand's share market entered 2021 at near record-high levels off the back of strong growth as the economy rebounded quickly out of COVID-19, and as quantitative easing policies in New Zealand and around the world boosted asset prices.

The impact of COVID-19 on businesses in New Zealand was highly varied. Some firms experienced near-total reductions in the ability to trade during periods at higher alert levels. For example, hospitality businesses and those delivering in-person services experienced heavy short-term falls in revenue, mitigated by Government support such as the Wage Subsidy schemes. Many firms have been able to re-size and adjust business practices to operate safely during alert level escalations.

Firms affected by border closures, including international education and tourism, face different challenges in finding sustainable ways of operating in the face of long-term reductions in demand. New Zealand's tourism sector before COVID-19 accounted for 6% of GDP and was largely reliant on overseas visitors. The Government has recognised the need to support the sector as it faces the effects of the global COVID-19 pandemic, including the $400 million tourism recovery package funding through the COVID-19 Response and Recovery Fund.

Other sectors and firms have held up well or even benefited from COVID-19-driven changes in economic activity. Aside from temporary delays to exports earlier in 2020, primary sector businesses have been largely unaffected. New Zealand's total goods exports in the year to November 2020 were up by $377 million, or 0.6%, from the previous year. This was a strong result given the global trade disruption caused by COVID-19, as well as the ongoing US-China trade war and uncertainty caused by political events, including Brexit uncertainty.

The importance of infrastructure investment as part of the Government's economic recovery and rebuild plan from COVID-19 means the outlook for New Zealand's built and physical assets is strong. While estimates vary, prior to COVID-19 New Zealand's infrastructure deficit was independently estimated to be between $25.9 billion[7] and $75 billion.[8] In 2017 the new Labour-led Government inherited an infrastructure spend over the previous nine years of $43.7 billion. From 2017 to 2020, $25.1 billion was invested, and we enter 2021 with a further $42.2 billion worth of infrastructure investment plans over the next four years, to be added to with future Budget capital allowances.

Within our built and physical assets, housing will continue to be a major focus for the Government as we expand existing plans for the number of new public homes delivered by the end of 2024 to more than 18,000. The September 2020 wellbeing supplement to the HLFS showed that 23% of respondents in September reported a minor problem with dampness or mould in their house or flat, and 4% reported a major problem. In addition, 16% of respondents reported a minor problem keeping their house or flat warm through winter, and 6% a major problem. Māori and Pacific, sole parents of dependent children, the unemployed, and those not working due to their own illness, injury or disability were more likely to report that their house or flat had major problems related to dampness, mould or heating.

The Government's infrastructure investment programme includes:

  • $2.6 billion of community-focussed, shovel-ready infrastructure projects across the country to create and maintain jobs as part of the COVID-19 response
  • increased capital investment for District Health Boards (DHBs) ($750 million capital), building on the record capital investment over the previous two Budgets ($750 million through Budget 2018 and $1.7 billion through Budget 2019, plus $1.4 billion announced for the redevelopment of Dunedin Hospital)
  • record investment of more than $4.5 billion per year into roads, rail and public transport infrastructure through the National Land Transport Fund
  • School Property investment ($119.5 million operating and $115.4 million capital at Budget 2020, then another $164 million capital in November 2020) to expand, maintain and enhance the quality of the School Property portfolio
  • Justice Property Health and Safety Remediation ($36.9 million operating and $163.5 million capital) to upgrade court buildings around New Zealand
  • Future of Rail investments ($821.2 million capital and $148.2 million operating) to replace ageing locomotives and upgrade KiwiRail's mechanical maintenance facilities, replace the ageing Interislander ferry assets, and fund ongoing maintenance and renewal of the rail network via the National Land Transport Fund, and
  • funding for an extra 8,000 new public and transitional homes, in conjunction with a $350 million Residential Development Response Fund to support and stimulate the residential construction sector, create jobs and reduce the housing shortage. This brings the number of public homes the Government will deliver by the end of 2024 to more than 18,000.


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