NZ Treasury costs quakes at $15-to-$20 billion dollars

Treasury costs quakes at $15-to-$20 billion dollars - give or take five billion

By Pattrick Smellie

March 6 (BusinessDesk) – The first official Treasury estimate of the total cost of both Canterbury earthquakes is $15 billion, figure the government’s economic agency says is “best described as a working assumption, rounded to the nearest $5 billion.”

The earlier than expected monthly economic update from the Treasury comes ahead of Thursday’s Monetary Policy Statement from the Reserve Bank of New Zealand, which many believe will see the Official Cash Rate cut TO 2.5% from 3%.

Financial market reaction to the Feb. 22 earthquake that shattered Christchurch had seen 90-day bank bills fall below 3% “indicating a probability of a reduction in the cash rate,” the Treasury noted, in rare commentary on specific monetary policy conditions. “The New Zealand dollar tumbled in the week following the earthquake on the weaker outlook and expectation of lower interest rates.”

The Treasury expressed no view on the desirability of a rate cut, and warned inflationary pressures abounded in the global economy, while the Christchurch reconstruction was so large it would inevitably have an impact on inflation. The faster the rebuild, the greater the pressure on prices, the Treasury says.

The Treasury will provide a full set of published forecasts in the May Budget, though today’s update predicts growth for calendar 2011 to settle at 2%. That’s down from 3.5% forecast at the half year update in December, but still strong compared to the 0.5% growth forecast from the New Zealand Institute of Economic Research.

Finance Minister Bill English took the opportunity to say the forecasts confirmed “the need for the government to carefully consider its priorities,” while committing to “the approach the government has taken of protecting the most vulnerable. Any spending changes we make will ensure that continues.”

The earthquake would punch a $3 billion-to-$5 billion hole in tax revenues over the next five years, but this was “manageable in the context of the government’s revenue base of about $330 billion over the five years,” English said.

Over the next four years, to the end of 2015, the Treasury forecasts the economy will rebound later than expected because of delays to the Christchurch rebuild, which had just been starting after September’s quake and is now again on hold.

The forecast impact of the bigger rebuild sees growth peak at 4% in 2013, 0.5 percentage points higher than the previously forecast peak of 3.5% in 2012.

Over the whole four years, however, the economy will have missed out on a total of around 1.5% growth because of the quakes, compared to the Treasury’s expectations before the latest shake.

The total cost estimate includes $5 billion for the Sept. 4 earthquake, while the rebuild job from the Feb. 22 earthquake is estimated to be $10 billion to $15 billion.

“Allowing for some double counting for cases where prior damage has been compounded, we estimate the combined financial cost of the two earthquakes at $15 billion,” the Treasury says, emphasising the potential for billions of dollars in leeway on either side of that estimate.

English said paying for the earthquake “will likely involve a balanced combination of a bit more borrowing in the short term and reconsidering our spending priorities, so we can provide the financial resources needed to help rebuild Christchurch and the Canterbury economy.”

The government would also “press on” with economic policies intended to “reduce New Zealand’s vulnerability to foreign lenders, get the government’s finances in order and build faster growth based on higher national savings and exports.”

While the most significant new in the Treasury update is its earthquake cost estimates, the bulk of the analysis concentrates on the global economy, where financial instability remains a risk, sharply rising food and oil prices are driving global inflationary expectations higher, and the ongoing need to return New Zealand’s government accounts to surplus is only exacerbated by the earthquake.

While the domestic economy had proven much weaker than expected in 2010, that seemed partly to be households and farms consolidating debt, despite sharply improving agricultural export commodity prices.

The Treasury continues to see a rebound in household sentiment, although continued focus on debt reduction is expected to continue.

(BusinessDesk)

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