Coronavirus: Massive Govt borrowing will drive up interest rates - economist

While interest rates here and abroad have dropped to record lows in response to the COVID-19 pandemic, the drastic measures taken to soften the economic blow will eventually see them rise sharply.

That's the warning from economist Cameron Bagrie, saying the next generation are going to end up paying for this rainy day.

In little more than a couple of weeks the Government has spent or set aside billions of dollars for wage subsidies and other measures intended to keep Kiwis in jobs and businesses running as the pandemic takes its toll.

Last week economist Shamubeel Eaqub predicted unemployment would double, with the tourism industry effectively shut down thanks to border controls, and others losing their jobs as businesses struggle through the lockdown. 

Borrowing has never been cheaper, and the Government has been quick to splash the cash with near-unanimous approval from economists and even the Opposition.

But that won't last, Bagrie warns.

"The Government does not have a bottomless pit of money. At some stage we're going to have constraints," he told The AM Show on Monday.

"That's a long way away at the moment, but eventually rating agencies are going to be knocking on our door and having a bit of a look. We're not going to have the same credit worthiness."

When credit ratings drop, the cost of borrowing rises as lenders seek to offset the higher risk. 

"Interest rates down the track, depending on where debt gets to, are going to be higher five years down the track," said Bagrie. 

That'll be good news for savers, but bad for anyone trying to pay off a mortgage.

But for now, they're still low. The Reserve Bank cut the official cash rate from 1 to 0.25 percent on March 16.

"This just reinforces that borrowing for a rainy day, pumping money into the system, is the right thing to do - but let's not forget we're going to have to go through one hell of a fiscal retrenchment process when we come out the other side. We have to build up those buffers again. We're gonna have to get debt back down to reasonable levels."

Current Government debt as a percentage of GDP is about 20 percent - low by international standards, thanks to the efforts of previous Finance Ministers. Sir Michael Cullen got debt down to virtually zero before the global financial crisis hit, forcing Sir Bill English to ramp up borrowing. By 2017 debt was once again falling.

"Glass half-full, we've got a great starting position," said Bagrie. "We're starting from a position where we're in surplus, Government debt is around to 20 percent of GDP. We've been saving for that rainy day, well we've now got a torrential downpour... 

"I suspect we're going to see Government debt move up in excess of 50 percent of GDP, numbers we've seldom seen in New Zealand's history. We saw it way back in 1991, and that led to one hell of a fiscal retrenchment programme which probably scarred New Zealand for a long time."

While that's the "right thing to do" in the current scenario, it's the youth - who entered the workforce in the wake of the global financial crisis - who'll pick up most of the tab.

"The next generation of kids, they're going to be saddled with paying down that debt, probably via higher taxes."

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