Budget 2016: The preview
It’s that time of year again. Budgets have become pretty boring and routine things over the last few years, especially in countries that are in pretty good fiscal shape like New Zealand. But that tends to understate their role in the policy framework. Tax policy, spending and public investment are all important parts of the macro-economic framework within which business and households are operating and living.
Budgets from the current National-led government have been characterised by three things in particular: a commitment to closing up the large operating deficits that followed the Global Financial Crisis and the Canterbury earthquakes and returning the Crown’s accounts to surplus; prudent debt management; and the taking of an “investment approach” to government spending especially in the challenging area of social policy. We expect those same messages to be front and centre in this year’s Budget.
In terms of the broader macro-economic numbers, the Minister of Finance has already let the cat out of the bag. He has announced a rejigging of the “new initiatives” allocation over the next few years. Some spending will be brought forward from next year’s allocation of $2.5b to bolster this year’s $1.0b allocation to cater particularly for the schooling and health needs of a larger population thanks to recent strong net migration gains.
At the same time, the Government has signalled a desire to focus on debt reduction with the Minister signalling that a portion of the new initiatives allocation in the out-years will be redirected towards debt repayment. The Government is targeting a net debt to GDP ratio of 20% by 2020, lower than the current level of 26% and the forecast level of 24% in 2020 contained in the last set of Treasury projections released in December.
Source: NZ Treasury
That’s a tall order making the mathematics of achieving that goal quite interesting. In order to make that work the Treasury will have nominal GDP forecasts in the latter part of the projection period that are considerably higher than mine.
It could be argued that with interest rates so low now is the time to borrow and invest in infrastructure. I disagree. With so much construction work currently underway I don’t think the economy has the capacity to do more right now. While such an approach might help the Reserve Bank meet its inflation objective, there will come a point in the cycle where higher borrowing will be more appropriate. It’s therefore right for the Government to be creating the fiscal headroom now.
As has become standard practice a number of Budget initiatives have already been announced but there is room for more. We expect health and education will be the big winners on the day. Of course housing is the real political hot potato right now. Last year saw a focus on social housing, freeing up crown land and the tax changes around the bright line capital gains tax. We expect to see more. Tax reductions have been parked for now but I would be surprised if the carrot wasn’t dangled to some extent.
There will be little for the Reserve Bank to get excited about on Thursday. Fiscal policy appears likely to be marginally more stimulatory in the near term and marginally less stimulatory over the medium-term as the Government prioritises debt repayment. That supports the lower for longer story for interest rates.
All will be revealed on Thursday.
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