Budget 2016: The Result
Budget 2016 shows a country in good shape with a set of fiscal accounts that must be the envy of most governments around the world.
In 2011, in the aftermath of the Global Financial Crisis and the Canterbury earthquakes, the Crown’s operating balance bottomed out at a worrisome 8.9% of GDP. Solid economic growth and careful management of spending saw that improve to a small surplus of 0.2% of GDP in 2015. Further small surpluses of 0.3% of GDP are expected for each of 2016 and 2017. Surpluses grow in the out-years, reaching 2.2% of GDP in 2020 as solid growth continues.
Fiscal balance as % of GDP
Source: NZ Treasury
The improved fiscal outlook has finally given the Government what any government wants: choices. In this Budget the Government has chosen to prioritise spending in health, social investment, innovation and public infrastructure. The political hot potato of housing gets a boost via increased spending on social housing and a new allocation of capital funding to support housing development on surplus Crown land.
Of course it’s the quality of the spending that matters most. In that respect we continue to applaud the Government’s investment focus on spending, particularly in the challenging area of social policy. Appropriate and successful early intervention can help reduce long-term dependency. However, we shouldn’t underestimate how challenging it will be to get that right.
As was flagged before the Budget, the Government has also chosen to prioritise debt repayment to get net debt down to its self-imposed “prudent” level of 20% of GDP. The Budget projections show net debt reaching 20.8% of GDP by 2020, so getting close. This is lower than the 24.0% forecast for 2020 in the December Economic and Fiscal Update (DEFU) by virtue of expected stronger economic and revenue growth, along with a reduction in planned capital expenditure.
Source: NZ Treasury
We agree with this approach. With so many of the country’s debt metrics in worrisome territory (household, dairy), it’s good to have at least one measure moving lower. We don’t buy the argument that now is the time to borrow and invest just because interest rates are low. There will be a more appropriate point in the economic cycle to take that approach so now is the time to build the headroom for that to happen.
Improved cash balances and lower debt means lower funding requirements. The Debt Management Office has announced an updated domestic bond programme that is $2 billion per annum ($8 billion over the projection period), lower than was expected at the time of the DEFU.
The fiscal forecasts are based on a relatively upbeat view of the economic outlook. The near-term real and nominal growth forecasts are broadly in line with our own, though the Treasury is more optimistic in the out-years. From 2018 onwards our real GDP forecasts are around 0.3-0.5% per annum lower than Treasury’s. The Treasury is well attuned to the primary risk to the economic outlook, the global growth environment, with an analysis of such an adverse ‘alternative’ outcome included in the projections.
As we said in the preview, the implications for the Reserve Bank are that compared to the DEFU forecasts fiscal policy will be marginally more stimulatory in the near term but less stimulatory in the out-years. That supports the case for interest rates being lower for longer.
As always, there are things we would have liked to see that weren’t there. Our perennial bugbear is the Government’s continued commitment to current arrangements for New Zealand Superannuation (NZS). We get the political issues but as time passes and no change to NZS entitlements is made, future Government’s choices will become increasingly constrained. There are ever-growing demands on the Government’s limited resources – it’s the opportunity cost of continuing to commit to a universal pension from age 65 that will make NZS ultimately unsustainable.
One policy initiative we thought was more likely was undertaking an auto-enrolment process for Kiwisaver. This became considerably cheaper last year when the Government (unfortunately) ended the $1000 kick-start. Auto-enrolment (with appropriate opt-out provisions) would have the benefit of capturing people that simply haven’t got around to joining yet and helping build household and national savings.
Grumbles aside, the overarching message from the Budget is New Zealand is in good economic and fiscal shape. The Government’s long-term investment-focussed approach, particularly in challenging areas such as social policy, is a lesson for many countries whose governments continue to struggle with developing and articulating credible and sustainable long-term fiscal strategies.
Assuming the economic forecasts are met and the fiscal outlook improves, the Government will continue to have choices between spending, investing, repaying debt and tax reductions. If our growth forecasts prove correct the choices will be there, but somewhat more constrained. We expect to hear more about them in Budget 2017, just a few months before next year’s general election.
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