Comments on Budget 2017
The New Zealand economy is expected to grow an average 3.1% per annum over the next five years
Solid growth underpins rising budget surpluses and falling debt as a percentage of GDP
Flagship announcements in Budget 2017 include a family incomes package, details of future infrastructure investment, and higher social spending across health, education, and law and order
This budget is fiscally stimulatory over the next two years, reinforcing our expectation that the next move in interest rates is up
The NZ Government’s bond tender programme for 2017/18 is unchanged at $7.0 billion
The economic forecasts underpinning the fiscal projections are reasonable though remain higher than ours, most noticeably in the mid-part of the projection period where Treasury expects growth to peak at 3.8% in 2019 compared to our 2.8%. Growth slows thereafter as the cycle matures and capacity constraints emerge. Treasury expects growth to average 3.1% over the next five years. That compares with our more conservative estimate of 2.7% over the same period.
Source: NZ Treasury, Statistics NZ, AMP Capital
Following Budget 2016 we argued the Treasury was overestimating the likely degree of slowdown of net migrant inflows. Unsurprisingly then, net migration is now expected to be “stronger for longer”. That is reflected in continued strong growth in the labour force, which stabilises the unemployment rate in the near-term and adds to demand pressures in the housing market, but underpins solid consumption growth.
Like us, Treasury remains optimistic on the outlook for productivity. This is the critical part of the story for improved per capita GDP growth and rising living standards. Productivity is expected to remain low in the near-term as the working-age population rises, but then improve as net migration slows and business investment rises. We remain hopeful of a similar outcome.
Solid growth underpins rising budget surpluses over the projection period. An Operating Balance Excluding Gains and Losses (OBEGAL) surplus of 0.6% of GDP is expected for financial year (FY) 2017, up from 0.2% of GDP in the Half-Year Economic and Fiscal Update (HYEFU).Treasury expects a surplus of 1.0% of GDP in FY 2018, with a rising profile to 2.2% of GDP in FY 2021. These are lower than previously forecast by virtue of the raft of new initiatives announced in the Budget today.
Source: NZ Treasury
Net core Crown debt reduces as a percentage of GDP over the projection period, falling from 23.2% of GDP in the current year to 19.3% of GDP in FY 2021, meeting the target of below 20% by that time. Finance Minister Stephen Joyce affirmed the commitment from his pre-Budget speech to setting a new target of 10-15% of GDP by 2025.
Source: NZ Treasury
This is a solid set of fiscal projections that will be the envy of many economies around the world. As I mentioned last week in our pre-Budget blog, Australia isn’t expected to achieve an operating surplus until 2021. Is that a wave of fiscal-envy emanating from across the Tasman?
As has become common practice, many smaller initiatives were announced before the Budget, leaving the big announcements for the day.
Flagship among these is the $2 billion per annum Family Incomes Package. This package includes changes to income tax thresholds, adjustments to Working for Families and the Accommodation Supplement. This is aimed at maximising the benefit of tax reductions to low and middle income earners, particularly families struggling with higher housing costs. That makes good economic and political sense.
The other big ticket news we were anticipating today was further detail around anticipated infrastructure spending. This includes the previously announced reinstatement of State Highway 1 around Kaikoura, significant investment in rail, and funding for building of new schools and hospital buildings.
A total of $7 billion has been allocated over four years to various public services, including the usual suspects of health, education and law and order.
The current National-led Government has worked hard to get into a strong fiscal position. They have had to manage a full range of economic, seismic and meteorological disasters, all of which have had significant fiscal impact. Through a mixture of strong economic growth and fiscal restraint, the Government has got the books back in order while at the same time investing heavily in infrastructure to support the growing population and economy.
Even today, only four months out from a general election, with the books back in order and an outlook of solid growth underpinning rising budget surpluses and falling debt, there was still an element of restraint in the Budget. That is typified by the new debt target of 10-15% of GDP.
Some will argue this is overly prudent. I tend to disagree, at least right now. The reality is the economy is performing well, the output gap is closed (or nearly closed), and the RBNZ’s next move will be to raise interest rates, though not until next year.
Furthermore, the Government is already investing heavily in infrastructure and the construction sector is probably the most constrained in the economy already. There will come a time for the Government to use its balance sheet to support the economy, but that’s not now.
It also depends on what you use debt for. It needs to be something that doesn’t just support growth in the near-term, but rather increases the capacity of the economy to grow sustainably.
We think the family incomes package is appropriately targeted. One of the key challenges in cutting taxes is how to target the benefits of those reductions at households most in need – so the combination of tax threshold moves combined with changes to Working for Families and the Accommodation Supplement makes sense to us.
This appears to us to be a balanced Budget. Yes, there are lots of other things the Government could have done. There have been the usual calls from various sector and lobby groups for various policies to be enacted. Most of them are worthy. The big one for us of course is the tax treatment of savings. Encouragingly in his comments during the lock-up, the Minister of Finance seemed open to doing a bit more thinking on this, though that also needs to be balanced with the fact that the best source of savings is higher after-tax incomes.
The interesting next phase of Budget 2017 is the alternative Budgets from the main opposition parties as they frame up the fiscal choices they intend campaigning on in the upcoming general election.
There is little in this Budget to excite markets. Gone are the days of big surprises on the day. The fiscal parameters are well flagged from Budget to Budget and with Budget Policy Statement's and half-year updates thrown in for good measure there is no shortage of fiscal reporting.
This budget is more stimulatory over the next two years. Other than reinforcing our expectation that the next move in interest rates is up we see little of concern in the Budget for the Reserve Bank.
Source: NZ Treasury
The 2017/18 NZ Government Bond programme is unchanged from the $7.0 billion projected at the 2016 HYEFU.
There is downside risk to the Treasury’s OBEGAL surpluses if we end up being ‘more right’ on the growth outlook. Differences in GDP forecasts of around 0.3% per annum can be dismissed as margin of error. Over the next four years the difference between our and the Treasury’s forecasts is 0.4% per annum and as high at 1.0% in 2019. That is a meaningful difference and therefore suggests to us downside risk to the surplus forecasts.
On balance though, Budget 2017 paints a picture of a solidly growing economy underpinning a strong fiscal outlook and that’s important in today’s world.
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