NZ hands down fiscally conservative Budget
The Budget’s political narrative is based on fixing social underinvestment, while benefiting from a robust economy.
- Robust growth outlook for NZ economy at 3% a year.
- Tax revenue to rise over the next five years by NZ$23.4 billion.
- Little expected or delivered on tax policy.
By Pattrick Smellie.
Formed seven months ago on the promise of a “transformative” agenda, New Zealand’s coalition government has delivered a first Budget that is notable more for its fiscal conservatism than its policy innovation.
Anxious to start fulfilling the high expectations of a political support base seeking improvements to social ills and creaky public infrastructure, Finance Minister Grant Robertson has made downpayments in numerous areas, while sticking to a set of Budget Responsibility Rules that critics to both the left and right argue are more stringent than necessary.
Business sentiment has sagged since late last year, reflecting in part an economy that is growing at full capacity and struggling to expand to meet demand, but also the inevitable uncertainty of political change after nine years of governments led by the centre-right National Party.
Knowing that Labour governments always struggle to convince the business community that they can be responsible fiscal managers, the government of Prime Minister Jacinda Ardern is determined to preserve surpluses and pay down debt to demonstrate its economic credibility.
This Budget achieves that, continuing a politically colour-blind record of prudent fiscal management that now stretches back to the early 1990s. It has served New Zealand well as a buffer against the 2008 global financial crisis and then the devastating South Island earthquakes of 2010, 2011, and 2016.
Budget surpluses are forecast to grow through the next four years to NZ$7.3 billon, remaining a little above 1% of GDP throughout that period.
A robust outlook for growth, at about 3% a year over the forecast period, allows scope for annual operating spending to increase by NZ$2.4 billion each year, up from a forecast NZ$1.8 billion annually in forecasts released just six months ago.
Tax revenue is set to rise over the five years to June 2022 by NZ$23.4 billion, a forecast 28.3% of GDP, and remain within the target of keeping government spending at or about 30% of the whole economy.
Unemployment is forecast to trend towards 4% over that period from a current 4.4%, rates of participation in the workforce remain high by global standards at above 70%, and wage growth is forecast at above 3%, while inflation rises to 2% only by the end of the forecast period. The current account deficit remains below 4%, benchmark interest rates rise slowly to just above 4% and the forecast track for the NZ dollar is stable, if slightly weaker.
In other words, while Labour’s political narrative is founded on cleaning up a mess of social underinvestment left by the previous government, it also benefits from the legacy of a robust domestic economy.
Meeting business expectations
Chartered Accountants Australia and New Zealand’s Advocacy and Professional Standing Leader for New Zealand, Peter Vial, says the Budget “probably meets business expectations”, which are limited in terms of new business-friendly policies, while anticipating a strong set of government books.
“It was pretty well foreshadowed,” says Vial. “The big issue is certainty and predictability and that will only come once all the working groups and advisory bodies (across a wide range of policy areas) start reporting back.”
While a decision last month to end the granting of new offshore oil and gas exploration permits shocked that sector, Vial is not picking up on concerns about similar bombshells in other sectors.
“That seems to have been a one-off.”
Tax not a headline topic
On the tax policy front, little was expected or delivered. A Tax Working Group has begun considering whether and how to improve income inequality through wealth or capital taxes, but any major new tax policy will be taken to the electorate at the 2020 election.
A rejigged tax and welfare package aimed at low-income households was announced in a pre-Christmas mini-Budget and is likely to create more political impact when it is implemented on 1 July than this Budget, which is light on themes beyond patching things up.
There are also no signs at this stage of movement on bracket creep, which is a significant factor in NZ$9.9 billion growth in revenue from wage and salary earners’ source deductions between 2018 and 2022.
The big issue is certainty and predictability and that will only come once all the working groups and advisory bodies (across a wide range of policy areas) start reporting back
One large omission from the NZ Budget forecasts is the potential cost of public sector wage demands. Some of the largest public workforces – nurses, teachers, and the police force – have all lodged large catch-up pay claims with a government that is also committed to progress over time on pay equity between the male and female workforces.
That concerns private sector employers, who are also worried by proposed industrial relations reforms that they fear will wind back the clock on New Zealand’s highly flexible workplace law.
The Treasury touches on that in commentary on the economic outlook, saying it assumes weakening business sentiment is judged to be “temporary and have limited effect on investment and hiring decisions” while acknowledging it is “possible that uncertainty around any other reforms and their combined impact leads to more cautious behaviour”.
Potential capacity constraints are a more pressing concern in overstretched parts of the economy as a possible brake on growth. Treasury points particularly to bottlenecks in the construction sector and has halved the anticipated impact of the government’s KiwiBuild programme over the forecast period.
KiwiBuild targets construction of 100,000 lower-cost homes over the next decade to help ease chronic housing shortages and unaffordability, but is now not expected to get into full swing until after 2022.
Also notable is the underpinning impact on growth of persistently high levels of net migration. After a net inflow of 68,000 people in the year to March – the third year of inflows at around the 70,000 mark – the Treasury has abandoned its long-held forecast of a return to historic average inflows of 15,000 a year in favour of 25,000 a year by 2022.
However, it acknowledges other forecasts that suggest migration could remain higher, at about 40,000, raising growth rates, employment, and Budget surpluses, while also fuelling house prices, inflation and leading to interest rates rising from current historic lows sooner than anticipated.
Where investors have found the Budget lacking is in articulating new sources of economic growth, particularly as the government actively pursues a “just transition” to lower carbon emissions in an economy with high emissions from its agricultural sector.
Related: The no surprises Budget
Read our CA ANZ commentary and analysis of the NZ Budget
Pattrick Smellie is an owner of BusinessDesk, a New Zealand economic and business news service and a one-time NZ correspondent for The Australian.