NZ: 2017 Budget can afford to be more generous – Westpac

Michael Gordon, Acting Chief Economist at Westpac, suggests that NZ’s 2017 Budget can afford to be more generous than last year’s effort as net debt is on track with the Government’s long-term target, and the tax take is running stronger than expected.

Key Quotes

“Strong population growth means that extra spending is also a necessity. The Government has already announced some major increases in capital spending over the last year.”

“The economic forecasts underpinning the fiscal accounts are likely to be similar to our own, with solid growth in the near term, slowing by the end of the decade as building activity tops out and population growth slows.”

“The 2017 Budget is likely to be more generous than the previous offering, and not just because it’s an election year. The focus of last year’s Budget was on debt control, and to that end there was actually a reduction in the allowances for new operational and capital spending over the next four years, though with some spending brought forward to address population pressures.”

“Keeping public sector debt in check is still an important consideration. The Government recently redefined its target for net debt, aiming to reduce it to 10-15% of GDP by 2025. However, the Treasury’s longer-term projections last year indicated that the Government was already comfortably on track to meet that target. And the improvement in the fiscal accounts since then suggests that the Government has some scope to increase spending without altering its borrowing requirements.”

“The forecasts of future surpluses are also likely to get an upgrade, though perhaps not to the same degree. Population growth alone argues for greater spending on social services.”

“This year’s Budget may also see a move towards putting more money directly into the pockets of New Zealanders. The Government has long been signalling a desire to reduce personal income taxes, and Finance Minister Joyce has hinted that any change is more likely to be in the income thresholds than in the tax rates themselves.”

“The Government has announced a capital spending allowance of $11bn for the next four years, a $2bn increase compared to the December fiscal update and a $7.4bn increase compared to last year’s Budget. Housing is likely to account for a sizeable chunk of this spending, including the Government’s recently announced plan to build 34,000 new homes on Crown land over the next ten years.”

“The economic forecasts that underpin the fiscal accounts are likely to be similar in tone to those in the December Half-Year Update. Lower than expected growth over the second half of 2016 will mean a softer starting point for the forecasts of real GDP growth over the near term. However, nominal GDP is likely to be upgraded, thanks to the strong rebound in export prices over the last year. Higher nominal GDP also helps to lower the net debt to GDP ratio.”

“Cumulative inflation over the next few years is shaping up to be similar to the December projections, albeit a bit higher this year and a bit lower in 2018. Whether the Treasury shares the Reserve Bank’s (and our) caution about the timing and extent of OCR hikes will be a point of interest. But long-term interest rates matter more for the fiscal position, and these are more subject to international trends than domestic ones.”