Indian Newslink Budget Special 4

Tempered growth may overshadow forecasts

Wellington, May 25, 2017

Finance Minister Steven Joyce presented his first Budget in Parliament a few minutes ago. This is his first Budget as Finance Minister and the Ninth for the National Party since occupying the Treasury benches in November 2008. We will bring updates continuously over the next few hours and conclude with our own exclusive analysis of the governments Fiscal Policy later tonight.

-Editor

In the following analysis, Michael Gordon (Pictured), Acting Chief Economist at Westpac New Zealand, says that while Budget 2017 supports GDP growth, the overall economic growth and the resultant surpluses may not as robust as we would want them. However, he welcome some of the initiatives introduced by Mr Joyce.

Key points

1. Strengthening economic conditions are allowing the Government to have its cake and eat it too.
2. In Budget 2017, the Government has introduced a Family Incomes Package to support those on lower and middle incomes. This includes an adjustment to tax thresholds, an increase in Working for Families, as well as increases in accommodation support.
3. Spending is being increased in a range of areas, including public and social services, as well as much needed infrastructure investment.
4. Firm economic conditions mean that the Government can make these changes while maintaining its focus on longer-term debt reduction and improving the economys financial resilience.
5. The initiatives announced today are likely to support GDP growth over the coming years. However, we have some concerns that economic growth, and therefore the surpluses, are unlikely to be as healthy as the Government expects over the course of the next five years.

Operating balance

Firm economic growth over the past year means that the Governments books are in good shape. The Treasury is now forecasting an operating surplus of $1.6 billion in the current fiscal year stronger than the modest $0.5 billion surplus expected in the Half-Year Fiscal and Economic Update (HYEFU) last December.

Over the next few years the surplus is expected to continue growing, but at a more gradual pace than previously assumed. The Government is now forecasting an operating surplus of $7.2 billion in 2021, down from the $8.5 billion that was forecast in the HYEFU.

A key reason for the more gradual improvement in the operating surplus over the coming years is that Budget 2017 has introduced a Family Incomes Package (described below) that includes adjustments to income tax thresholds. While this is assumed to boost activity and spending (and hence the GST take), the reduced income tax take per person pulls down core Crown tax revenues by $6.3billion over the forecast period.

Core Crown expenses are also expected to grow more rapidly than previously assumed, with around $1.8 billion additional expenditure assumed in this years Budget. In addition, allowances for new spending in future years have also been increased.

Policy initiatives

Family Incomes package

The big policy announcement today was $2 billion Family Income Package targeting those on low to middle incomes.

This package will come into effect on April 1, 2018.

It has four key parts:

1. Income tax thresholds are being increased. The current $14,000 threshold will be increased to $22,000, and the current $48,000 threshold will increase to $52,000. In terms of cash in hand, those earning more than $22,000 will now get an extra $11 per week, rising to $20 per week for those earning more than $52,000.

2. The Independent Tax Earners credit of up to $10 per week is being removed. This was available to those on lower incomes without families. But its removal will be offset by the change in tax thresholds.

3. Working for Families payments for those with children under 16 will be increased to the same level as those with older children.

4. Accommodation supplements will be increased for families and students.

In addition to the policy changes themselves, there will be flow-on effects for superannuitants due to the link between after-tax wages and NZ Superannuation. The couples rate for superannuitants will increase by $13/week from April 1.

Budget 2017 – Family Incomes Package

Source: The Treasury

* This is a payment to those who may be adversely affected by the other policy changes.

The 2017 Budget makes allowances for increased spending in four key areas:

Public services: $7 billion including spending on health services, education, law and order, and social services.

Infrastructure: Around $4 billion of spending is planned. This includes spending on roading in Kaikoura, rail networks, and schools.

Business growth agenda: $1 billion. This includes $373 million as part of the Innovative NZ programme, as well as spending to support increased trade, the tourism sector, and the film industry.

Social investment: $321 million social spending to support those in need including mental health support and support for vulnerable children.

To help replenish the National Disaster Fund, the Government has announced that the EQC premium for homeowners will increase by 15-20c per $100 of cover from November 1.

The Government is investing $11 billion in new capital spending over Budgets 2017 to 2020 on top of existing plans. Budget 2017 includes $4 billion of new spending in areas including education, transport, defence, housing, health and justice.

Summary of Budget 2017 Initiatives

Source: The Treasury

Economic forecasts

The Budget forecasts are underpinned by some fairly bullish views about the strength of the economy. The Treasury expects GDP growth to average 3.1% a year over the next five years. Whats more, the Treasury appears to regard this as close to the countrys potential the projected output gap remains near zero over the next four years, and inflation settles at around 2%.

In contrast, we are expecting average annual growth of 2.6%. One key point of difference in our forecasts is residential investment: The Treasury is forecasting nationwide growth of almost 9% in each of the 2019 and 2020 years, at a time when the Christchurch quake rebuild will be winding down. The need for more housing, particularly in Auckland, is not in doubt; the homebuilding industrys ability to ramp up activity that quickly is more of a concern.

Net debt

Despite the increase in spending, firm economic conditions mean that the Government continues to forecast a decline in debt levels. As a share of nominal GDP, core Crown debt is still forecast to fall below 20% in FY2021, though by slightly less than previously assumed. As already announced, the Government is aiming to reduce net debt to between 10% and 15% of GDP by 2025.

Government bonds

Government bonds worth $35 billion are expected to be issued between 2017 and 2021. Thats up by $1 billion compared to estimates at the time of the HYEFU. The increased issuance is projected to occur in 2020. Forecast issuance in other years is unchanged from the HYEFU.

Economic implications

The economy has been growing at a firm pace in recent years. However, some of the current drivers will fade over time. In particular, we are already seeing some slowdown in the housing market. In that sense, the initiatives in todays Budget are a welcome development in that they will help to brace the economy as other drivers of growth moderate.

There was no market reaction in either interest rates or the exchange rate after the Budget announcement.

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