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Eco migrants head back to NZ with growth, tax cuts in the budget

Just as Australians are digesting news of a tax hike, New Zealanders can look forward over the next four years at the prospect of tax cuts, budget surpluses and a steady reduction in public debt.

Finance Minister Bill English revealed his sixth budget on Thursday forecasting New Zealand's first operating surplus since 2008 and seeing enough room in a forecast track of surpluses to both repay debt and offer unspecified tax cuts. 

The centre-right National-led coalition Government faces a general election on September 20 and can now dangle the prospect of tax cuts for those on middle incomes. 

The contrast in the economic and fiscal outlooks evident in the two budgets on both sides of the Tasman this week couldn't have been stronger. 

The New Zealand Treasury forecast economic growth in the current year to March 2015 of 4 per cent and a fall in the unemployment rate from 6.0 per cent to 5.4 per cent as construction booms in Christchurch and Auckland while dairy, meat and log export revenues are strong and buoyant consumer spending powers GDP higher. 

This growth will help produce an operating surplus for 2014-15 of $NZ372 million or 0.2 per cent of GDP. New Zealand's surplus was forecast to grow to $NZ3.5 billion or 1.3 per cent of GDP by 2017-18. 

Meanwhile, Australia's Treasury forecast GDP growth of 2.5 per cent in 2014-15 and a budget deficit of $A25.9 billion or 1.6 per cent of GDP.  Economic growth is projected to bounce back to 3.5 per cent by 2017-18  and drag the budget back into balance, but only after the imposition of a 'Budget Repair Levy' on taxpayers earning over $A180,000 and a range of spending cuts.

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Source: ANZ, NZ Treasury, Commonwealth Budget Papers

Migration and the diverging economic outlooks of New Zealand and Australia featured in the Budget. Treasury modeled the effects of a further increase in a net migration surge seen in the last year, which has been driven mostly by a slide in net migration across the Tasman. Total annual net migration was forecast to rise to as high as 41,500 or almost 1per cent of the total population by late this year, up from nearly zero in early 2012. 

Net migration from New Zealand to Australia halved to an annual rate of 21,700 over the last 18 months. Fewer New Zealanders left for work in Australia as the mining boom ended and jobs growth jumped in New Zealand. There has also been a growing flow of Australian-based New Zealanders who have returned home for work. 

English told reporters he had heard suggestions net migration to Australia could fall to an unheard of zero in the next year or two, but he thought it unlikely. The lowest level of net migration to Australia since 2000 was 11,200 in September 2003. 

"My own view is the Australian situation is in better shape than the Australians think," he said, adding demand for New Zealand workers in Australia was likely to rebound. 

Prime Minister John Key has positioned National as a conservative manager of the government's finances which would not repeat the third term spending surge  the previous Labour Government launched from 2005 to 2008. Key ran 'zero' budgets in 2011 and 2012 where the Government paid for the natural increase in health and education spending with cuts in other areas such as social welfare and the core bureaucracies. 

Key even pointed across the Tasman to warn of the dangers of a centre-left government. 

"You can see from the Australian budget how dire things have been over there and the consequences of a Labor/Green government in Australia, and you can contrast that with what's happened in New Zealand," Key told reporters. 

However, that didn't stop Key and English from a slight loosening of fiscal policy over the next three years. They increased the Government's new spending allowance by $NZ500 million in each of the 2015-16, 2016-17 and 2017-18 years, which Treasury said represented a slight reduction in the fiscal contraction built into the forecast track. It said extra spending in 2014-15 would turn a 0.7 per cent detraction from GDP by Government into a slight 0.1per cent addition to GDP. 

The Government announced a $NZ500 million package of tweaks to benefits for young families, including extending paid parental leave by four weeks to 18 weeks and increasing a parental tax credit for families who are not on paid parental leave and not on a benefit. 

It also cut tariffs on imported building materials to reduce the cost of building a standard new house by $NZ3,500 and said it would lend $NZ375 million to New Zealand's Transport agency to accelerate the building of new motorways in Auckland. Housing affordability in Auckland after a boom in house prices is shaping up as a major election issue.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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