But what really matters for tax is nominal GDP. Here, the outlook is similar to the Half-Year forecasts, with a slight downgrade over the next year. On the prices side, the forecast CPI inflation is little changed and hits 2 per cent over the next few years.
However, they also haven’t incorporated official cash rate cuts and expect the Reserve Bank of New Zealand to starting hiking interest rates from mid-2020.
As part of the forecast process, the Treasury makes a judgement on how much of the upside and downside economic risks out there get baked into their central outlook compared with how much goes into their risks and scenarios. There were two scenarios:
1. Weak trading partner growth, driven by trade tensions or a China slowdown. This would mean lower nominal GDP growth due to slower exports, business investment and consumption growth. Surpluses would be smaller each year and net debt higher.
2. More wage pressure, given greater capacity pressures in the labour market. Greater household income is assumed to flow through to higher consumption and nominal GDP growth, improving the Governments operating balance and lowering net debt.
All up, this Budget has pushed government spending to the limits of its debt target and while ANZ Research’s economic outlook is a little softer than the Treasury’s, the Government’s books would remain in good shape on their growth numbers. However, net debt’s return to 20 per cent of GDP would likely be delayed.
Given the array of economic risks out there, and the pressures on New Zealand’s infrastructure, ANZ Research still sees a very real possibility of fiscal targets being loosened in time. Indeed, this debate is likely to ramp up as New Zealand approaches the next election. But for now, the Government remains content to push the limits of its targets while sticking to the ‘fiscal prudence’ script.
Budgets can never please everyone. But this one does a reasonable job of trading off addressing some long-neglected areas (eg mental health) while building fiscal resilience for the inevitable rainy day.
Miles Workman is a Senior NZ Economist for ANZ