NZ Budget 19: take it to the limit

Miles Workman

Senior NZ Economist, ANZ

The 2019-20 New Zealand Budget included a little more spending than ANZ Research anticipated, with a bump on both the operating and capital side.

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However, based on December’s Half-Year Update forecasts, which showed net core Crown debt falling to 19 per cent of gross domestic product (GDP) in 2021/22 (1 percentage point of GDP below target), ANZ Research always knew there was a bit of wiggle room come Budget day.

" The Government’s books… remain in good shape on growth numbers.”

Despite higher spending, the Government is still expected to meet its Budget Responsibility Rules.

Treasury’s economic outlook is a little more optimistic than ANZ Research which means any surprises to the downside of their expectations could make for a few difficult decisions in the coming years (provided the Government sticks to its 20 per cent of GDP debt target).

From a macroeconomic perspective, this Budget suggests fiscal policy is likely to be a little more stimulatory than previously thought. But overall, keeping net debt on its trajectory to 20 per cent of GDP by 2022 prevents fiscal settings from persistently adding to demand pressures.

Key spending announcements (which have been passed through the lens of the Treasury’s Living Standards Framework) include:

$NZ2.9 billion to invest in healthcare for District Health Boards over five years and $NZ1.7 billion to invest in hospital infrastructure over the next two years.
$NZ1.2 billion to invest in schools over 10 years and $NZ200 million for vocational education reforms.
$NZ1 billion to invest in KiwiRail and $NZ406 million for the Auckland City Rail Link.
$NZ455 million for a mental health frontline service and $NZ124 million for further support plus $NZ320 million to address family violence.
$NZ300 million for a venture capital fund for start-ups firms.
$NZ229 million for a sustainable land-use package, focusing on waterways and $NZ106 million to help the transition to a low-carbon future.
$NZ197 million to strengthen the Housing First Programme.
$NZ154 million for a new transition service for young people leaving state care.
$NZ98 million for a whānau-centred pathway to break the cycle of Māori reoffending.

The Treasury’s economic outlook has been downgraded in the near term but shows an heroic pickup in growth to just over 3 per cent by 2020. Treasury still assumes moderate growth in residential investment (aided by KiwiBuild), solid (private and public) consumption growth, and acceleration in business investment from here. The terms of trade are lower over the next few years, and the unemployment rate is slightly higher.

Compared to ANZ Research’s own economic outlook, Treasury’s forecasts still appear a little optimistic, even with some extra fiscal stimulus. Indeed, with Treasury expecting real growth of 0.6 per cent quarter-on-quarter for Q1, it may not be long before outturns begin to disappoint.

ANZ Research’s expectation is first quarter growth will come in at 0.5 per cent quarter-on-quarter and they note there are some small downside risks to this.

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

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