Budget Afterthoughts: The bigger picture is blurred

Jay Changlani – 

Budget 2015 was a classic stick and a carrot combination of rewards and punishment to induce behaviour.

The Budget document was more political than fiscal with Finance Minister Bill English indicating that New Zealand will post its first budget surplus in the coming year (the first in eight years) but government finances will be slow to improve because of lower tax take.

The following are highlights of the government’s 2015-2016 budget, which include updated forecasts for the economy and its finances.

Government finances

The government expects to post $176 billion surplus in the year ending June 2016, smaller than its previous forecast around $600 billion in December. Surpluses through 2019 will be smaller than anticipated, due to expectations for slower economic growth and easing inflation in the coming years.

Economic growth

The government downgraded its GDP forecast to annualised 3.1% in 2015-2016 from 3.4% in its previous forecast. It kept its outlook for 2016-2017 unchanged at 2.8% while raising forecast for the following two years.

Annualised consumer prices for 2015-2016 has been cut to 1.4% from 2%, but forecasts beyond 2016-2017 are unchanged.

Net debt is likely to rise to 26.3% of GDP next year, slightly down from 26.5% and with modest rise in the following years.

Bonds: The government plans to increase its domestic bonds to $8 billion in 2015-2016, while keeping intact its issuance plans beyond next year.

Price of dairy products, the country’s biggest export earner, is expected to recover from the second half of this year, after tumbling by 50% from an all-time high last year.

Economic Risks

The biggest risks facing the economy include a sharp fall in Chinese demand for commodities, ongoing weakness in the Australian economy, low dairy prices, the impact of imminent US monetary tightening on emerging countries, and continued low inflation around the world.

Migration is expected to be strong, while low mortgage rates may support housing demand, but a decline in migration may affect the real estate market.

The contribution of earthquake rebuilding projects to overall growth may slow as housing supply catches up with demand, while commercial projects take longer than expected.

Spending

The government will set up $52.2 million fund to free up state-owned land for development by private companies, which will be selected by competition.

The fund is intended to increase housing supply in Auckland, which is growing rapidly due to increased immigration, and create more affordable housing.

The government is committing about $250 million to transport projects over four years.

It will allocate around $210 million to KiwiRail, the country’s rail network operator.

Transport projects in Auckland will receive a boost to address increasing congestion.

Child Welfare

Budget 2015 provides $790 million to reduce hardship among children in New Zealand’s poorest families. Benefit rates for families with children will rise by $25 a week, while most sole parents and partners of beneficiaries will be required to return to part-time work when their youngest child turns three years, from the current five.

All beneficiaries with part-time work obligations will be required to work for 20 hours a week, from 15 hours currently in force.

The big issue is whether we have sufficient jobs and whether the politicians have considered small regions.

The government had provided additional $107.8 million over four years for the Canterbury Rebuild, taking total contribution to $16.5 billion.

Investment Bank

Taxpayers will contribute between $100 million and $150 million to the proposed Asian Infrastructure Investment Bank, payable from 2016-2017 to 2020-2021.

New operating funding of $264 million over four years will be spent on Defence, while $106 million will go as capital from the New Zealand Defence Forces’ balance sheet for new equipment.

The country’s intelligence service and its secretive surveillance bureau will each receive $20 million over four years.

KiwiSaver disadvantaged

The government will cease $1000 payment to new KiwiSaver accounts, the country’s pay-as-you-earn pension scheme.

A new border tax of about $16 for arriving passengers and $6 to departing passengers to raise $100 million every year to improve biosecurity and other customs measures.

This will come into force from January 1, 2016.

Harsh Questions

I believe that by just focusing on inflation target and not on growth or housing, we are missing a big picture. Core inflation is between 1.3% to 2% due to the high value of the New Zealand Dollar and lower oil prices.

But the bigger question is how this would solve the emerging theme of urban centres versus regional centres.  How will some of these policies impact the so called Zombie suburbs, including some in Auckland?

I am also of the view that the opposition missed the ‘White Dancing Elephant’ manifest in ‘another deficit year’.

Labour and others in Opposition were not able to respond to National’s ‘Hardship Package,’ missing in the process housing and immigration issues in Auckland.

Jay Changlani is a Chartered Accountant and Director at accounting firm Accounts Icon. He can be contacted on 021-0763762.

 

 Budget 2015 Short Highlights

Real production GDP, annual average percentage change

Percent of labour force, March quarter, seasonally adjusted

Consumers Price Index (CPI), annual percentage change % of GDP

Total Crown operating balance before gains and losses (OBEGAL)

Net core Crown debt excluding the New Zealand Superannuation Fund and advances

(Source: Budget 2015 – At a Glance) 

table

 

Photo :

Jay Changlani with Adrienne Rodden, Manager, Transaction Banking, ANZ at the Bank’s Post-Budget Breakfast meeting held in Wellington on May 22, 2015.

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